Cash vs. Accrual Accounting Methods

Under IRS definition, an accounting method is a set of rules used to determine when and how income and expenses are reported.

Normally for IRS purposes, the accounting method; cash vs accrual is chosen before you file the first business income tax return. It must then be used on a consistent basis for the life of the business, unless changes in the business occur that statutorily necessitate a change in the accounting method. If you wish to change methods for particular reasons of your own, you must get written permission from the IRS.

When you bill the client, when you actually receive the money and bank it, and when the job and its guarantees reach completion can each define when you have to report the income.

Normally, you calculate your income and expenses by using three major methods: 1) Cash Method; 2) Accrual Method; or 3) Hybrid Method in which select elements of cash and accrual are combined.