Cash vs. Accrual: Choosing the Right Accounting Method

Many small business owners start with simple accounting processes. But as their companies grow, the choice of accounting method can significantly impact taxes, financial reporting and access to financing. Understanding the differences between the cash and accrual methods — and when each makes sense — can help you make more informed decisions as your business develops.

Cash-basis accounting: Simplicity and tax flexibility

Under the cash method, companies recognize revenue when payments are received and expenses when they’re paid. As a result, cash-basis entities may report fluctuations in profits from period to period, especially if they’re working on long-term projects. This can make it hard to benchmark a company’s performance from year to year — or against other entities that use the accrual method.

Small businesses with average annual gross receipts below an inflation-adjusted threshold may qualify to use the cash method for federal tax purposes. For the 2025 tax year, the inflation-adjusted gross receipts threshold was $31 million. For 2026, the threshold increases to $32 million. These tax thresholds apply to most small businesses, including sole proprietorships, partnerships and corporations.

Businesses that are eligible to use the cash method of accounting for tax purposes may have some ability to manage the timing of income and deductions within the boundaries of tax rules. This typically involves planning around when income is received and expenses are paid.

In some cases, businesses may benefit from deferring revenue and accelerating expenses near year end to reduce current-year taxable income. However, this approach should be evaluated carefully, as it may also make the business appear less profitable to lenders or investors. Conversely, if tax rates are expected to increase substantially in the coming year, it may be advantageous to accelerate revenue recognition and defer expenses at year end. This strategy may increase current-year tax liability but could result in overall tax savings if future rates change.

Accrual-basis accounting: Clearer financial picture for decision-making

The accrual method is more complex but provides a more complete view of a company’s financial performance. It conforms to the matching principle under Generally Accepted Accounting Principles (GAAP), meaning companies recognize revenue and expenses in the period they’re earned or incurred. This method reduces major fluctuations in profits from one period to the next, making performance easier to benchmark.

For example, a business that delivers services in December but isn’t paid until January would still report that revenue in December under the accrual method — providing a more accurate picture of when the work was performed.

In addition, accrual-basis businesses report several asset and liability accounts that are generally absent on a cash-basis balance sheet. Examples include prepaid expenses, accounts receivable, accounts payable, work-in-process inventory and accrued expenses.

The U.S. Securities and Exchange Commission requires public companies to issue financial statements that conform to GAAP, which prescribes the usage of the accrual method. Private companies that are large enough to consider going public, or that are contemplating mergers or acquisitions, may want to issue GAAP financial statements to facilitate these transactions. Likewise, many lenders prefer GAAP financials for underwriting and due diligence purposes.

Some states also require sales tax returns to be filed on an accrual basis. If you don’t track and plan carefully in these states, you might get hit with a sales tax bill on payments you haven’t yet collected. This can affect your cash flow.

Which method is right for you?

Many businesses begin with the cash method but revisit that choice as operations become more complex. Choosing the wrong accounting method — or failing to revisit your approach as your business grows — can affect everything from tax liability to financing opportunities. We can help you evaluate whether your current method remains appropriate and guide you through the transition if a change makes sense. Contact us to evaluate your financial reporting options and help you make an informed decision.

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