Cash vs Accrual Accounting: The Difference, the IRS Rules and How to Choose

Cash vs accrual accounting is a question about timing, not about totals. The cash method records revenue when the money arrives and expenses when the money leaves. The accrual method records revenue when it is earned and expenses when they are incurred, whatever the bank account is doing. For tax, the choice is open below a size threshold: under the gross receipts test in section 448(c) of the Internal Revenue Code, a corporation or partnership may use the cash method if its average annual gross receipts for the three tax years ending with the year before do not exceed $32,000,000 for tax years beginning in 2026, per Revenue Procedure 2025-32, or $31,000,000 for tax years beginning in 2025, per Revenue Procedure 2024-40.

The short version: cash is simpler and follows your bank balance; accrual shows what a month actually earned and is what lenders, investors and financial reporting standards are built around. Choose accrual if you carry inventory, invoice on terms or expect outside finance. Changing later means filing Form 3115 and obtaining IRS consent.

Cash vs accrual accounting, shown on one set of numbers

Take a business that does three things across two months. In December it finishes a job and invoices $10,000. In December it also receives a $3,000 bill from a supplier. In January the customer pays, and the business pays the supplier.

Nothing about the work changes between the two methods. Only the month each item lands in changes.

Under the cash method, December looks like a month in which nothing happened and January looks like the best month of the year. Under the accrual method, December carries the profit because December is when the work was done and the cost was incurred, and January is flat because January contained only the settling of money already accounted for.

Across the two months together, profit is $7,000 either way. That is the whole point: the methods do not disagree about how much the business made, only about when it made it. The disagreement matters because businesses are managed and taxed by period, and a period is exactly what the two methods draw differently.

It also matters at the year boundary. If December is the last month of the tax year, the cash method puts that $7,000 into the following year’s return and the accrual method keeps it in the year just ended.

Who may use the cash method for tax

The default position in the Internal Revenue Code is permissive. Section 446(c) states that a taxpayer may compute taxable income under “the cash receipts and disbursements method,” “an accrual method,” “any other method permitted by this chapter,” or “any combination of the foregoing methods permitted under regulations prescribed by the Secretary.”

The restriction sits in section 448. IRS Publication 538, Accounting Periods and Methods, states that the cash method generally may not be used by a corporation other than an S corporation, by a partnership that has a corporation other than an S corporation as a partner, or by a tax shelter as defined in section 448(d)(3).

Then comes the exception, the gross receipts test.

Two details in that table do real damage when they are missed.

The first is the measurement period. Revenue Procedure 2025-32 states the test in full: a corporation or partnership meets it “if the average annual gross receipts of such entity for the 3-taxable-year period ending with the taxable year which precedes such taxable year does not exceed $32,000,000.” The test looks backward at three completed years, ending with the year before the one you are filing for. It is not a test of the current year’s receipts.

The second is that Publication 538 is out of date on the number. Its revision date is January 2022 and it still prints the threshold as “$26 million or less (indexed for inflation).” That publication remains the right place to read the rules; the Revenue Procedure for the year is the right place to read the figure. Any article quoting $26 million as the current line is reading a four-year-old page.

Inventory, and why it no longer forces accrual

The old rule of thumb was that a business holding stock had to be on the accrual method. Section 471(c) changed that for small business taxpayers.

A business that meets the same gross receipts test may, per Publication 538, account for inventory by “treating the inventory as non-incidental materials and supplies, or conforming to its treatment of inventory in an applicable financial statement.” A business with no applicable financial statement may use the method in its own books and records.

In practice that means a shop or a small manufacturer under the threshold can stay on the cash method for tax without running full inventory accounting for tax purposes. It does not mean inventory stops mattering to management. A business whose money is tied up in stock still needs to know what it is holding and what it cost, and cash-basis statements are the format least likely to tell it.

Changing from one method to the other

A method is not something a business switches between at will. Section 446(e) of the Internal Revenue Code states that a taxpayer changing the method of accounting on which it regularly computes income “shall, before computing his taxable income under the new method, secure the consent of the Secretary.”

Consent is requested on Form 3115, Application for Change in Accounting Method. The IRS instruction for it reads: “File this form to request a change in either: an overall method of accounting or the accounting treatment of any item.” The instructions carry a December 2022 revision and the IRS page was last reviewed on March 30, 2026. Some changes fall under automatic consent procedures, listed in Revenue Procedure 2025-23, which the Form 3115 page links.

The mechanical consequence of switching is that items would otherwise be counted twice or not at all, since the two methods disagree about which year each item belongs to. That is what the adjustment on Form 3115 exists to resolve. Which procedure applies, and what the adjustment comes to, is specific to the business, and it is the point at which to bring in the person who signs the return.

