Cash vs accrual accounting

The accounting method decides in which year income and expenses count, both in your books and on your tax return. This guide compares the two methods, explains who can use each for tax, and helps you choose.

By Awais Jameel, Chartered Accountant. Reviewed by Muhammad Bilal, Chartered Accountant. Checked against official sources on . 2 minute read.

Short answer

Cash vs accrual accounting is about timing. The cash method records income when received and expenses when paid. The accrual method records income when earned and expenses when incurred. Most small businesses can use the cash method for tax. For 2026, C corporations and partnerships with a C corporation partner can use it if average annual gross receipts are $32 million or less.

At a glance

Cash method
Income when received, expenses when paid
Accrual method
Income when earned, expenses when incurred
Most small businesses
Can use the cash method for tax
2026 gross receipts test
$32 million average over three years
Inventory
Small businesses have simplified options
Changing later
Generally needs IRS consent, often automatic
Cash vs accrual accountingCash method: Income when received, expenses when paid; Accrual method: Income when earned, expenses when incurred; Most small businesses: Can use the cash method for tax; 2026 gross receipts test: $32 million average over three years; Inventory: Small businesses have simplified options; Changing later: Generally needs IRS consent, often automatic.KEY FACTS AT A GLANCECash vs accrual accountingCash methodIncome when received,expenses when paidAccrual methodIncome when earned,expenses when incurredMost small businessesCan use the cash methodfor tax2026 gross receipts test$32 million average overthree yearsInventorySmall businesses havesimplified optionsChanging laterGenerally needs IRSconsent, often automaticChecked against official sourcesTax BakersCash vs accrual accountingCash method: Income when received, expenses when paid; Accrual method: Income when earned, expenses when incurred; Most small businesses: Can use the cash method for tax; 2026 gross receipts test: $32 million average over three years; Inventory: Small businesses have simplified options; Changing later: Generally needs IRS consent, often automatic.KEY FACTS AT A GLANCECash vs accrual accountingCash methodIncome when received, expenses when paidAccrual methodIncome when earned, expenses when incurredMost small businessesCan use the cash method for tax2026 gross receipts test$32 million average over three yearsInventorySmall businesses have simplified optionsChanging laterGenerally needs IRS consent, often automaticChecked against official sourcesTax Bakers
Key facts at a glance, as set out in this guide.

What is the difference?

Cash methodAccrual method
Income recordedWhen payment is receivedWhen earned, such as when you invoice or deliver
Expenses recordedWhen paidWhen incurred, even if unpaid
Shows money owed to and by youNoYes: receivables and payables
EffortLowerHigher
Tax timingIncome taxed when collectedIncome taxed when earned, even if unpaid

How receivables and payables are tracked under each method is covered in accounts receivable and payable basics.

How does the timing differ in practice?

A consultant finishes a project on December 20, 2026, invoices $10,000, and is paid on January 15, 2027. Under the cash method, the $10,000 is 2027 income. Under the accrual method, it is 2026 income, even though the money arrives in 2027.

Who can use the cash method for tax?

  • Sole proprietors, partnerships without a C corporation partner, and S corporations can generally use it.
  • C corporations and partnerships with a C corporation partner can use it if their average annual gross receipts for the previous three years are $32 million or less, for tax years beginning in 2026.
  • Tax shelters cannot use it, whatever their size.

Businesses that meet the same gross receipts test also get simplified rules for inventory, so selling products does not force the accrual method on a small business. See inventory and cost of goods sold.

Which method should you choose?

  • Cash suits most small service businesses and freelancers: simpler, and tax follows cash in the bank.
  • Accrual suits businesses that sell on credit, carry significant payables, need lenders' or investors' financial statements, or want a truer monthly picture of profit.

Many businesses keep management accounts on accrual and file taxes on the cash method, where allowed. The method used on your first return is your tax method. See your first business tax return.

Can you change method later?

Yes, but it generally needs IRS consent through Form 3115. Many common changes are automatic changes that do not need advance approval. Adjustments are made so income is neither counted twice nor missed in the year of change.

Not sure which method fits?

We set up your books on the method that suits your business and tax position, and handle the change if you need to switch.

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Questions people ask

What is the difference between cash and accrual accounting?

Cash records income when received and expenses when paid. Accrual records them when earned and incurred.

Can my small business use the cash method?

Most can. C corporations and partnerships with a C corporation partner qualify if average gross receipts are $32 million or less for 2026.

Which is better for a small business, cash or accrual?

Cash suits most small service businesses. Accrual suits businesses with credit sales, significant payables or outside lenders and investors.

How do I change my accounting method?

Generally with Form 3115. Many changes are automatic and do not need advance IRS approval.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IRS Revenue Procedure 2025-32, section 4.30: 2026 limitation on use of cash method
  2. IRS: Questions and answers about the limitation on the deduction for business interest expense (gross receipts amounts)
  3. IRS Publication 538: Accounting Periods and Methods
  4. IRS: Form 3115, Application for Change in Accounting Method

Rules and fees change. If you are reading this long after September 30, 2026, confirm the figures with the source before you rely on them.

BookkeepingBookkeeping basics for small business ownersBusiness tax by entity typeHow to file your first business tax returnOnline sellersInventory and cost of goods sold for online sellers

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This guide is general information. It is not tax or legal advice for your situation.