Topic 09 · 5 min read
Choosing the Right Accounting Method
When income counts can matter as much as how much it is.
A business must pick a method for deciding which year income and expenses land in. Cash basis counts money when it moves. Accrual counts it when it is earned or owed. The choice quietly shifts tax from one year to another.
What to know
- Cash basis
- Income counts when received, expenses when paid. Simple, and it lets a business delay December billing or prepay January costs to manage the year.
- Accrual basis
- Income counts when earned and expenses when incurred, regardless of payment. It matches revenue with its costs and is required for some larger businesses.
- Inventory rules eased
- Smaller businesses under the gross receipts threshold may use cash basis even when they carry inventory, a change that simplified many filings.
- Hybrid and special methods
- Long-term contracts, installment sales, and some service businesses use tailored methods with their own timing rules.
- Changing methods is formal
- Switching requires filing an accounting method change and spreading the resulting adjustment; you cannot simply start doing it differently.
The tax benefit
The right method lets a business accelerate deductions and defer income into lower-tax years without changing a single real transaction.
Worked example
The December decision
A cash-basis consultant invoices a $30,000 project on January 2 instead of December 20 and prepays $6,000 of insurance in December. Roughly $36,000 of taxable income shifts into the following year.
Watch out for
- Deferring income only helps if next year's rate is not higher.
- Accrual can tax you on invoices customers have not paid yet.
- Consistency matters — flip-flopping without filing the change invites adjustment.
Terms from this topic
Cash basisAccrual basisAccounting method changeGross receipts test
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