Cash basis vs. accrual

Definition

Books that count money when it moves, or when it is earned and owed.

Why It Matters

Almost every small business a searcher looks at keeps cash books, because that is what the tax return wants, and cash books hide two things a buyer pays for. Work finished in December and invoiced in January lands in the wrong year, so a strong final quarter can look like a weak one or the reverse. And money already collected for work not yet delivered reads as profit when it is a debt the buyer inherits. The quality of earnings engagement converts the books before anyone argues about a multiple, and the conversion is where the price usually moves.

In numbers: A $40,000 December job invoiced in January counts in next year on cash books and in this year on accrual.