# Should my business keep its books on the cash basis or the accrual basis, and why does the same period's profit change when a report switches between them?
- **[United States · reporting entities providing general purpose financial reports (FASB conceptual framework; Concepts Statements are not part of the FASB Accounting Standards Codification) · accrual accounting compared with accounting based on cash receipts and outlays]** A major difference between accrual accounting and accounting based on cash receipts and outlays is the timing of recognition of revenues, expenses, gains and losses. → [CG-MCE-005#S06](#s-CG-MCE-005-S06)
- **[not stated · not stated · cash basis vs accrual basis]** In the worked example, the same $10,000 sale is recognised in April under the cash basis and in March under the accrual basis — the same amount falling in a different period on each basis. → [CG-MCE-005#S09](#s-CG-MCE-005-S09)
- **[not stated · not stated · cash basis]** The usefulness of the cash basis declines as transaction volume, complexity or external reporting needs increase. → [CG-MCE-005#S83](#s-CG-MCE-005-S83)
- **[not stated · businesses seeking investment or lending · accrual basis]** Investors and lenders will want accrual-basis financial statements before they invest in or lend to a business. → [CG-MCE-005#S75](#s-CG-MCE-005-S75)
## What this page establishes
- The recognition rule behind each basis, and why it is a question of timing — Partly established (Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, official platform documentation, primary regulator or government.)
- What the tax rules allow, and what depends on your entity, activity and size — Established
- Where the basis lives in QuickBooks, and how to tell which one a report used — Not established
- The categories that sit between the two presentations — Not established (Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.)
- What a lender or an SBA programme asks you to hand over — Partly established
- What a preparer, an investor or a buyer expects to see — Not established
- What each basis records, and the event that triggers the record — Partly established (Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, official platform documentation, primary regulator or government.)
- What each basis is good at showing you, and what it hides — Not established (Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.)
- How to decide which basis your books should run on — Established (Required authority: authoritative lender insurer or program documentation, authoritative professional or accounting standard, primary regulator or government. Highest achieved: high quality professional secondary reference, primary regulator or government.)
- Are you even free to choose? — Established
- Why the same period shows two different profits — Partly established
- Which items the switch actually moves — Not established (Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.)
- Neither figure is wrong - which one to act on — Not established (Required authority: authoritative lender insurer or program documentation, authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.)
- Itemising the difference so you can explain it — Partly established (Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.)
- Changing a report setting has not converted your books — Partly established
- The half-and-half books, and what has to be true for a basis to really be in effect — Partly established (Required authority: authoritative professional or accounting standard, official platform documentation. Highest achieved: high quality professional secondary reference, official platform documentation, primary regulator or government.)
- Which presentation to give an outsider — Partly established
## What each basis records, and the event that triggers the record
- Generally, under the cash receipts and disbursements method, all items which constitute gross income (whether in the form of cash, property, or services) are to be included for the taxable year in which actually or constructively received. _(jurisdiction: United States (federal income tax), entity_scope: taxpayers computing taxable income for Federal income tax purposes, accounting_basis: cash receipts and disbursements method)_ `CG-MCE-005#S01`
> “(i) Cash receipts and disbursements
return. The following are among the method. Generally, under the cash re-
essential features that must be consid- ceipts and disbursements method in
ered in maintaining such records: the computation of taxable income, all
(i) Except in the case of a taxpayer items which constitute gross income
qualifying as a small business taxpayer (whether in the form of cash, property,
for the taxable year under section or services) are to be included for the
471(c), in all cases in which the produc- taxable year in which actually or con-
tion, purchase or sale of merchandise structively received.” — [Internal Revenue Service, Department of the Treasury; published in the Code of Federal Regulations by the Office of the Federal Register and the U.S. Government Publishing Office — 26 CFR 1.446-1 - General rule for methods of accounting](https://www.govinfo.gov/content/pkg/CFR-2025-title26-vol8/pdf/CFR-2025-title26-vol8-sec1-446-1.pdf), 2025-04-01; § 1.446-1(c)(1)(i) Cash receipts and disbursements method [The pinned text file is a two-column CFR page whose columns are interleaved line by line, so a byte-exact quote of a sentence in one column necessarily carries the adjacent column's text (and any page furniture) inside it. Read only the column named in this locator.]. Verified 2026-09-08.
