Most individual taxpayers use the cash method of accounting, but some businesses may be required to use the accrual method. Knowing which method you use matters because it determines when you report income and claim deductions on your tax return.
Generally, taxpayers use one of these two accounting methods:
- Cash method (the most common)
- Accrual method
What Is the Cash Method?
Under the cash method, you report income in the tax year you actually receive it. You also deduct expenses in the year you pay them.
For example, if a customer pays you in January 2027 for work you completed in December 2026, you generally report that income on your 2027 tax return because that's when you received the payment.
Most individuals and many small businesses use the cash method because it's simple and closely follows the movement of money in and out of your accounts.
What Is the Accrual Method?
Under the accrual method, you generally report income when it's earned, even if you haven't been paid yet. Likewise, you deduct expenses when they're incurred, even if you haven't paid the bill.
For example, if you complete work in December 2026 but don't receive payment until January 2027, you would typically report the income in 2026 because that's when it was earned.
The accrual method is often used by businesses that maintain inventory or need a more detailed picture of their financial activity.
Important Information About Changing Accounting Methods
Once you've established an accounting method, you generally can't switch to a different one whenever you want. If you need to change your accounting method, you must receive approval from the IRS before making the change.
See Publication 538