Basis of accounting: cash, accrual or hybrid

What "basis of accounting" means

The basis (or method) of accounting determines when you record income and expenses. The same business can show a different profit in the same year depending on the method. There are three common ones: cash, accrual and hybrid.

The three methods at a glance

Cash basis: pros and cons

• Pros: simple to keep, you are taxed only on money actually received, and it is easy to see cash in the bank.
• Cons: profit can swing with timing of payments, unpaid invoices and bills are invisible, and lenders and investors often want accrual statements.

Accrual basis: pros and cons

• Pros: income and expenses land in the right period, giving a truer picture of performance. It is the basis required by U.S. GAAP and often by lenders and investors.
• Cons: more bookkeeping (receivables, payables, prepaid and accrued items), and you may owe tax on income before you collect it.

Hybrid methods

A hybrid method combines the two, for example accrual for sales and purchases of inventory and cash for everything else. It is allowed if it clearly reflects income and is used consistently. Many businesses also keep tax books on one basis and management or loan reports on another.

When accrual is required (federal tax)

• C corporations, and partnerships with a C corporation partner, whose average annual gross receipts for the prior three years exceed the $32 million threshold for 2026 (inflation-adjusted yearly; $31 million for 2025). Smaller C corporations may use cash.
• Tax shelters, regardless of size.
• Businesses over the gross receipts threshold that carry inventory, which must generally use accrual and the uniform capitalization (UNICAP) rules. Businesses under the threshold can often use cash and treat inventory more simply.
• Any business whose chosen method does not clearly reflect income. The IRS can require a change.
• In practice: lenders, investors, regulators, audits and GAAP financial statements usually require accrual.

Can I change methods?

Yes, but a change in tax accounting method generally needs IRS consent (Form 3115) and an adjustment so income is not skipped or counted twice. Many changes are "automatic" if you follow the procedures. Plan the change before year end.

A simple example

You invoice a customer $10,000 on December 20, 2026 and they pay on January 10, 2027. On the cash method the $10,000 is 2027 income. On the accrual method it is 2026 income, because you earned it in 2026.

How to choose

• Do you carry inventory or sell on credit?
• Do lenders, investors or a buyer need accrual financials?
• Are you near or above the gross receipts threshold?
• Does your state follow the federal rules?
• Do you want simplicity or the most accurate picture?

Common questions

General information for 2026, not advice for your situation. Rules change and have exceptions. Talk to us before you act.