Who this applies to
Owners choosing or reconsidering an accounting method.
Key questions
- Do you carry inventory or extend credit?
- Do lenders or investors want accrual statements?
- Are you under the gross receipts threshold for the cash method?
Review with the OICPA team
- Decide the basis for your books and for your return
- Discuss any method change (Form 3115) before year-end
On this page
Cash and accrual are two ways of deciding when income and expenses are recorded. The choice affects your reports, your taxes and what lenders think of your numbers.
Cash basis
Income is recorded when money arrives; expenses when money leaves.
- Pros: simple, matches your bank account, and income you haven't collected isn't taxed yet.
- Cons: profit swings with the timing of payments, and the books don't show what customers owe you or what you owe vendors.
Accrual basis
Income is recorded when earned (usually when you invoice); expenses when incurred (when you receive the bill), regardless of when cash moves.
- Pros: matches revenue with the costs of earning it, shows receivables and payables, and gives a truer picture of performance. Lenders and investors usually expect it.
- Cons: more work, and you can owe tax on income you haven't collected yet.
A quick example
You finish a $10,000 project in December and are paid in January. On the cash basis, the income lands in January (next year). On the accrual basis, it's December income (this year).
Which can you use for taxes?
Many small businesses may use the cash method. Businesses with average annual gross receipts above an inflation-adjusted threshold (about $31 million for 2025) generally must use accrual, and special rules apply to inventory, tax shelters and certain entity types. Changing your tax accounting method usually requires filing Form 3115, so it's a decision to make with your tax preparer.
Can you use one for books and another for taxes?
Yes. Some businesses keep accrual books for management and lenders, and file on the cash basis where allowed, with adjustments at year-end. Your accounting software can produce both views if the books are kept on accrual.
What we recommend
- Cash basis: service businesses, freelancers and consultants with no inventory and quick payments.
- Accrual basis: businesses with inventory, significant receivables or payables, loans with covenants, or plans to raise money or sell.
Our Essential monthly bookkeeping package is cash basis; Growth and Advanced include accrual adjustments. See bookkeeping pricing.
See what this would cost
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