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.
GHL Planning Verdict: Depends on your factsFact-dependent to review
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)

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, the last two weeks of December genuinely moves income between tax years — which is worth most when this year and next are taxed differently.

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 that is spread over several years rather than landing at once.

An illustration, not a quote — one 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. Which method a business may use depends on its size and whether it carries inventory; a business past the threshold may be required to use accrual. A change of method generally needs consent and produces a one-time adjustment spread over several years.

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. Full notice

How it works

On the cash method, income is counted when the money is received and expenses when they are paid.

On the accrual method, income is counted when it is earned and expenses when they are incurred, 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 adjustment so that income is neither counted twice nor dropped, and that adjustment is generally spread across several years.

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.

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 deliberately rather than by habit.
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 makes December an instrument. Invoicing on January 2 and paying a supplier on December 30 both move income between years, legitimately and only on the cash method.
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 to stop income being counted twice or missed entirely, and that adjustment is spread rather than taken 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.
Does delaying an invoice to January really work?: On the cash method, yes, and it is entirely legitimate — income is counted when received. On accrual it does almost nothing, because the income was earned when the work was 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.

Written and taught by Bryan, academy educator & client support at GHL. If something here is unclear, that is worth telling us. It gets rewritten — tell us.

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.

The full notice

Educational material only. It describes how a rule works in general. What it is worth to you, and whether it applies at all, depends on your own facts, the documents behind them, and professional review — and is settled during annual 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.