Understanding Accounts Receivable: Cash vs. Accrual Accounting for Nonprofits
Cash vs accrual accounting is one of the most important financial distinctions for small businesses and nonprofits to understand. While many businesses operate on a cash basis, nonprofits are generally required to use accrual accounting to maintain accurate financial reporting and properly track accounts receivable.
And understanding the difference between cash accounting vs. accrual accounting, especially as it relates to accounts receivable, is essential for maintaining accurate, compliant, and meaningful financial records.
Cash vs. Accrual Accounting: What’s the Difference?
At a high level, the difference comes down to timing.
Cash Accounting
Cash accounting records income and expenses when money actually moves.
- Revenue is recorded when cash is received
- Expenses are recorded when cash is paid
This method is simple and commonly used by small businesses because it’s easy to maintain and understand.
Accrual Accounting
Accrual accounting records income and expenses when they are earned or incurred, regardless of when cash changes hands.
- Revenue is recorded when it is earned
- Expenses are recorded when they are incurred
This is where accounts receivable (AR) comes into play.
What Are Accounts Receivable?
Accounts receivable represent money that has been earned but not yet received.
For example:
- A nonprofit earns grant revenue that hasn’t been paid yet
- A business invoices a client but hasn’t been paid
Under accrual accounting, that revenue is still recorded because it has been earned.
This provides a more accurate view of the organization’s financial position. More accurate, but can also seem more confusing if the stakeholders don’t understand what the financial reports are showing. For example, a nonprofit is required by law to record revenue when they receive a letter from a foundation informing them they will be awarded a $400,000 grant by the end of the year. They receive the letter in May but the cash doesn’t come until October. The nonprofit is required to record that revenue in May. Without understanding the financial reports, leadership might think there is $400,000 sitting in the bank account ready to be spent, when really it’s a Receivable, it is not YET received. The income has gone up, but the cash has not. The P&L looks great, our revenue went up! But the cash hasn’t followed yet, so the nonprofit should be increase expenses YET.
Why Nonprofits Use Accrual Accounting
Unlike many small businesses, nonprofits are generally required to use accrual accounting vs cash for financial reporting. cash vs accrual accounting for nonprofits
This is because:
- It provides a clearer picture of financial health
- It aligns revenue with the period it was earned
- It supports transparency for boards, donors, and stakeholders
This is both true and not true! Sometimes it provides a clearer picture, but sometimes it leads to a lot of confusion. Why should I record revenue if I don’t know when it’s actually coming? Why not wait until it actually arrives to record it. By recording it when it’s earned, it helps to plan ahead. You can plot out future cash flow and make future projections. But you have to know what you are looking for. You have to understand the Receivables in order to understand how it affects cash and expenditures.
Organizations filing financial statements, especially those required to complete Form 990, benefit from the structure and clarity that accrual accounting provides.
Why Cash vs Accrual Accounting Matters for Financial Clarity
Accrual accounting goes beyond tracking cash, it tells the full story.
With accrual-based books, organizations can:
- See what revenue is expected (not just received)
- Track outstanding invoices and grant funding
- Understand true monthly performance
- Make more informed financial decisions
Without this structure, financial reports can feel incomplete or misleading.
Why Accrual Accounting Requires More Expertise
While accrual accounting provides better insight, it also requires:
- Proper tracking of receivables and payables
- Consistent reconciliation of accounts
- Clear categorization of revenue and expenses
- Ongoing review of financial statements
This is where many organizations begin to feel overwhelmed. Because it’s no longer just about tracking transactions, it’s about maintaining a system.
How Truly Supports Accrual Accounting for Nonprofits
At Truly Bookkeeping, we work closely with both small businesses and nonprofits, and we bring particular care and expertise to organizations operating on an accrual basis.
Our approach includes:
- Maintaining accurate accounts receivable and payable records
- Ensuring financial reports reflect true organizational activity
- Supporting clarity for leadership, boards, and stakeholders
- Creating systems that are consistent, sustainable, and easy to understand
We understand that accrual accounting can feel more complex, but with the right systems in place, it becomes a powerful tool rather than a burden.
Check out our recent blog, Sustainable Financial Systems for Small Businesses and Nonprofits: Moving from Reactive to Proactive.
Cash accounting works well for simplicity. Accrual accounting offers a more complete and accurate financial picture, but it also requires consistency, structure, and the right level of support. At Truly Bookkeeping, we work closely with small businesses and nonprofits to maintain clear, reliable financial systems, so you’re not left guessing, especially when it matters most. If your organization is navigating accrual accounting or needs support managing accounts receivable, we’re here to help.