Cash basis records income when you receive payment and expenses when you pay them. Accrual basis records income when you earn it and expenses when you incur them, regardless of when money actually changes hands.

Here’s the practical difference. You complete a $10,000 project in December but don’t get paid until January. Under cash basis, that income shows up in January and counts toward next year’s taxes. Under accrual, it counts as December revenue because that’s when you earned it. The same logic applies to expenses. A $2,000 supply bill received in December but paid in January goes in January under cash basis, December under accrual.

Most small businesses use cash basis because it’s simpler and matches how you naturally think about money. When the check clears, it counts. This method also gives you more control over tax timing since you can delay sending invoices or accelerate expenses to shift income between years.

The IRS requires accrual accounting for businesses with average annual gross receipts over $29 million. Below that threshold, you generally have a choice. There used to be stricter rules for businesses with inventory, but most small businesses carrying inventory can now use cash basis as long as they’re under the revenue limit.

Accrual makes sense in specific situations. If clients regularly take 30 to 90 days to pay, cash basis understates how your business is actually performing. You might show a terrible month because invoices haven’t been paid yet, even though the work was completed and payment is coming. Monthly bookkeeping on accrual gives you a clearer picture of actual business activity in those cases.

If you’re seeking financing or investors, they often want accrual-basis financials because it shows revenue when earned, not just when collected. Banks see this as a more accurate picture of business performance. Some businesses keep accrual books internally for decision-making but file taxes on cash basis, getting the best of both.

For most small businesses working with Los Angeles QuickBooks bookkeepers, cash basis works fine. It’s easier to maintain, matches your bank statements intuitively, and provides tax flexibility. Consider accrual if you have significant receivables, seek outside financing, or want more precise month-to-month visibility into how your business is performing.

The accounting method gets configured in your bookkeeping software and affects how every transaction is recorded. Changing methods mid-year creates complications, so it’s worth getting this right when you first set up your books.