Business & S-Corp5 min read2026 law · updated September 2026

Cash or Accrual

Why the profit on the return is not the money in the bank

Cash accounting counts money when it moves. Accrual counts it when it is earned or owed. The choice changes which year income lands in, and it is not freely switched.

At a glance

Best for: Business owners · Growing businesses
Complexity: Moderate
When it happens: Set up firstAllow one to two months. Some of it depends on other people.
Deadline: The method is chosen on the first return and then stays. Changing it later generally needs consent on a form filed with the return, not a decision in the bookkeeping.
Rests on: IRC §446 (methods of accounting), §448 (limitation on cash method), §471 (inventories), §481(a) (adjustments on a change of method); Publication 538; Form 3115 instructions and Rev. Proc. 2015-13

In this guide

Does this fit you?

Any one of these is reason enough to read on.

Is your business choosing a method for the first time?
Is your business growing toward the size where the choice stops being free?
Is it true that you cannot understand why the tax bill and the bank balance disagree?

Recognize yourself in one of these and the rest of the guide is worth your time. Recognize yourself in none of them and it is probably about somebody else — though nothing here is a test you pass or fail, so read on if you are close.

The situations come from the guide’s own fit lines and are not checked by anything. The checks are the ones your plan runs, from the same source.

What it could be worth

Not a saving so much as control over timing. On the cash method, when money is actually received and paid in the last weeks of December can move income and deductions between tax years — which is worth most when this year and next are taxed differently. The invoice date on its own does not decide it.

On accrual, that lever is largely gone, and the planning moves to what is actually owed and owing at the year end.

The larger sum is usually the method change itself: a business moved onto the right method produces a one-time adjustment. Generally an adjustment that adds income is spread over four years, and one that reduces income is taken in the year of change.

An illustration, not a figure for you Full noticeone invoice, two methods

Work done in December, invoiced December 28	cash: not yet income · accrual: income this year
Paid by the client on January 10	cash: income next year · accrual: already counted
Supplier bill received December 20, paid January 5	cash: deducted next year · accrual: deducted this year
Year-end lever	cash: real · accrual: largely absent
Profit on the return versus the bank	cash: close · accrual: can differ widely

The general difference, assuming the business had no right to the money before January 10 and nothing was made available to it earlier. On the cash method, income is counted when it is actually or constructively received — credited to the business or made available without restriction — so a payment the business could have collected in December is December's income. On accrual, income is counted once all the events fixing the right to it have happened and the amount can be determined with reasonable accuracy, and an expense once the all-events test is met and economic performance has occurred. Which method a business may use depends on its size and whether it carries inventory. A change of method generally needs consent and produces a section 481(a) adjustment: generally spread over four years when it adds income, taken in the year of change when it reduces income.

How it works

On the cash method, income is counted when it is received and expenses generally when they are paid. Received includes constructively received: an amount credited to the business's account or made available to it without restriction counts, even if it was not collected.

On the accrual method, income is counted once all the events that fix the right to receive it have happened and the amount can be determined with reasonable accuracy — generally no later than when it is earned, due or paid, whichever comes first. An expense is counted once the liability is fixed in the same way and economic performance has occurred, whatever the bank is doing.

The method is adopted on the first return that uses it and becomes the business's method of accounting.

Changing it generally requires consent, requested on a form filed with the return, rather than simply keeping the books differently.

A change produces a one-time section 481(a) adjustment so that income is neither counted twice nor dropped. Generally, an adjustment that adds income is spread over four years — the year of change and the next three — and one that reduces income is taken in full in the year of change, with exceptions set out in the Form 3115 instructions.

Businesses above a size threshold, and many that hold inventory, may be required to use accrual.

Books and return do not have to be on the same basis; where they differ, the difference is reconciled rather than resolved.

Sources

What you would do

YouA decision or a step that is yours to take.

Ask GHL which method you are actually on. A surprising number of owners are not sure, and it is printed on the return.
If you are on cash and the year end matters, plan the last two weeks of December with GHL rather than by habit — and remember that holding back an invoice or a deposit does not move income that was already available to the business.
If revenue is growing, raise the threshold question before you cross it rather than after.
Keep the accounts receivable and accounts payable listings at the year end whatever your method. A change later is built from them.
Do not switch method in the bookkeeping and assume the return follows. It does not, and the mismatch is discovered at filing.

