Most small restaurants do fine with cash accounting. It’s simpler, easier to understand, and matches how you actually experience money flowing through your business. Unless you’re running a large operation or have specific circumstances that require accrual, cash basis is probably the right choice.

Cash accounting records income when you receive payment and expenses when you pay them. Accrual accounting records income when you earn it and expenses when you incur them, regardless of when money actually changes hands.

For a typical restaurant, this distinction shows up in timing. With cash basis, tonight’s credit card sales hit your books when the processor deposits funds in your account. Your food delivery expense shows when your card gets charged or you write the check. With accrual, that same food delivery would be an expense when you receive the invoice, even if you don’t pay it for another two weeks.

Cash accounting makes more sense for most restaurants because almost all revenue comes in immediately through credit card settlements and cash registers. It matches your cash flow reality and makes it easier to see where you actually stand financially. It also requires less bookkeeping work since you’re not tracking receivables or payables that haven’t settled yet.

The IRS allows cash accounting for businesses with average annual gross receipts under $29 million over the past three years. For the vast majority of restaurants, this threshold isn’t a concern.

The inventory question comes up often. Restaurants and bars have inventory in the form of food and beverages, and there’s a common belief that you need accrual accounting if you have inventory. But the IRS allows small businesses under that $29 million threshold to use cash accounting even with inventory. Most restaurants treat food purchases as expenses when paid rather than maintaining a full inventory cost tracking system.

When might accrual make more sense? If you have significant accounts receivable from regular catering clients you invoice, or if you’re seeking outside investors who want GAAP-compliant financials, accrual accounting provides a more precise picture of profitability in each period. It also better matches revenue to the time it was actually earned.

One thing to keep in mind is that switching methods later requires IRS approval through Form 3115 and can create a one-time tax adjustment. Starting with the method you plan to stick with is easier than converting down the road.

For most restaurants running normal operations with mostly immediate payment, cash accounting is the straightforward choice. If you’re not sure which method fits your situation, a Richmond bookkeeper familiar with restaurant operations can look at your specifics and help you decide before you file your first return with the wrong method.