What is the difference between cash and accrual accounting for a small business?

Cash-basis accounting records income when money actually lands in your account and expenses when you pay them. Accrual accounting records income when you earn it (send the invoice) and expenses when you incur them, regardless of when cash moves. Most freelancers and small service businesses use cash basis because it's simpler and matches how their bank account behaves, and the IRS generally allows it below certain revenue thresholds it updates periodically. Accrual gives a truer picture of profitability for businesses carrying inventory or large receivables, and larger companies are often required to use it. You pick a method when you file your first return; switching later requires IRS approval. When unsure, cash basis is the usual starting point for a solo operation.