Cash or Accrual? How a Small Business Chooses Its Accounting Method
Published November 7, 2026
Publication 334 (2025), Tax Guide for Small Business, explains how to report income and expenses for a business. Chapter 2 covers accounting methods. An accounting method is the set of rules that decides when and how you report income and expenses. This guide covers the two main choices. It is general information. It is not advice about your case.
When you choose
You choose your method when you file your first income tax return that includes a Schedule C for the business. If you later want to change, you generally need IRS approval. The publication also says you must use the same method to figure your taxable income and to keep your books.
The cash method
Under the cash method, you include in gross income the items you actually or constructively receive during the tax year. Constructive receipt means an amount is credited to your account or made available to you without restriction. You do not need to hold the money yourself. The publication says a valid check you receive by year-end counts as received that year. This is true even if you cannot deposit it until the next year.
The publication also says you cannot hold checks to move income into another year. The same is true for postponing possession of similar property. Under the cash method, you generally deduct expenses in the year you actually pay them.
The publication gives this example. A client sends you a check for services on December 30, 2024, and you receive it on January 4, 2025. The publication says you must include the amount in income for 2025.
The accrual method
Under an accrual method, you generally report income in the year it is earned, and you deduct or capitalize expenses in the year they are incurred. You include an amount in income when all the events that fix your right to it have occurred. You must also be able to determine the amount with reasonable accuracy.
For expenses, the publication says you generally must meet two tests. The all-events test must be met, and economic performance must have occurred. The publication's example: you buy office supplies in December 2025 and pay the bill in January 2026. You can deduct the expense in 2025, because the liability was fixed and the supplies were provided that year.
Prepaid expenses
Under the cash method, an expense you pay in advance is generally deductible only in the year it applies. The publication's example is a $1,000 business insurance policy, effective for one year from July 1, 2025. You can deduct $500 in 2025 and $500 in 2026.
Inventory and the small business exception
Most individuals and many sole proprietors with no inventory use the cash method. If you need inventory to account for income, the publication says you generally must use an accrual method. This applies to sales and purchases. The exception is the small business taxpayer. You qualify if your average annual gross receipts for the three prior tax years are $31 million or less, indexed for inflation. You also must not be a tax shelter.
Two businesses, two methods
You can use different methods for business and personal items. If you run two or more separate and distinct businesses, you can use a different method for each one. The publication says they are separate only if you keep complete and separate books and records for each.
Keep records for either method
Whichever method you use, keep records that show when money came in and when bills were paid or incurred. Under the cash method, the date a check was received is key. Under the accrual method, the date the liability was fixed matters, along with the invoice. Keep these records with your books.
Next steps
List your business income and expenses for the year, and note the dates of checks and bills. Then check whether you carry inventory. If you do, confirm whether the small business exception applies. Changing a method generally requires IRS approval, so ask a tax professional before you switch. For the schedule where these numbers go, see our guide to Schedule C business income and expenses.
Sources: Sources: IRS, Publication 334 (2025), Tax Guide for Small Business, chapter 2 (https://www.irs.gov/pub/irs-pdf/p334.pdf) This is general information, not advice about your specific return.
