Cash basis
Income counts when money arrives and expenses count when you pay them. It is simple and matches your bank account, and it is what many small service businesses use.
Accrual basis
Income counts when you earn it and expenses when you incur them, whether or not cash has moved. It shows what the business actually owes and is owed, which helps if you invoice customers or carry inventory.
Which can you use for taxes?
The IRS lets many small businesses use the cash method, with limits and exceptions, and businesses that carry inventory or exceed certain gross-receipts thresholds may need accrual for tax. Ask a CPA or enrolled agent which applies to you. Your books can also be kept on accrual even if your tax return is on cash.
How to choose
Think about who needs the numbers. A lender, investor or buyer may ask for accrual statements. Owners who just want to know what is in the bank may prefer cash. Whichever you pick, use it consistently, and talk to your tax professional before changing.
Common questions
Can I switch from cash to accrual?
Yes, but a change in the tax accounting method may need IRS approval. Speak to your CPA first.
Which does QuickBooks use?
QuickBooks can show reports on either basis. Your books are kept in a way that supports both.
This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.
