Accounting Method: Cash or Accrual, Which Should You Choose?

Quick answer: The two main accounting methods are cash basis (record income and expenses when money actually changes hands) and accrual basis (record them when they're earned or incurred, regardless of payment). Small businesses with under $30 million in average annual gross receipts can generally choose either method for tax purposes; most larger businesses, C corporations, and businesses carrying inventory must use accrual.

What is the cash method of accounting?

The cash method records transactions only when cash is received or paid. If you invoice a client in December but get paid in January, that income belongs to January under cash accounting. It's the default choice for freelancers, sole proprietors, and most service-based small businesses.  

Use cash basis when you want:

• Simpler bookkeeping
• A clearer view of how much cash is actually in the bank
•  Easier tax planning (you can time income and expenses by timing payment) 

What is the accrual method of accounting?

The accrual method records income when it's earned and expenses when they're incurred, even if no money has moved. That December invoice counts as December income, regardless of when the client pays. It's the standard for businesses with inventory, accounts receivable, or significant credit transactions.  

Use accrual basis when you want:

• A more accurate picture of profitability over time
• Better matching of revenue with the expenses that generated it
• Financial statements that lenders, investors, and auditors will take seriously (GAAP requires accrual)

Cash vs accrual accounting: what's the difference?

Which accounting method is better for taxes?

Cash basis usually gives small businesses more tax flexibility because you control timing. You could choose to delay sending an invoice or prepay an expense in December to shift it into the right tax year.

Accrual basis can be better when you have large outstanding receivables that you don't want to pay tax on before collecting, or when you carry inventory and need to match cost of goods sold to revenue.

The IRS allows most businesses with average gross receipts of $30 million or less (2025 threshold, adjusted for inflation) to choose either method. See IRS Publication 538 for the full rules.

What accounting method should I use for Schedule C?

On Schedule C (Profit or Loss from Business), sole proprietors check one of three boxes for accounting method: Cash, Accrual, or Other.

Most sole proprietors and single-member LLCs choose Cash because:

• It matches how they actually run the business
• It's simpler to reconcile with bank statements
• It avoids paying tax on income they haven't received yet

Choose Accrual on Schedule C if you carry inventory above the $30M threshold, or if you've already been keeping accrual-based books for other reasons (loans, investors, partners).

⚠️ Once you pick a method on your first return, you generally have to stick with it. Changing methods requires filing Form 3115 with the IRS.

Can I switch from cash to accrual (or back)?

Yes, but it requires IRS approval. File Form 3115 (Application for Change in Accounting Method) to request the change. Some changes are "automatic" (no fee, faster approval); others require advance consent.

Common reasons to switch:

• Growing past the $30M gross receipts threshold (must move to accrual)
• Taking on investors or applying for larger financing (lenders want accrual)
• Adding inventory to your business model

Do I have to use accrual accounting?

You're required to use the accrual method if:

1. Your business is a C corporation (or partnership with a C-corp partner) with average annual gross receipts over $30 million
2. You carry inventory as a material income-producing factor AND exceed the gross receipts threshold
3. You're a tax shelter (regardless of size)

Otherwise, the choice is yours.

What is the hybrid (or "other") accounting method?

The hybrid method mixes cash and accrual, for example, using accrual for inventory and cost of goods sold, but cash for everything else. It's allowed by the IRS but must be consistent and clearly reflect income. This is what gets checked under "Other" on Schedule C.

The bottom line

Pick cash basis if you're a small service business, freelancer, or sole proprietor who wants simple books and better control over tax timing. Pick accrual basis if you carry inventory, sell on credit, need GAAP-compliant statements for investors or lenders, or exceed the IRS gross receipts threshold. When in doubt, consult a CPA as the method you choose on your first tax return is sticky, and switching later means filing Form 3115.

Frequently Asked Questions