Cash vs accrual accounting: Which is right for your DFW business?

"Should I use cash or accrual accounting?"

It sounds like a boring question. But the answer affects how much tax you pay, when you pay it, and how clearly you see your business's financial health.

The short answer: Most small businesses start with cash accounting because it's simpler. But as you grow—or if you carry inventory or extend credit—accrual accounting often makes more sense.

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The core difference

Cash basis accounting

Income: Recorded when you receive payment Expenses: Recorded when you pay them

You invoice a client on December 15, but they don't pay until January 5. Under cash basis, that income counts in January—the year you actually received the money.

Accrual basis accounting

Income: Recorded when you earn it (regardless of payment) Expenses: Recorded when you incur them (regardless of payment)

Same scenario: you invoice on December 15. Under accrual, that income counts in December—when you earned it, even though payment came later.

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A real-world example

Let's say you run a marketing agency in Plano. In December, you:

• Invoice clients for $50,000 in completed work
• Receive payments of $30,000 (some from older invoices)
• Get a $5,000 bill from a contractor (but don't pay until January)
• Pay $8,000 for software subscriptions

Cash Basis December:

• Income: $30,000 (what you received)
• Expenses: $8,000 (what you paid)
• Net: $22,000

Accrual Basis December:

• Income: $50,000 (what you earned)
• Expenses: $13,000 (what you incurred: $5,000 contractor + $8,000 software)
• Net: $37,000

Same business, same month—different profit picture.

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IRS rules: Can you choose?

For most small businesses, you can choose either method. But there are restrictions—IRS Publication 538 covers the full rules.

You MUST use accrual if...

• Your business has inventory and average annual gross receipts exceed $32 million (2026 threshold, adjusted annually for inflation)
• You're a C-corporation with average gross receipts over $32 million
• You're a tax shelter (which hopefully doesn't apply to you)

You CAN use cash if...

• Average annual gross receipts are under $32 million (most small businesses)
• You're a sole proprietor, partnership, or S-corp under the threshold
• You don't have inventory, OR your inventory business qualifies for the small business exception

Good news: The Tax Cuts and Jobs Act raised the threshold significantly. Before 2018, it was just $5 million. Now most small businesses have full flexibility.

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Pros and cons breakdown

Cash basis accounting

Pros:

• Simpler — Easier to track; matches your bank account
• Tax timing control — Delay income by delaying invoices; accelerate deductions by prepaying expenses
• Better cash flow visibility — Shows money you actually have
• Lower bookkeeping costs — Less complex reconciliation

Cons:

• Can be misleading — Doesn't show money you're owed or bills you owe
• Hard to see true profitability — A "great" month might just mean old invoices got paid
• Not GAAP compliant — If you ever need audited financials, you'll need to convert

Accrual basis accounting

Pros:

• More accurate picture — Shows true profitability period-by-period
• Better for planning — See what's coming in and going out
• Required for larger businesses — You won't need to switch later
• GAAP compliant — Required for bank loans, investors, audits

Cons:

• More complex — Requires tracking receivables and payables
• Can create tax surprises — You owe tax on income you haven't collected
• Higher bookkeeping costs — More entries, more reconciliation
• Less cash flow visibility — Profit doesn't equal cash in the bank

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Tax planning implications

Your accounting method significantly impacts year-end tax planning.

Cash basis tax strategies

• Defer income: Don't invoice December work until January
• Accelerate expenses: Prepay January rent, insurance, or subscriptions in December
• Control the timing: You have significant control over which year income and expenses hit

Accrual basis tax strategies

• Less timing flexibility — Income is recognized when earned, not when received
• Bad debt deductions — Can write off uncollectible receivables (cash basis can't)
• Prepaid expenses rules — Prepaying doesn't always accelerate deductions

Example: A Richardson consultant with a great year expects to be in the 37% bracket. Under cash basis, they could:

• Hold December invoices until January (defer income)
• Prepay Q1 rent and insurance in December (accelerate expenses)
• Potentially save thousands by shifting income to the next tax year

Under accrual basis, these strategies don't work—income is recognized when earned regardless of billing.

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Which method should you choose?

Stick with cash if...

• You're a service business with no inventory
• You want simplicity and lower bookkeeping costs
• You value tax timing flexibility
• Your gross receipts are well under the threshold
• You don't need GAAP-compliant financials

Consider accrual if...

• You carry inventory
• You extend significant credit to customers (lots of receivables)
• You want a clearer picture of true profitability
• You're planning to seek investors or loans
• Your business is growing toward the threshold
• You need accurate period-over-period comparisons

Hybrid approach

Some businesses use accrual for internal management but file taxes on cash basis (if eligible). This gives you the best financial visibility while preserving tax flexibility.

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Switching methods: Form 3115

Already using one method and want to switch? It's possible, but not simple.

The process

1. File Form 3115 (Application for Change in Accounting Method)
2. Calculate the Section 481(a) adjustment (the cumulative difference between methods)
3. Spread the adjustment over future tax years (for positive adjustments) or take it all in year one (for negative adjustments)

When people usually switch

• Cash to accrual: Growing business needs better financial visibility; preparing for investors; exceeded the gross receipts threshold
• Accrual to cash: Business qualifies under expanded threshold; wants simpler accounting and tax flexibility

A word of caution

Switching creates a one-time adjustment that can significantly impact your taxes. Always model this out with your CPA before committing.

Example: A Dallas retailer switches from accrual to cash. They have $100,000 in accounts receivable (already taxed under accrual) and $40,000 in accounts payable (already deducted under accrual).

The Section 481(a) adjustment: -$100,000 + $40,000 = -$60,000

That's a $60,000 deduction they can take in year one. Worth planning for!

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Common misconceptions

"My bank account is my accounting"

Only works for cash basis. And even then, your bank doesn't track what you owe or what's owed to you.

"I have to use what QuickBooks defaults to"

QuickBooks can handle either method. The default is cash, but you can run reports either way.

"Accrual is too complicated for small businesses"

With good bookkeeping software, accrual isn't much harder. The bigger issue is whether you need it.

"I can switch back and forth"

Technically possible, but each switch requires IRS approval and creates tax adjustments. Pick a method and stick with it unless there's a compelling reason to change.

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The bottom line

For most DFW small businesses—especially service providers—cash basis accounting is the right choice. It's simpler, gives you tax flexibility, and matches how you think about money (what's in the bank).

But if you carry inventory, extend lots of credit, or want clearer financial insights, accrual may serve you better despite the added complexity.

Not sure which method fits your business? Let's look at your specific situation—I can usually tell you which approach makes sense in about 10 minutes.

Let's figure it out →

— Krystal Le, CPA

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LeCPA helps small businesses across Plano, Richardson, Frisco, and Dallas with bookkeeping setup and tax planning.

Sources:

• IRS Publication 538: Accounting Periods and Methods
• IRS: About Form 3115, Application for Change in Accounting Method