Cash or accrual: which method fits your business?
Cash accounting records income when you receive it and expenses when you pay them. Accrual records income when you earn it and expenses when you owe them. Most small businesses can use cash, and it's simpler. Accrual gives a truer picture when you invoice clients, carry inventory or need investor-ready numbers.
Updated November 2026 · By Pankil Kumar, Managing Partner
Quick facts
- Cash. Income when received, expenses when paid
- Accrual. Income when earned, expenses when incurred
- Most small firms. Most small businesses are allowed to use the cash method
How do the two methods differ?
Say you send a $10,000 invoice on December 20 and get paid on January 10. On the cash method, that's January income. On accrual, it's December income. Same work, different tax year.
| Example | Cash method | Accrual method |
|---|---|---|
| Invoice sent Dec 20, paid Jan 10 | Income in January | Income in December |
| Bill received Dec 15, paid Jan 5 | Expense in January | Expense in December |
| Annual software paid in December | Generally when paid, with limits | Spread over the period covered |
Who can use the cash method?
Most small businesses qualify. The IRS allows the cash method for businesses under an inflation-adjusted average gross receipts test set far above most small firms. C-Corps and partnerships with a C-Corp partner above that test must use accrual, and so must tax shelters. Check Publication 538 if you're near the line.
Why choose cash?
It's simple, it matches your bank balance and you don't pay tax on money you haven't collected yet. It also gives you some control at year end, since you can send invoices later or pay bills earlier. Used sensibly, that's a legitimate way to time income and expenses.
Why choose accrual?
Accrual matches revenue to the work that earned it. So if you run long projects or carry big receivables, it shows whether you actually made money last month. Investors and lenders often expect it, which is why many software and startup companies use it.
Can you switch later?
Yes, but it's not just a setting in your software. Changing your overall tax method generally means filing Form 3115 with the IRS, and there's usually an adjustment to make sure no income gets counted twice or missed. Many businesses keep their tax return on cash and run accrual reports for management, since QuickBooks and Xero can show both.
Sources
General information, not tax advice for your situation.
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See our bookkeeping serviceCan I use cash for taxes and accrual for my reports?
Yes. Many small businesses file on cash and review accrual reports to manage the business, and accounting software can show both.
Do I have to use accrual if I have inventory?
Not always. Small businesses under the gross receipts test can generally use the cash method even with inventory, with their own inventory rules.
What method does the IRS prefer?
The IRS requires a method that clearly reflects income, and you have to use it consistently from year to year.
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