Commercial finance writer Sam Thacker writes a nice blog post on the basic accounting question; What’s the difference between Cash and Accrual methods? His description includes what lenders, like a factoring company, typically look for with these forms of bookkeeping.
With regard to revenue recognition, cash basis bookkeepers recognize revenue when they receive it. Expenses are recognized when they are paid.
Companies that elect to use accrual based accounting recognize revenues when they are earned (goods and services are delivered) or when revenue is realizable. Realizable means the company has every expectation that it will be paid for its goods and services in the future. Expenses are accrued when they are incurred, whether they are paid or not. There is a principle in accounting called the “matching principle,†which allows accrual basis bookkeepers to accrue an expense in the same period they accrue the income.
When a business starts up, it must decide if it will be a cash basis bookkeeper or an accrual basis bookkeeper. That determination is required by the IRS and there are rules about what kinds of businesses can be one or the other. In general, a business can be a cash basis bookkeeper when it does not have inventory.