Accrual vs. Cash Accounting - A Primer

What even is cash accounting, accrual accounting, and the differences?

Cash Accounting

Cash accounting is probably what you think of when you think of the simplest way to track your finances. Someone paid me on Tuesday so I earned revenue on Tuesday. I paid someone Thursday, so I had an expense on Thursday.

I really follows one rule: record activity when the money moves.

When cash comes in from a payer, that’s revenue. When cash leaves the bank to pay employees, rent, supplies, malpractice, or pizza, that’s an expense.

There’s no tracking of accounts receivable (what people owe you) or accounts payable (what you owe other people). No timing adjustments, accrual entries, or other accountant words. It’s basically just looking at your bank account. Or like when you used to balance your check book in the glory days.

This approach is clean and intuitive. It also helps that most medical practices file taxes on a cash basis anyways. The reason for that is due to pesky payer payment timings and denials, so one can avoid paying tax on revenue that hasn’t been collected.

In essence, you are left to manage by bank account or your billing company’s metrics. All of which are a bit like driving while looking in the rearview mirror. Better than driving with your eyes closed for sure, but it can also present other challenges.

Accrual Accounting

On the flip side, accrual accounting is what most large operations use, but to be fair, it can be… okay… it is more administratively complex than cash accounting.

The real crux you should care about in accrual accounting is when revenue is recognized and recorded and when expenses are incurred and recorded.

Revenue is recorded when services are performed, because that’s when the revenue is earned.

Expenses are recorded when they are incurred, because that’s when the economic benefit is consumed.

This aligns with the core accounting principles: revenue recognition and expense matching.

Here’s how it flows at a high level:

A patient comes in for a visit or procedure. Once completed, the service appears as revenue on that date of service. The practice records revenue and increases accounts receivable representing the claim to future payment. When cash arrives, the receivable is reduced, but revenue doesn’t change, because it already reflected the economic activity of the practice.

Expenses follow the same logic. When that patient received care clinicians were providing those services to enable the revenue. So for expenses, we use the matching principle and payroll for the clinical month is matched to the month’s revenue, not the week payroll was run. Likewise, supplies are expensed when used, not when the invoice is paid.

Accrual accounting produces a profit and loss statement that connects the practice’s work, its cost structure, and its financial outcome. It allows for forecasting, budgeting, productivity analysis, and margin assessment. It can also be a shift from looking in the rearview mirror to looking through the windshield.

Wrapping up

Accrual and cash accounting answer two different questions. Cash shows what moved through the bank. Accrual shows what the practice earned and consumed in real time. Cash reflects liquidity. Accrual reflects performance.

A practice that wants to understand margins, production, payer dynamics, and operational reality may benefit from the accrual lens somewhere in its financial workflow.

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