- Generally, under an accrual method, income is to be included for the taxable year when all the events have occurred that fix the right to receive the income and the amount of the income can be determined with reasonable accuracy. _(jurisdiction: United States (federal income tax), entity_scope: taxpayers computing taxable income for Federal income tax purposes, accounting_basis: accrual method)_ `CG-MCE-005#S03`
> “(ii) Accrual method. (A) Generally,
tions thereunder.) under an accrual method, income is to
(ii) Expenditures made during the be included for the taxable year when
year shall be properly classified as be- all the events have occurred that fix
tween capital and expense. For exam- the right to receive the income and the
ple, expenditures for such items as amount of the income can be deter-
plant and equipment, which have a use- mined with reasonable accuracy.” — [Internal Revenue Service, Department of the Treasury; published in the Code of Federal Regulations by the Office of the Federal Register and the U.S. Government Publishing Office — 26 CFR 1.446-1 - General rule for methods of accounting](https://www.govinfo.gov/content/pkg/CFR-2025-title26-vol8/pdf/CFR-2025-title26-vol8-sec1-446-1.pdf), 2025-04-01; § 1.446-1(c)(1)(ii)(A) Accrual method [The pinned text file is a two-column CFR page whose columns are interleaved line by line, so a byte-exact quote of a sentence in one column necessarily carries the adjacent column's text (and any page furniture) inside it. Read only the column named in this locator.]. Verified 2026-09-08.
- Under an accrual method, a liability is incurred, and generally is taken into account for Federal income tax purposes, in the taxable year in which all the events have occurred that establish the fact of the liability, the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred with respect to the liability. _(jurisdiction: United States (federal income tax), entity_scope: taxpayers computing taxable income for Federal income tax purposes, accounting_basis: accrual method)_ `CG-MCE-005#S04`
> “Under such a
capital account and not to an expense method, a liability is incurred, and
account. generally is taken into account for
(iii) In any case in which there is al- Federal income tax purposes, in the
lowable with respect to an asset a de- taxable year in which all the events
duction for depreciation, amortization, have occurred that establish the fact of
or depletion, any expenditures (other the liability, the amount of the liabil-
than ordinary repairs) made to restore ity can be determined with reasonable
the asset or prolong its useful life shall accuracy, and economic performance
be added to the asset account or has occurred with respect to the liabil-
charged against the appropriate re- ity.” — [Internal Revenue Service, Department of the Treasury; published in the Code of Federal Regulations by the Office of the Federal Register and the U.S. Government Publishing Office — 26 CFR 1.446-1 - General rule for methods of accounting](https://www.govinfo.gov/content/pkg/CFR-2025-title26-vol8/pdf/CFR-2025-title26-vol8-sec1-446-1.pdf), 2025-04-01; § 1.446-1(c)(1)(ii)(A) [The pinned text file is a two-column CFR page whose columns are interleaved line by line, so a byte-exact quote of a sentence in one column necessarily carries the adjacent column's text (and any page furniture) inside it. Read only the column named in this locator.]. Verified 2026-09-08.
- Accrual accounting depicts the effects of transactions and other events on economic resources and claims in the periods in which those effects occur, even when the related cash receipts and payments fall in a different period. _(jurisdiction: United States, entity_scope: reporting entities providing general purpose financial reports (FASB conceptual framework; Concepts Statements are not part of the FASB Accounting Standards Codification), accounting_basis: accrual)_ `CG-MCE-005#S05`
> “Accrual accounting depicts the effects of transactions, and other
events and circumstances on a reporting entity’s economic resources and claims
in the periods in which those effects occur, even if the resulting cash receipts and
payments occur in a different period.” — [Financial Accounting Standards Board — Statement of Financial Accounting Concepts No. 8, As Amended, Conceptual Framework for Financial Reporting — Chapter 1, The Objective of General Purpose Financial Reporting](https://storage.fasb.org/Concepts%20Statement%208%E2%80%94Chapter%201%20(As%20Amended).pdf), 2021-12; Chapter 1, Financial Performance Reflected by Accrual Accounting, paragraph OB17. Verified 2026-09-08.
