Cash vs. accrual accounting: which method fits your business

2026 examples. Figures, rates and dates on this page change by year; check current IRS and state guidance before you rely on them.

Every business has to decide when a sale counts as income and when a bill counts as an expense. That choice is your accounting method, and it affects both your tax return and how you read your own numbers.

This guide explains the two common methods in plain language. It is general information, so check current IRS guidance and talk to a CPA about your own situation.

What is the cash method?

Under the cash method, you generally report income in the year you actually or constructively receive it, and you deduct expenses in the year you pay them. If a client pays a December invoice in January, that income belongs to January.

The cash method is simple and tracks closely with your bank account. That is why many sole proprietors, freelancers and small service businesses use it.

What is the accrual method?

Under the accrual method, you record income when you earn it and expenses when you incur them. A December invoice for work completed in December counts as December income even if the client pays in January.

Accrual books show a more complete picture of what the business owes and is owed at any point. Larger businesses, and many businesses that carry inventory, use it for that reason.

Who can use the cash method?

The Internal Revenue Code limits the cash method for some businesses, mainly C corporations, partnerships with a C corporation partner and tax shelters. Most of these can still use it if they meet the gross receipts test in section 448, though tax shelters cannot. Most small businesses fall within that test.

The gross receipts threshold is adjusted for inflation, so check the current figure in IRS Publication 538 or the latest IRS guidance rather than relying on an old number. If you are setting up a new entity, the choice is worth discussing as part of business formation.

Can you change methods later?

Yes, with IRS consent. Your method has to clearly reflect income and be applied consistently from year to year. Changing it generally requires filing Form 3115, Application for Change in Accounting Method.

Some changes qualify for automatic consent, while others require advance approval from the IRS. A switch can also create a one-time adjustment to taxable income, so timing matters. We look at this together with tax planning before the year closes.

How does the method affect your bookkeeping?

Cash-basis books need clean records of deposits and payments. Accrual books also need accurate tracking of invoices, unpaid bills and, in many cases, inventory.

Whichever method you use, keep the supporting records for as long as the IRS can examine the return. Our how long to keep tax records guide covers the retention periods, and our bookkeeping page explains how we keep the books current month to month.

Summary

The cash method records income when received and expenses when paid.

The accrual method records income when earned and expenses when incurred.

Many small businesses qualify for the cash method under the gross receipts test.

The gross receipts threshold is adjusted for inflation, so check the current IRS figure.

Your accounting method must clearly reflect income and be used consistently.

Changing your accounting method generally requires filing Form 3115 with the IRS.

Frequently asked questions

What is the main difference between cash and accrual accounting?

The difference is timing. The cash method counts income when the money arrives and expenses when you pay them. The accrual method counts income when you earn it, such as when you complete the work and invoice it, and expenses when you incur them, even if payment happens later.

Can my small business use the cash method?

Many can. A business that meets the gross receipts test in IRC section 448 can generally use the cash method, though some entities and situations have extra rules. The dollar threshold is adjusted for inflation each year, so check the current figure in IRS guidance or ask your CPA.

Which method gives a clearer picture of profit?

Accrual accounting usually matches income with the expenses that produced it, so monthly profit is easier to read. Cash accounting is simpler and shows what is actually in the bank. Some owners file on the cash method and also review accrual-style reports for management decisions.

How do I switch from cash to accrual, or the other way?

A change in accounting method generally requires IRS consent, which is requested on Form 3115. Some changes qualify for automatic consent procedures, while others need advance approval. The switch can also create an adjustment to taxable income, so plan it before year-end.