Accounting software users and/or business owners who have had discussions with their tax advisors about accounting methods may have heard the concepts of cash-basis accounting or accrual accounting kicked around, and maybe even the hybrid method or percentage of completion.

This post is meant to give a little background on the methods and provide information you can use to help you decide which method is right for you.

Cash Method

The cash method of accounting (or cash basis accounting) is the simplest form of accounting, when compared to the accrual or hybrid method. Entries are recorded on a company’s books when cash is received, or when cash is paid.

Many small businesses or solo entrepreneurs utilize this method for their internal financial statements and tax reporting. With respect to tax reporting, the IRS imposes limitations on businesses who can use the cash method to those businesses who have average annual gross receipts for the past three years of $32 million for the tax year 2026 (among other requirements as part of Section 448-see Revenue Procedure 2025-32). This safely includes many small businesses, and as such, many small businesses utilize the cash method for tax purposes.

Accrual Method

Under accrual accounting, revenues are recorded when earned, and expenses are recorded when they are incurred, whether or not actual cash deposits or cash outlays have occurred. This is to smooth out the sometimes bumpy history of cash receipts and payments. For example, if a customer pays annually for access to a 12 month service, the accrual method would have you realize income each month the service is provided, rather than in one lump sum, potentially in two separate years. Expenses Work similarly – another example could be an annual insurance premium payment – under the accrual method 1/12 of the expense is recorded each month, more closely matching the benefit of the service.

Conclusion

While accrual accounting can potentially be more useful and provide better insights to business owners, accrual accounting is more complicated to perform correctly as compared to cash accounting. Many small business owners will use the cash method, for its ease, savings of time, and potentially savings of money if your bookkeeper charges an additional fee to keep books on accrual.