Cash basis records income when you receive payment and expenses when you pay them. Accrual records income when you earn it and expenses when you incur them, regardless of when money actually moves. The difference sounds minor but it affects how your financial statements look and when you pay taxes on income.

For most small businesses, cash basis works well. You finish a job, send an invoice, get paid two weeks later, and record the income when the check clears. Simple. Your books more or less match your bank account, and there’s less to track.

The IRS allows businesses with less than $29 million in average annual gross receipts to choose either method. Since most small businesses fall well under that threshold, you have flexibility. The decision comes down to what gives you useful information and what makes tax planning easier.

Cash basis tends to work best for service businesses with straightforward billing. A landscaper who invoices weekly and gets paid within a week or two doesn’t gain much from accrual. The timing difference is minimal and the extra complexity isn’t worth it.

Accrual starts making more sense when there’s a meaningful gap between doing the work and getting paid. Contractors working larger jobs with 30 or 60 day payment terms often find cash basis distorts their monthly numbers. You complete a $40,000 project in October but don’t get paid until December. Cash basis shows October as a bad month and December as great, which doesn’t reflect reality. Accrual shows the revenue in October when you actually earned it.

Restaurants typically stick with cash basis because most sales happen in real time. You serve food, the customer pays immediately, that’s income. There’s no receivables to track and no timing mismatch to worry about.

Businesses with significant inventory have a nuance. The IRS historically required accrual for inventory, but small businesses under the $29 million threshold now have an exception. You can use cash basis even with inventory, though accrual often gives better visibility into cost of goods sold and true margins.

One thing worth knowing is that your tax method doesn’t have to match your internal reporting. Some owners file taxes on cash basis for the timing advantages but run internal reports on accrual for better decision-making. This takes more work and isn’t necessary for most small businesses, but it’s an option if you outgrow cash basis operationally but don’t want to change your tax method.

My general advice is to start with cash basis unless you have a specific reason to choose accrual. It’s simpler, your Tri-Cities bookkeeper can manage it with less overhead, and it works fine for most small operations. If you grow into a situation where accrual makes more sense, switching is possible.

Talk to your accountant before making a final decision. The accounting method affects tax timing and year-end planning strategies in ways that matter for your specific situation.