- A major difference between accrual accounting and accounting based on cash receipts and outlays is the timing of recognition of revenues, expenses, gains and losses. _(jurisdiction: United States, entity_scope: reporting entities providing general purpose financial reports (FASB conceptual framework; Concepts Statements are not part of the FASB Accounting Standards Codification), accounting_basis: accrual accounting compared with accounting based on cash receipts and outlays)_ `CG-MCE-005#S06`
> “A major difference between accrual accounting and accounting based on
cash receipts and outlays is the timing of recognition of revenues, expenses,
gains, and losses.” — [Financial Accounting Standards Board — Statement of Financial Accounting Concepts No. 8, As Amended, Conceptual Framework for Financial Reporting — Chapter 1, The Objective of General Purpose Financial Reporting](https://storage.fasb.org/Concepts%20Statement%208%E2%80%94Chapter%201%20(As%20Amended).pdf), 2021-12; Front matter, “Accrual, Deferral, and Allocation (Including Amortization)”. Verified 2026-09-08.
- A material item is any item that involves the proper time for the inclusion of the item in income or the taking of a deduction. _(jurisdiction: United States (federal income tax), entity_scope: taxpayers computing taxable income for Federal income tax purposes)_ `CG-MCE-005#S07`
> “A material regulations under section 166 of the In-
item is any item that involves the ternal Revenue Code. A change in the
proper time for the inclusion of the method of accounting also does not in-
item in income or the taking of a de- clude a change in treatment resulting
duction.” — [Internal Revenue Service, Department of the Treasury; published in the Code of Federal Regulations by the Office of the Federal Register and the U.S. Government Publishing Office — 26 CFR 1.446-1 - General rule for methods of accounting](https://www.govinfo.gov/content/pkg/CFR-2025-title26-vol8/pdf/CFR-2025-title26-vol8-sec1-446-1.pdf), 2025-04-01; § 1.446-1(e)(2)(ii)(a) [The pinned text file is a two-column CFR page whose columns are interleaved line by line, so a byte-exact quote of a sentence in one column necessarily carries the adjacent column's text (and any page furniture) inside it. Read only the column named in this locator.]. Verified 2026-09-08.
- Changes in method of accounting include a change from the cash receipts and disbursement method to an accrual method, or vice versa. _(jurisdiction: United States (federal income tax), entity_scope: taxpayers computing taxable income for Federal income tax purposes)_ `CG-MCE-005#S08`
> “Changes in method of account- from a change in underlying facts. For
ing include a change from the cash re- further guidance on changes involving
ceipts and disbursement method to an depreciable or amortizable assets, see
accrual method, or vice versa,” — [Internal Revenue Service, Department of the Treasury; published in the Code of Federal Regulations by the Office of the Federal Register and the U.S. Government Publishing Office — 26 CFR 1.446-1 - General rule for methods of accounting](https://www.govinfo.gov/content/pkg/CFR-2025-title26-vol8/pdf/CFR-2025-title26-vol8-sec1-446-1.pdf), 2025-04-01; § 1.446-1(e)(2)(ii)(a) [The pinned text file is a two-column CFR page whose columns are interleaved line by line, so a byte-exact quote of a sentence in one column necessarily carries the adjacent column's text (and any page furniture) inside it. Read only the column named in this locator.]. Verified 2026-09-08.
- Accrual accounting uses accrual, deferral and allocation procedures so that revenues, expenses, gains and losses are recognised in periods that depict the entity's performance for the period rather than merely listing cash receipts and outlays. _(jurisdiction: United States, entity_scope: reporting entities providing general purpose financial reports (FASB conceptual framework; Concepts Statements are not part of the FASB Accounting Standards Codification), accounting_basis: accrual accounting compared with accounting based on cash receipts and outlays)_ `CG-MCE-005#S12`
> “Accrual accounting
includes using accrual, deferral, and allocation procedures, the result of which is
the recognition of revenues, expenses, gains, and losses in periods that depict an
entity’s performance during a period instead of merely listing its cash receipts and
outlays.” — [Financial Accounting Standards Board — Statement of Financial Accounting Concepts No. 8, As Amended, Conceptual Framework for Financial Reporting — Chapter 1, The Objective of General Purpose Financial Reporting](https://storage.fasb.org/Concepts%20Statement%208%E2%80%94Chapter%201%20(As%20Amended).pdf), 2021-12; Front matter, “Accrual Accounting”. Verified 2026-09-08.
