Cash vs. Accrual: Which Basis Should Your Business Use?
The same month can show a $30,000 profit or a $4,000 loss depending on which basis you use. Here is what each one measures, and how to pick the one that matches how your business actually works.
Two businesses do identical work in March. One shows a $30,000 profit for the month; the other shows a $4,000 loss. Nobody is lying. They are just answering a different question.
The short answer
Should my small business use cash basis or accrual basis accounting?
Cash basis records income when money arrives and expenses when money leaves — simple, and it matches your bank account. Accrual basis records income when it is earned and expenses when they are incurred, regardless of payment timing — more work, but it tells you whether a given month was actually profitable. If you invoice customers and wait to be paid, use accrual for your books.
What each one is actually measuring
Cash basis asks…
Accrual basis asks…
The gap between the two is timing, and timing is exactly what small businesses get wrong when they judge a month.
You complete a $40,000 project in March and invoice it. The customer pays in May. Your subcontractor bills you $18,000 in March and you pay them in April. Your other March costs, all paid in March, come to $6,000.
| | Cash basis | Accrual basis | | --- | --- | --- | | Income counted in March | $0 | $40,000 | | Expenses counted in March | $6,000 | $24,000 | | March result | ($6,000) loss | $16,000 profit |
Cash basis says March was your worst month of the year. Accrual says it was one of your best. Accrual is describing the business; cash is describing the bank.
How to choose
The short decision rule
If you get paid at the moment of sale — retail, restaurants, most service businesses that collect on the spot — cash basis is honest and much simpler. If you invoice and wait, or you buy materials weeks before you get paid for them, accrual is the only basis that will tell you the truth about a month.
There are a few hard constraints on top of that preference:
- Inventory. If you carry inventory, the IRS generally pushes you toward accrual.
- Size. Above the gross-receipts threshold (currently $30 million for tax years beginning in 2025), accrual is required for tax purposes.
- Outside readers. Lenders, investors and buyers expect accrual statements and will discount cash-basis ones.
- Grants and audits. Formal reporting requirements almost always assume accrual.
The practical answer for most owners
You are not required to pick one and live with it everywhere. The common, sensible setup is:
- Keep the books on accrual, so monthly statements reflect the work actually done
- Enter bills when they arrive and invoices when the work is finished, not when money moves
- Review the accrual P&L monthly for decisions — pricing, hiring, capacity
- Review a cash-basis view alongside it to understand what is actually in the bank
- Let your accountant decide the tax-return basis at year end
Switching later is not free
Changing your basis for tax purposes generally requires filing Form 3115 and making adjusting entries so income is not counted twice or skipped. It is routine work for a CPA, but it is work — which is why this is worth deciding deliberately at the start rather than discovering in year three.
What to remember
- 01Cash basis follows the money; accrual basis follows the work.
- 02If you invoice and wait to be paid, cash basis will misreport nearly every month.
- 03Inventory, size, and outside readers can force accrual regardless of preference.
- 04Keep the books on accrual and let your CPA choose the tax basis — you do not have to pick one for both purposes.
Next: the chart of accounts — the outline that decides whether your P&L is readable at all.
Common questions
- Can I use cash basis for taxes and accrual basis for management?
- Yes, and many businesses do. You keep the books on accrual so your monthly statements are meaningful, then your accountant converts to cash basis for the tax return if that is advantageous and permitted. QuickBooks can toggle most reports between the two.
- Is my business required to use accrual accounting?
- Generally the IRS requires accrual accounting if you carry inventory or if your average annual gross receipts exceed the current threshold — $30 million for tax years beginning in 2025, indexed annually. Most small businesses fall below it and may choose. Confirm your situation with your CPA.
- Which basis makes my business look better to a lender?
- Accrual, almost always. It matches revenue to the period the work was done, so it shows a truer earnings pattern. Lenders and buyers discount cash-basis statements because timing of deposits can be managed.