Templates to use

Records you keep, not documents that change anything — a worksheet or a log, built for the 2026 tax year. Where an agreement or other legal document is needed, that comes from an attorney.

Month-end bookkeeping close checklistXLSXOne line per month showing what was reconciled, coded and closed — and what each month was closed without.

What GHL needs from you

These are what has to exist in the file by the time the return is prepared. Assembled during the year they are a checklist; assembled in March they are a reconstruction.

Which method the business has used on prior returns.
Accounts receivable and payable at the year end.
Inventory on hand, where there is any.
Revenue for the last three years, for the threshold question.
Any change of method already applied for or made.

What usually goes wrong

Failure modes, not caveats. Each of these has cost somebody the strategy — most of them after the point where it could still have been fixed.

The method is not a bookkeeping preference. Once used on a return it is the business's method, and changing it requires consent rather than just doing it differently next year.
Cash basis gives December some room, but less than it looks. Paying a supplier on December 30 generally moves the deduction into this year, and money that has not been received is generally next year's income — but income is counted when it is credited to the business or made available to it without restriction, not only when it is deposited. Interest credited to the account in December is December's income even if nobody touches it, and holding a check received in December until January does not postpone the income.
Accrual basis removes that lever almost entirely, which surprises owners who are used to managing a year end by timing a deposit.
A business past a size threshold, or one holding inventory, may be required to use accrual whether it wants to or not.
Books kept on one method and a return filed on the other is common and it is a reconciliation, not a problem — but somebody has to do the reconciling, and an owner reading the books will not see the return's figure.
Accrual accounts show profit before the cash exists. A profitable accrual year with nothing in the bank is normal and it is still taxable.
Changing method produces a one-time adjustment (the section 481(a) adjustment) to stop income being counted twice or missed entirely. Under the general rules in the Form 3115 instructions, an adjustment that increases income is spread over four years — the year of change and the next three — while one that decreases income is taken entirely in the year of change. Exceptions shorten the spread, including a business under examination and an election to take a small increase all at once.

Common questions

The return says we made a profit and there is nothing in the bank. How?: That is the normal shape of an accrual year: revenue is counted when it is earned, so work invoiced and not yet paid is already income. Cash basis tracks the bank much more closely, which is the main reason smaller businesses prefer it.
Can I just switch to whichever is better?: Not unilaterally. The method used on a return becomes the business's method, and changing it generally needs consent on a form filed with the return. It is often worth doing — but as a deliberate application rather than a change in the bookkeeping.
When does the adjustment from a change of method hit the return?: Under the general rules in the Form 3115 instructions, it depends on its direction. An adjustment that increases income is spread over four tax years: the year of change and the next three. One that decreases income is taken entirely in the year of change. Exceptions apply — a shorter spread for a business under examination, and an election to take an increase of less than $50,000 in a single year among them — so the figure and its timing are settled when the change is prepared, not assumed.
Does delaying an invoice to January really work?: Not by itself. On the cash method the invoice date is not what counts: income is counted when it is received, and that includes money credited to the business or made available to it without restriction. Sending an invoice in January for a client who pays in January generally puts the income in January; holding a check received in December until the new year does not. On accrual the invoice date does almost nothing, because income is counted once the right to it is fixed — usually when the work is done.

Keeping it alive

A position is not finished when it is set up. This is what it needs each year to still be there when it matters.

Confirm it still applies — circumstances change more often than the law does.
Keep the record current. Filled in as the year happens it is evidence; assembled in March it is a reconstruction.
Check the documents still say what they said — an agreement that has drifted from practice is the usual failure.
Ask GHL what changed for 2027. Figures move every year and rules move most years.

Bryan · Academy Educator & Client SupportAbout Bryan →

Tax law changes frequently. This guide was written against 2026 law and last updated September 2026; it is due for review again September 2027. Read it with GHL before acting on it rather than after.

Any example here is an illustration, not a figure for you. Whether it applies and what it is worth depend on your own facts and are settled during tax preparation.

Where a strategy needs an agreement, a plan document, a valuation or an actuarial calculation, that comes from the relevant professional rather than from GHL. See when GHL is not enough.