- Several periods may pass between cash being spent on raw materials or fixed assets and cash being collected from customers for the resulting products. _(jurisdiction: United States, entity_scope: reporting entities providing general purpose financial reports (FASB conceptual framework; Concepts Statements are not part of the FASB Accounting Standards Codification), accounting_basis: accrual accounting compared with accounting based on cash receipts and outlays)_ `CG-MCE-005#S17`
> “Several periods may elapse between the time cash is invested
in raw materials or fixed assets, for example, and the time cash is received from
collecting the sales price of products from customers.” — [Financial Accounting Standards Board — Statement of Financial Accounting Concepts No. 8, As Amended, Conceptual Framework for Financial Reporting — Chapter 1, The Objective of General Purpose Financial Reporting](https://storage.fasb.org/Concepts%20Statement%208%E2%80%94Chapter%201%20(As%20Amended).pdf), 2021-12; Front matter, “Accrual, Deferral, and Allocation (Including Amortization)”. Verified 2026-09-08.
_Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._
_Partly established. Established: that the two bases differ only in timing rather than in the amounts eventually recorded (S09, S10). Missing: for each basis, the event that causes income to be recorded; for each basis, the event that causes a cost to be recorded._
_Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, official platform documentation, primary regulator or government._
## The recognition rule behind each basis, and why it is a question of timing
- See above: Generally, under the cash receipts and disbursements method, all items which constitute gross income (whether in the form of cash, property, or services) are to be included for the taxable year in which actually or constructively received. ([CG-MCE-005#S01](#s-CG-MCE-005-S01))
- See above: Generally, under an accrual method, income is to be included for the taxable year when all the events have occurred that fix the right to receive the income and the amount of the income can be determined with reasonable accuracy. ([CG-MCE-005#S03](#s-CG-MCE-005-S03))
- See above: Under an accrual method, a liability is incurred, and generally is taken into account for Federal income tax purposes, in the taxable year in which all the events have occurred that establish the fact of the liability, the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred with respect to the liability. ([CG-MCE-005#S04](#s-CG-MCE-005-S04))
- See above: Accrual accounting depicts the effects of transactions and other events on economic resources and claims in the periods in which those effects occur, even when the related cash receipts and payments fall in a different period. ([CG-MCE-005#S05](#s-CG-MCE-005-S05))
- See above: A major difference between accrual accounting and accounting based on cash receipts and outlays is the timing of recognition of revenues, expenses, gains and losses. ([CG-MCE-005#S06](#s-CG-MCE-005-S06))
- See above: A material item is any item that involves the proper time for the inclusion of the item in income or the taking of a deduction. ([CG-MCE-005#S07](#s-CG-MCE-005-S07))
- See above: Changes in method of accounting include a change from the cash receipts and disbursement method to an accrual method, or vice versa. ([CG-MCE-005#S08](#s-CG-MCE-005-S08))
- In the worked example, the same $10,000 sale is recognised in April under the cash basis and in March under the accrual basis — the same amount falling in a different period on each basis. _(jurisdiction: not stated, entity_scope: not stated, accounting_basis: cash basis vs accrual basis, conditions: stated as an example)_ `CG-MCE-005#S09`
> “Revenue recognition . A company sells $10,000 of green widgets to a customer in March, which pays the invoice in April. Under the cash basis, the seller recognizes the sale in April, when the cash is received. Under the accrual basis, the seller recognizes the sale in March, when it issues the invoice.” — [AccountingTools, Inc. (Steven Bragg) — Cash basis vs. accrual basis](https://www.accountingtools.com/articles/cash-basis-vs-accrual-basis-accounting.html), 2026-01-14; Section: Examples of Cash Basis and Accrual Basis Differences — Revenue recognition. Verified 2026-09-08.
- In the worked example, the same $500 purchase is recognised in June under the cash basis and in May under the accrual basis — the same amount falling in a different period on each basis. _(jurisdiction: not stated, entity_scope: not stated, accounting_basis: cash basis vs accrual basis, conditions: stated as an example)_ `CG-MCE-005#S10`
> “Expense recognition . A company buys $500 of office supplies in May, which it pays for in June. Under the cash basis, the buyer recognizes the purchase in June, when it pays the bill. Under the accrual basis, the buyer recognizes the purchase in May, when it receives the supplier's invoice.” — [AccountingTools, Inc. (Steven Bragg) — Cash basis vs. accrual basis](https://www.accountingtools.com/articles/cash-basis-vs-accrual-basis-accounting.html), 2026-01-14; Section: Examples of Cash Basis and Accrual Basis Differences — Expense recognition. Verified 2026-09-08.
