Cash vs accrual accounting

Cash and accrual are two ways to decide when income and expenses count in your books. On the cash basis, income counts when you receive it and an expense counts when you pay it. On the accrual basis, income counts when you earn it and an expense counts when you owe it.

Over the life of a business, both give the same totals. They differ in timing. Timing decides your profit for a month, and the year you pay tax on it.

The short version

• Cash basis: count money when it moves.
• Accrual basis: count income when earned and expenses when incurred, whenever the cash moves (Publication 538).
• Most freelancers and small service businesses use the cash method.
• Some corporations and partnerships cannot use the cash method.
• You choose your tax method on your first return. To change it later, you generally need IRS approval.

Words to know

• Accounting method: the rule for when you count income and expenses.
• Constructive receipt: income counts when it is credited to your account or made available to you without restriction, even if you do not take it (Publication 538).
• Receivable: money a customer owes you.
• Bill: money you owe a vendor.

Cash basis has rules too

The cash method is not only “whatever reaches the bank.”

• Constructive receipt. A valid check that you receive by the end of the year is income for that year, even if you cannot cash it until January (Publication 334).
• Prepaid expenses. An expense paid in advance is generally deductible only in the year it applies to, with some exceptions (Publication 538).

Who can use the cash method

Under Publication 538, a corporation other than an S corporation, and a partnership with a corporation as a partner, generally cannot use the cash method. There is an exception for those that pass a gross receipts test (Publication 538). For tax years beginning in 2026, the limit is average annual gross receipts of $32,000,000 or less for the three prior years (Rev. Proc. 2025-32).

Sole proprietors, single-member LLCs taxed as sole proprietors, and S corporations are not on that list.

If you make or sell products, the general rule is that you keep an inventory and use accrual for sales and purchases. Small businesses have exceptions. Ask a tax professional.

Changing your method

Once you have filed your first return, you generally need IRS approval to change your method. A change from cash to accrual, or back, needs that approval (Publication 538). You ask on Form 3115. Do not simply start to count differently one January.

An example

Maya is a freelance designer who started in January 2026. (She is an example, not a real person.) By December 31, clients paid her $78,000 and she paid $14,000 of expenses. In December she also finished a $4,000 project, paid on January 10. A printer billed her $600 in December, and she paid it in January.

On the cash basis, the $4,000 and the $600 count in 2027, when the money moves. On the accrual basis, they count in 2026. Neither answer is wrong. Cash follows your bank account. Accrual follows your work.

Which one fits

For most freelancers, the cash basis is the practical choice. You pay tax on money you have received. Your bank and card statements are the base of your records, so the books are simpler.

Accrual is worth the extra work when timing gaps are large: you carry inventory, you bill big projects months before you are paid, or a lender asks for accrual statements.

The cash basis has one blind spot. It does not show what is owed. A month when no client paid can look slow, even if you were busy. The fix is to keep a list of what customers owe you and what you owe others.

A Righto tip

Righto works on the cash basis only for now. Every report, such as the Profit and Loss, is on the cash basis. You can track bills and receivables, and each one counts when it is paid. If you need accrual books, Righto is not the right tool today. Righto does not choose your tax method. See how Righto handles the cash basis.

Common questions

Can I keep my books on cash and file taxes on accrual? The tax code says taxable income is computed under the method you regularly use to keep your books (26 U.S.C. 446). Ask an accountant before you mix them.

Where does a credit card purchase go on the cash basis? Record the expense on the date of the purchase. Paying the card later is a transfer, not a second expense. See how to categorize bank transactions.

Do I need to do anything if I already use cash? No. If you filed a Schedule C on the cash method, that is your method.

What to do now

1. Check which method your last return used.
2. Keep a list of unpaid customer amounts and unpaid bills.
3. In December, remember that checks you receive count in that year.
4. Talk to a tax professional before you change your method.

Righto is free, easy to use and needs no account.

Sources

• Publication 538, Accounting Periods and Methods, IRS
• Publication 334, Tax Guide for Small Business, IRS
• Revenue Procedure 2025-32, IRS
• About Form 3115, Application for Change in Accounting Method, IRS
• 26 U.S. Code 446, General rule for methods of accounting, Legal Information Institute