What accrual buys that cash does not

Accrual is the basis financial reporting standards are built on. The FASB Conceptual Framework, which underpins US generally accepted accounting principles, puts it this way at paragraph OB17: “Accrual accounting depicts the effects of transactions, and other events and circumstances on a reporting entity’s economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period.” Its stated reason is that this “provides a better basis for assessing the entity’s past and future performance than information solely about cash receipts and payments during that period.”

A practical version of the same point sits in lender documentation. The Small Business Administration’s SOP 50 10 8, effective June 1, 2025, instructs lenders on CAPLines to “obtain Borrower prepared financial statements and tax returns if the CAPLine amount is $1,000,000 or less and compiled, reviewed, or audited financial statements and tax returns if the CAPLine amount is over $1,000,000.” Once a third party with money at stake starts specifying the form of the statements, the informal basis a business kept for itself stops being sufficient.

Accrual is also what makes ordinary management questions answerable. Which month was profitable. What a customer contract earned against what it cost to deliver. Whether revenue grew or just landed. Cash-basis statements answer none of those cleanly, because every answer is contaminated by payment timing.

How to choose

Six considerations, in the order they tend to arise.

Who reads your statements. If a lender, an investor or an acquirer will read them, accrual is the format they are expecting and the one the SBA language above describes for larger facilities. Producing accrual statements from a cash-basis ledger under deadline is expensive and avoidable.

Whether you carry inventory. Section 471(c) means stock no longer forces accrual for tax below the gross receipts threshold. It does not make cash-basis statements useful for managing stock. The tax question and the management question have different answers here, and a business can honor both by filing cash and reporting accrual internally.

How you invoice. A business paid on the spot sees little difference between the two methods, because money and work arrive in the same month. A business invoicing on 30 or 60-day terms sees the whole difference, every month, in exactly the shape of the worked example above.

Size. Past the section 448(c) threshold, which is $32,000,000 for tax years beginning in 2026, a C corporation or a partnership with a C corporation partner loses the choice. That is a hard stop rather than a preference: above it, the choice is gone.

Tax timing, as a rule rather than as advice. The two methods put income in different years, which is the mechanism behind the December example. That is a rule about which year an item falls into, not a recommendation about what to do with it. Anything phrased as a plan to shift income across a year boundary is a conversation with a credentialed preparer, not something to act on from a web page.

Reversibility. Cash is easier to start with and harder to leave, because leaving means Form 3115 and IRS consent. A business that can already see accrual in its future avoids that work by starting there.

How accounting software handles the two bases

Ledgers handle the two bases in two quite different ways, and the difference shows up when it is time to convert.

QuickBooks Online sets one accounting method for the company file and lets individual reports run on the other basis: the company method is a setting, and reports can be switched between cash and accrual at the report level. Intuit’s own guidance is that the IRS expects the same method year to year, with approval before changing it, which matches the Form 3115 requirement above.

A few ledgers maintain both sets of books at once instead. Puzzle does this from its entry plan, keeping cash and accrual books side by side rather than converting between them, which is the difference set out in Puzzle vs QuickBooks. For a business that files cash and reports accrual, having both maintained rather than derived removes a recurring month-end job.

The basis also affects what outsourced bookkeeping costs. Among the national providers publishing prices in September 2026, Pilot’s $99 a month Essentials plan is cash basis only and accrual requires its Core tier; Xendoo’s $395 a month Essential plan is cash, its Growth plan is described as cash or modified accrual, and full accrual moves the customer to an unpriced custom plan. Bookkeeping services pricing sets out what each provider publishes. If you are choosing the software rather than the service, our accounting software comparison is the place to start.

Who to ask before you decide

The rules above are general and stated as the IRS and the Code state them. Which method a specific business may use, what the Form 3115 adjustment would be and which automatic-change procedure applies are questions about one set of facts, and they belong with someone who can sign the return and represent you afterward. That means a CPA, an enrolled agent or an attorney, all three of whom the IRS grants unlimited representation rights. Our directory lists practices by state and city, checked against the IRS register of credentialed preparers.

Frequently Asked Questions

Sources

12 links

• IRS Publication 538, Accounting Periods and Methods
• IRS Revenue Procedure 2025-32, section 3.30, gross receipts threshold for tax years beginning in 2026
• IRS Revenue Procedure 2024-40, section 3.31, gross receipts threshold for tax years beginning in 2025
• IRS: About Form 3115, Application for Change in Accounting Method
• 26 U.S. Code section 448, limitation on use of cash method of accounting
• 26 U.S. Code section 446, general rule for methods of accounting
• 26 U.S. Code section 471, general rule for inventories
• SBA SOP 50 10 8, effective June 1, 2025
• FASB Concepts Statement No. 8, Chapter 1, paragraph OB17
• Intuit: choose between cash and accrual accounting methods in reports
• Pilot pricing
• Xendoo pricing