- The term 'method of accounting' includes not only the overall method of accounting of the taxpayer but also the accounting treatment of any item; examples of such over-all methods are the cash receipts and disbursements method, an accrual method, combinations of such methods, and combinations of the foregoing with various methods provided for the accounting treatment of special items. _(jurisdiction: United States (federal income tax), entity_scope: taxpayers computing taxable income for Federal income tax purposes)_ `CG-MCE-005#S11`
> “The term ‘‘method
tion 444 be disregarded will be per- of accounting’’ includes not only the
mitted to resume use of the year it pre- overall method of accounting of the
viously elected under section 444, com- taxpayer but also the accounting treat-
mencing with its first taxable year be- ment of any item. Examples of such
ginning on or after January 1, 2002. over-all methods are the cash receipts
Such S corporation will be required to and disbursements method, an accrual
file a return under § 1.7519–2T for each method, combinations of such methods,
taxable year beginning on or after Jan- and combinations of the foregoing with
uary 1, 2002. No payment under section various methods provided for the ac-
7519 will be due with respect to the counting treatment of special items.” — [Internal Revenue Service, Department of the Treasury; published in the Code of Federal Regulations by the Office of the Federal Register and the U.S. Government Publishing Office — 26 CFR 1.446-1 - General rule for methods of accounting](https://www.govinfo.gov/content/pkg/CFR-2025-title26-vol8/pdf/CFR-2025-title26-vol8-sec1-446-1.pdf), 2025-04-01; § 1.446-1(a)(1) (26 CFR Ch. I, 4-1-25 Edition, printed page 49/50) [The pinned text file is a two-column CFR page whose columns are interleaved line by line, so a byte-exact quote of a sentence in one column necessarily carries the adjacent column's text (and any page furniture) inside it. Read only the column named in this locator.]. Verified 2026-09-08.
- See above: Accrual accounting uses accrual, deferral and allocation procedures so that revenues, expenses, gains and losses are recognised in periods that depict the entity's performance for the period rather than merely listing cash receipts and outlays. ([CG-MCE-005#S12](#s-CG-MCE-005-S12))
- Accrual accounting provides information about an entity's assets and liabilities and their changes that accounting for cash receipts and outlays alone cannot provide. _(jurisdiction: United States, entity_scope: reporting entities providing general purpose financial reports (FASB conceptual framework; Concepts Statements are not part of the FASB Accounting Standards Codification), accounting_basis: accrual accounting compared with accounting based on cash receipts and outlays)_ `CG-MCE-005#S13`
> “Accrual accounting thus provides
information about an entity’s assets and liabilities and changes in them that cannot
be obtained by accounting for only cash receipts and outlays.” — [Financial Accounting Standards Board — Statement of Financial Accounting Concepts No. 8, As Amended, Conceptual Framework for Financial Reporting — Chapter 1, The Objective of General Purpose Financial Reporting](https://storage.fasb.org/Concepts%20Statement%208%E2%80%94Chapter%201%20(As%20Amended).pdf), 2021-12; Front matter, “Accrual Accounting”. Verified 2026-09-08.
- A short-period report of cash receipts and outlays cannot show how much cash received is return of investment versus return on investment, and so cannot show whether or how far the enterprise is successful. _(jurisdiction: United States, entity_scope: reporting entities providing general purpose financial reports (FASB conceptual framework; Concepts Statements are not part of the FASB Accounting Standards Codification), accounting_basis: accrual accounting compared with accounting based on cash receipts and outlays)_ `CG-MCE-005#S14`
> “A report showing cash
receipts and cash outlays of an enterprise for a short period (such as a statement
of cash flows) cannot indicate how much of the cash received is return of
investment and how much is return on investment and, thus, cannot indicate
whether or to what extent an enterprise is successful or unsuccessful.” — [Financial Accounting Standards Board — Statement of Financial Accounting Concepts No. 8, As Amended, Conceptual Framework for Financial Reporting — Chapter 1, The Objective of General Purpose Financial Reporting](https://storage.fasb.org/Concepts%20Statement%208%E2%80%94Chapter%201%20(As%20Amended).pdf), 2021-12; Front matter, “Accrual, Deferral, and Allocation (Including Amortization)”. Verified 2026-09-08.
