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Cash vs. Accrual: Which Accounting Method Fits Your Essex County Business?

Cash vs accrual

Oct 23, 2025

Submitted by:
Gregory Monaco, CPA
Livingston, NJ
Greg@MonacoCPA.cpa
(862) 320-9554

Choosing between cash and accrual accounting is one of the most important decisions a small business owner can make. For businesses in Livingston, NJ, and throughout Essex County, the method you select affects how you record income, manage taxes, and interpret your company’s performance.

This guide explains the differences between cash and accrual accounting, how each impacts your books, and how to decide which method best fits your business goals.

What Is the Accounting Method — and Why Does It Matter?

Your accounting method determines when you recognize income and expenses. It’s the foundation of your bookkeeping and your tax reporting.

  • Cash basis: You record income when money is received and expenses when they’re paid.

  • Accrual basis: You record income when it’s earned and expenses when they’re incurred — even if cash hasn’t moved yet.

The IRS requires you to use one consistent method across your bookkeeping and tax reporting, and switching methods requires IRS approval.
 

The Cash Basis Method

How It Works
Under the cash basis, you only record transactions when the money actually changes hands.

If a client pays you today, it counts as income today — even if you invoiced them last month.

Pros of Cash Accounting

  • Simple to manage: Great for sole proprietors and small service businesses.

  • Clear cash flow view: What’s in your account reflects your actual cash on hand.

  • Tax timing control: You can delay or accelerate payments to manage taxable income.

Cons of Cash Accounting

  • No long-term visibility: You can’t see what’s owed to you or what you owe.

  • Limited for inventory: Not ideal for businesses that stock goods.

  • IRS limits: Businesses with over $25 million in average annual receipts may not qualify.

Local tip: Many Essex County service-based businesses — like consultants, landscapers, and salons — start on the cash basis for simplicity.

The Accrual Basis Method

How It Works
Accrual accounting recognizes revenue when it’s earned, not when paid.
For example, if you invoice a client in December but get paid in January, the income still counts for December.
Pros of Accrual Accounting

  • Simple to manage: Great for sole proprietors and small service businesses.

  • Clear cash flow view: What’s in your account reflects your actual cash on hand.

  • Tax timing control: You can delay or accelerate payments to manage taxable income.

Cons of Accrual Accounting

  • More complex: Requires journal entries and adjustments.

  • Can distort cash flow: Shows “profit” even if the bank balance is low.

  • Needs professional oversight: Ideal with CPA review or monthly bookkeeping service.

CPA insight: For growing businesses in Livingston that bill clients on terms (like “Net 30”), accrual accounting provides a clearer view of your financial health.

Cash vs. Accrual: Side-by-Side Comparison

Feature

Cash Basis

Accrual Basis

When Income

Recorded

When received

When earned

When Expenses

Recorded

  When paid

When incurred

Best For

Service-based, small

cash businesses

Inventory or growth-focused businesses

Tax Flexibility

Higher

Moderate

Complexity

Low

High

GAAP-

Compliant

No

Yes

How Your Choice Affects Taxes

Cash Basis:

You only pay tax on income you’ve actually received — great for managing taxable income near year-end. For example, if you delay billing until January, that income falls into the next tax year.
Accrual Basis:
You recognize income when it’s earned, regardless of payment timing. This can mean higher taxable income in the short term but more accurate long-term reporting.
Note: The IRS generally allows small businesses (under $25M in gross receipts) to choose cash or accrual freely — but consistency is key.

When to Switch from Cash to Accrual

Consider switching if:

  • You manage large accounts receivable or payable balances.

  • You want to pursue financing or investors.

  • You maintain inventory or large prepaid contracts.

  • Your CPA recommends it for tax strategy alignment.

Switching typically requires filing Form 3115 (Application for Change in Accounting Method) with the IRS, often guided by your CPA.

Hybrid Approach (Advanced Option)

Some New Jersey businesses use a hybrid method — cash for most operations, but accrual for inventory or major contracts. While not officially recognized by the IRS as a “third method,” many CPAs structure hybrid systems internally for management reporting.

Choosing the Right Method for Your NJ Business

Here’s how to decide:

  • Service-based under $1M revenue: Cash basis often works best.

  • Product-based or growing business: Accrual basis usually offers better insights.

  • Rapid expansion or financing plans: Use accrual for comparability and credibility.

Discuss with your CPA — switching midstream without proper adjustments can cause reporting issues.

CPA Perspective: The Local Advantage

A Livingston, NJ CPA understands both IRS and state-level considerations. For instance, some New Jersey business taxes and gross receipts rules interact differently depending on your accounting method.
Working with a local CPA ensures your financial method aligns with both federal and NJ compliance while optimizing your tax position.
 

Need help determining whether cash or accrual accounting is best for your business?

Contact Gregory Monaco, CPA LLC in Livingston, NJ. We’ll review your current system, run side-by-side financial comparisons, and guide you toward the most tax-efficient method for your business.

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