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.
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