Basis of Accounting
Basis of accounting refers to the method your business uses to determine when to record revenue and expenses. The two main methods are cash basis (record when money moves) and accrual basis (record when earned or incurred). Your chosen basis affects your financial statements, tax reporting, and how
Basis of Accounting Definition
Basis of accounting refers to the method your business uses to determine when to record revenue and expenses. The two main methods are cash basis (record when money moves) and accrual basis (record when earned or incurred). Your chosen basis affects your financial statements, tax reporting, and how you manage your books day-to-day.
Basis of Accounting in Practice — Example
You run a freelance copywriting business. In March, you complete a $3,000 project and invoice the client. The client pays in April. On cash basis, you record $3,000 revenue in April (when paid). On accrual basis, you record $3,000 revenue in March (when earned). Same transaction, completely different timing. Your choice of basis determines which month shows the income — and which month you might owe taxes on it.
Why Basis of Accounting Matters for Your Books
Your basis of accounting shapes every financial report you produce. A cash basis P&L shows you actual money in and out. An accrual basis P&L shows economic activity regardless of cash timing. Neither is wrong — they serve different purposes and suit different businesses.
Choosing the right basis affects your tax strategy. Cash basis lets you defer income by delaying invoices or accelerate expenses by prepaying bills before year-end. Accrual basis doesn't offer these timing tools but gives you a more accurate view of profitability.
The IRS requires certain businesses to use accrual basis (generally those with inventory or gross receipts over $25 million). Most small service businesses under the threshold can choose either method. Once you pick, switching requires IRS approval via Form 3115.
How Basis of Accounting Shows Up in QuickBooks
Set your accounting method in QBO under Settings → Advanced → Accounting. Choose cash or accrual. The great thing about QBO is that it tracks transactions in a way that lets you view reports in either basis — just toggle between "Cash" and "Accrual" at the top of any financial report. However, your day-to-day workflow should align with your chosen method for consistency.
Common Mistakes
FAQ
Q: Which basis of accounting is better for small businesses? A: Cash basis is simpler and better for very small service businesses. Accrual basis is more accurate and better for businesses with inventory, receivables, or revenue over $25M. Ask your CPA which fits your situation.
Q: Can I use cash basis for my books and accrual for tax? A: No — your books and tax return should use the same basis. However, QBO lets you view reports in either basis, which can help with planning.
Related Terms
> Need help making sense of your books? Ketchup cleans up your QuickBooks in 3–7 business days. Get your price →
Related Terms
The matching principle is a fundamental accounting concept requiring expenses to be recorded in the same period as the revenues they help generate. Instead of recording expenses when paid or revenues when received, the matching principle ensures that costs are aligned with the income they produce. T
Earned revenue is income that your business has legitimately recognized by delivering goods or services to customers. It's revenue you've actually "earned" through performance, not just money you've collected. On accrual basis, earned revenue appears on your P&L when the work is completed, regardles
A credit memo (credit memorandum) is a document that reduces the amount a customer owes you — essentially a "negative invoice." It's used for returns, refunds, pricing adjustments, or error corrections. When applied to an existing invoice, it reduces the balance due. When issued independently, it cr
Operating income is the profit generated from a business's core operations, calculated as gross profit minus operating expenses. It excludes non-operating items like interest expense, investment income, and one-time gains or losses. Operating income shows how profitable the business is at its fundam
Need these terms applied to your books?
Accounting Ketchup catches up your QuickBooks so the glossary becomes your reality. Flat rate.