Cash or accrual is the first structural decision in a set of books, and it quietly determines whether your monthly reports are useful or misleading. It is not an accounting-theory question — it changes what your P&L says about a month you actually lived through.
The difference, in one example
Cash basis records a transaction when money moves. Accrual basis records it when the work is earned or the cost is incurred, regardless of when it is paid.
Say you finish a $10,000 job in March, invoice it, and get paid in May. On the cash basis, March shows nothing and May shows $10,000 of income. On the accrual basis, March shows $10,000 in revenue and a $10,000 receivable, and May's payment is just that receivable turning into cash. Add the $4,000 of materials you bought on account in March and paid for in April: cash basis reports an empty March and a profitable May, while accrual reports $6,000 of profit in the month the work actually happened.
Neither is wrong. They answer different questions. Cash answers 'what happened to my bank account.' Accrual answers 'did that month of work make money.'
What each is genuinely good at
Cash basis is simpler, cheaper to maintain, and it maps directly to solvency. If you invoice on delivery and get paid quickly, it is often close enough to reality that the added complexity of accrual buys you nothing. It also gives you a legitimate amount of timing control at year end, because income you have not collected yet is not taxable income yet.
Accrual basis matches revenue to the expenses that produced it, which is the only way to read margin honestly. If you carry inventory, work jobs spanning multiple months, bill in progress draws, or collect deposits up front for work you have not done, cash-basis books will show profit spikes and holes that have nothing to do with performance. Lenders, investors, and any eventual buyer of the business will expect accrual statements too — a customer deposit sitting in your bank looks like profit on a cash P&L and like a liability on an accrual one, and the second reading is the true one.
What you are actually allowed to choose
For taxes, the IRS lets most small businesses elect the cash method. The Tax Cuts and Jobs Act created a small-business exception based on average annual gross receipts over the prior three years — a threshold that is inflation-adjusted each year and now sits in the low tens of millions, so the ceiling is not the binding constraint for a typical small business. C corporations, tax shelters, and certain entity situations have their own rules, and businesses carrying inventory were pushed toward accrual before that exception existed. Confirm the current year's figure and your own eligibility with whoever signs your return.
Two things are worth knowing before you pick. First, you choose your method on your first tax return, and switching later is not a preference you simply announce — it generally requires filing Form 3115 for a change in accounting method, with an adjustment so income is not counted twice or dropped entirely. Second, your books and your tax return do not have to use the same basis. Plenty of businesses keep accrual books all year because that is what tells them how they are doing, then convert to cash for the return; good accounting software will produce either report from the same ledger when the underlying data is entered properly.
The one thing you cannot do is drift. Half-accrual books — invoices entered but bills recorded only when paid — produce reports that are neither, and that is the most common state we find books in.
How to decide, and who sets it up
A short version that fits most businesses: if you are paid at the time of service and carry no inventory, cash basis is fine and you should stop worrying about it. If you invoice on terms, carry inventory, take deposits, or run jobs longer than a month, keep accrual books even if you file cash — you will make better decisions with them, and your CPA can convert at year end.
Setting the basis correctly and keeping it consistent is the kind of thing that is easy at the start and expensive to retrofit. Evolv Bookkeeping is $199 per month flat, with your accounts reconciled and your P&L and Balance Sheet closed and delivered by day 2 of the following month. If your existing books have drifted into neither basis, the one-time cleanup is $500 flat, finished within 2 days, guaranteed in writing. No contracts, cancel anytime — get an instant quote on our homepage.