Accrual vs. Cash Accounting — What Business Buyers and Sellers Need to Know

Revenue and expenses are recorded when the transaction happens, not when cash actually changes hands. Contrast with the cash method, where a sale isn't recorded until payment lands in the bank.

Why it matters: Which accounting method a business uses changes how its numbers read — and can quietly distort deal comparisons if buyer and seller aren't speaking the same language. A business on cash-basis accounting can show a very different profit picture in any given month than the same business would show under accrual, even though nothing about the underlying operations changed. Buyers evaluating multiple listings, and lenders underwriting a loan, need to know which method they're looking at before comparing multiples or trending performance year over year. It also explains a lot of the "why don't these two documents match" confusion that comes up in due diligence, when a business's tax return and its internal P&L appear to tell different stories.

Example: A contractor's P&L shows a strong November because a $40,000 job was invoiced that month — even though the client won't pay for 60 days. Under cash accounting, that same $40,000 wouldn't show up until January. Same business, same job, two very different monthly pictures depending on method.

A quick tell: check monthly cost-of-goods-sold as a percentage of revenue across 12 months. A steady percentage points to accrual; noticeable swings point to cash. Differences between a tax return and an income statement often trace back to a mismatch in accounting method — look for the M-1 Reconciliation schedule on the tax return, which explains it. Under accrual accounting, the cost of each inventory unit stays on the balance sheet as an asset until that unit actually sells, rather than hitting the P&L all at once.

Related terms: Cash Flow Statement, GAAP, Financial Statements, Balance Sheet