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Bookkeeping, close & software3 min readPublished October 2023Updated September 2026

Cash basis vs accrual accounting: which one should you use?

Nare KhachatryanHead of Marketing, Hundred MS. Reviewed by Narek Abgaryan, CFA, FRM.

Illustration of cash basis vs accrual accounting: a balance scale with a stack of coins on one side and a calendar page on the other

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The short answer

Cash basis records income when money arrives and costs when money leaves. Accrual records income when it is earned and costs when they are incurred, whatever the payment date. Cash basis is simpler and fine for very small businesses. Accrual shows the real performance of the month, and it is what US accounting standards (GAAP), lenders and investors expect.

Key takeaways

Cash basis follows the bank. Accrual follows the work.
Accrual is what US accounting standards, lenders and investors expect.
You can keep accrual books and still watch cash closely with a forecast.

The difference in one example

In March you finish a project and send an invoice for $10,000. The customer pays in April. In March you also receive a $3,000 bill from a contractor, which you pay in April. The figures are an example only.

Item	Cash basis	Accrual
March income	$0	$10,000
March costs	$0	$3,000
March profit	$0	$7,000
April profit	$7,000	$0

Same business, same total. Cash basis says March was empty and April was great. Accrual says the work and the profit happened in March. If you are deciding whether March went well, only one of these answers the question.

Side by side

Item	Cash basis	Accrual
Income is recorded	When the money arrives	When it is earned
Costs are recorded	When the money leaves	When they are incurred
Shows receivables and payables	No	Yes
Effort	Low	Higher: needs a real month-end close
Good for	Very small, simple businesses	Growing companies, inventory, contracts, anyone raising money
Accepted under US GAAP	No	Yes

A quick test

Did your profit swing sharply last quarter for a reason you cannot explain with anything that happened in the business? That is usually cash-basis timing, not performance.

Who can use which

In the US, the tax rules let many small businesses choose cash basis. The main limit applies to C corporations and to partnerships that have a C corporation as a partner. Once their average yearly gross receipts over the previous three tax years pass a threshold, they must use accrual for tax: $31 million for tax years beginning in 2025 and $32 million for 2026. The figure is adjusted for inflation every year. Tax shelters cannot use cash basis at all, and some types of business have their own rules. Check your own case with your tax adviser.

Tax is only half of it. Banks, investors and auditors expect accrual statements. If anyone outside the company will read your numbers, plan for accrual.

You can have both views

Keep the books on accrual and still manage cash closely. Accrual tells you whether the business is profitable. A cash forecast tells you whether you can pay wages next month. You need both, and one does not replace the other.

When to switch to accrual

Customers pay upfront for work you deliver over months.
You hold inventory.
You are about to raise money, borrow, or be audited.
Profit swings wildly from month to month for no business reason.
You approach the tax threshold.

How to switch without breaking the books

Pick a clean start date, ideally the first day of a fiscal year.
List what is open on that date: unpaid customer invoices, unpaid bills, prepaid costs, deposits from customers, accrued wages.
Post them as opening balances, with support for each.
Ask your tax adviser about the filing that a change of method needs. In the US this is normally a formal request to the IRS on Form 3115.
Start a monthly close, because accrual only works if someone reviews these balances every month.

Where this goes wrong

The problem	What it costs you	The fix
Cash-basis profit is read as performance	A good month looks bad, or the other way round	Judge performance on accrual numbers
The switch happens in the middle of a year	Two methods in one set of reports	Switch on the first day of a fiscal year
Accrual books with no monthly close	Receivables, payables and accruals drift away from reality	Review those balances every month

How we know

We keep accrual books and run a monthly close for our clients, so we see both views of the same business every month.

Sources we opened and checked for this guide:

First published 2023. Rewritten and checked in September 2026. If something here is out of date, tell us and we will fix it.

Cash basis vs accrual accounting: common questions.

1Is accrual accounting required?

Under US GAAP, yes. For US tax, many small businesses may choose cash basis. C corporations, and partnerships with a C corporation as a partner, must switch to accrual once their average gross receipts pass a threshold that is adjusted every year ($32 million for tax years beginning in 2026). Lenders and investors normally ask for accrual statements whatever your tax method is.

2Can I use cash basis for tax and accrual for management?

Often, yes. The tax rules start from the method you use in your books, but accept differences if you keep a reconciliation between the two. A tax preparer can convert accrual books to cash basis for the return. Confirm with your tax adviser.

3Does QuickBooks support both methods?

Yes. QuickBooks can show most reports on either basis from the same data, as long as invoices and bills are entered properly and not only the payments.

4Which method is better for a small business?

If you are very small and paid on the spot, cash basis is enough. Once you invoice customers, carry stock or need outside money, accrual gives you numbers you can actually manage by.