- Information about economic resources and claims and their changes during a period is a better basis for assessing past and future performance than information solely about the period's cash receipts and payments. _(jurisdiction: United States, entity_scope: reporting entities providing general purpose financial reports (FASB conceptual framework; Concepts Statements are not part of the FASB Accounting Standards Codification), accounting_basis: accrual accounting compared with accounting based on cash receipts and outlays)_ `CG-MCE-005#S15`
> “This is important because information about
a reporting entity’s economic resources and claims and changes in its economic
resources and claims during a period provides a better basis for assessing the
entity’s past and future performance than information solely about cash receipts
and payments during that period.” — [Financial Accounting Standards Board — Statement of Financial Accounting Concepts No. 8, As Amended, Conceptual Framework for Financial Reporting — Chapter 1, The Objective of General Purpose Financial Reporting](https://storage.fasb.org/Concepts%20Statement%208%E2%80%94Chapter%201%20(As%20Amended).pdf), 2021-12; Chapter 1, Financial Performance Reflected by Accrual Accounting, paragraph OB17. Verified 2026-09-08.
- The modified cash basis combines elements of the cash basis and the accrual basis. _(jurisdiction: not stated, entity_scope: not stated, accounting_basis: modified cash basis)_ `CG-MCE-005#S62`
> “The modified cash basis of accounting uses elements of both the cash basis and accrual basis of accounting .” — [AccountingTools, Inc. — Modified cash basis of accounting definition](https://www.accountingtools.com/articles/what-is-the-modified-cash-basis-of-accounting.html), 2026-02-27; Section: What is the Modified Cash Basis of Accounting?. Verified 2026-09-08.
_Partly established. Established: what each basis therefore represents about a period (S12); whether the two bases differ only in the period in which an amount is recorded rather than in the amounts a completed transaction eventually records (S09, S10). Missing: the event that causes income to be recorded under each accounting basis; the event that causes cost to be recorded under each accounting basis._
_Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, official platform documentation, primary regulator or government._
## What each basis is good at showing you, and what it hides
- See above: Accrual accounting uses accrual, deferral and allocation procedures so that revenues, expenses, gains and losses are recognised in periods that depict the entity's performance for the period rather than merely listing cash receipts and outlays. ([CG-MCE-005#S12](#s-CG-MCE-005-S12))
- See above: Accrual accounting provides information about an entity's assets and liabilities and their changes that accounting for cash receipts and outlays alone cannot provide. ([CG-MCE-005#S13](#s-CG-MCE-005-S13))
- See above: A short-period report of cash receipts and outlays cannot show how much cash received is return of investment versus return on investment, and so cannot show whether or how far the enterprise is successful. ([CG-MCE-005#S14](#s-CG-MCE-005-S14))
- See above: Information about economic resources and claims and their changes during a period is a better basis for assessing past and future performance than information solely about the period's cash receipts and payments. ([CG-MCE-005#S15](#s-CG-MCE-005-S15))
- Information about cash flows during a period helps users assess the ability to generate future net cash inflows and shows how the entity obtains and spends cash, including borrowing and repayment and distributions to investors, and other factors affecting liquidity or solvency. _(jurisdiction: United States, entity_scope: reporting entities providing general purpose financial reports (FASB conceptual framework; Concepts Statements are not part of the FASB Accounting Standards Codification))_ `CG-MCE-005#S16`
> “Information about a reporting entity’s cash flows during a period also
helps users to assess the entity’s ability to generate future net cash inflows. It
indicates how the reporting entity obtains and spends cash, including information
about its borrowing and repayment of debt, cash dividends or other cash
distributions to investors, and other factors that may affect the entity’s liquidity or
solvency.” — [Financial Accounting Standards Board — Statement of Financial Accounting Concepts No. 8, As Amended, Conceptual Framework for Financial Reporting — Chapter 1, The Objective of General Purpose Financial Reporting](https://storage.fasb.org/Concepts%20Statement%208%E2%80%94Chapter%201%20(As%20Amended).pdf), 2021-12; Chapter 1, Financial Performance Reflected by Past Cash Flows, paragraph OB20. Verified 2026-09-08.
- See above: Several periods may pass between cash being spent on raw materials or fixed assets and cash being collected from customers for the resulting products. ([CG-MCE-005#S17](#s-CG-MCE-005-S17))
- Because the cash basis ignores receivables and payables it can mislead about financial performance for larger businesses, potentially causing significant timing mismatches between revenue and expenses. _(jurisdiction: not stated, entity_scope: larger businesses, accounting_basis: cash basis)_ `CG-MCE-005#S18`
> “However, it can present a misleading picture of financial performance for larger businesses, as it ignores receivables and payables, potentially causing significant timing mismatches between revenue and expenses.” — [AccountingTools, Inc. (Steven Bragg) — Cash basis vs. accrual basis](https://www.accountingtools.com/articles/cash-basis-vs-accrual-basis-accounting.html), 2026-01-14; Section: What is the Cash Basis of Accounting?. Verified 2026-09-08.
- The cash basis is often used by small businesses and individuals because it is simple and makes cash flow easy to track. _(jurisdiction: not stated, entity_scope: small businesses and individuals, accounting_basis: cash basis)_ `CG-MCE-005#S19`
> “This method is straightforward and often used by small businesses and individuals due to its simplicity and ease of tracking cash flow.” — [AccountingTools, Inc. (Steven Bragg) — Cash basis vs. accrual basis](https://www.accountingtools.com/articles/cash-basis-vs-accrual-basis-accounting.html), 2026-01-14; Section: What is the Cash Basis of Accounting?. Verified 2026-09-08.
_Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._
- The accrual basis gives a more accurate picture of financial performance and position because economic events are recognised in the periods to which they relate. _(jurisdiction: not stated, entity_scope: not stated, accounting_basis: accrual basis)_ `CG-MCE-005#S20`
> “This approach provides a more accurate picture of a company's financial performance and position by recognizing economic events in the periods to which they relate.” — [AccountingTools, Inc. (Steven Bragg) — Cash basis vs. accrual basis](https://www.accountingtools.com/articles/cash-basis-vs-accrual-basis-accounting.html), 2026-01-14; Section: What is the Accrual Basis of Accounting?. Verified 2026-09-08.
_Not established from an authoritative source._
_Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference._
## How to decide which basis your books should run on
- See above: Several periods may pass between cash being spent on raw materials or fixed assets and cash being collected from customers for the resulting products. ([CG-MCE-005#S17](#s-CG-MCE-005-S17))
- See above: The cash basis is often used by small businesses and individuals because it is simple and makes cash flow easy to track. ([CG-MCE-005#S19](#s-CG-MCE-005-S19))
- In any case in which it is necessary to use an inventory, the accrual method of accounting must be used with regard to purchases and sales, unless the taxpayer qualifies as a small business taxpayer for the taxable year under section 471(c), or is otherwise authorized under paragraph (c)(2)(ii) of this section. _(jurisdiction: United States (federal income tax), entity_scope: taxpayers for whom it is necessary to use an inventory, accounting_basis: accrual method, effective_from: taxable years beginning on or after January 5, 2021 (per paragraph (c)(3)), conditions: unless the taxpayer qualifies as a small business taxpayer under section 471(c); unless otherwise authorized under paragraph (c)(2)(ii))_ `CG-MCE-005#S26`
> “(2) Special rules. (i) In any case in
passes to the customers, whether or which it is necessary to use an inven-
not billed, depending on the method tory, the accrual method of accounting
52
VerDate Sep<11>2014 14:21 Jun 23, 2025 Jkt 265099 PO 00000 Frm 00062 Fmt 8010 Sfmt 8010 Y:\SGML\265099.XXX 265099
Internal Revenue Service, Treasury § 1.446–1
must be used with regard to purchases contained in the regulations under sec-
and sales unless: tion 446 for such taxable year and all
(A) The taxpayer qualifies as a small subsequent taxable years.
business taxpayer for the taxable year (d) Taxpayer engaged in more than one
under section 471(c), or business. (1) Where a taxpayer has two
(B) Otherwise authorized under para- or more separate and distinct trades or
graph (c)(2)(ii) of this section.” — [Internal Revenue Service, Department of the Treasury; published in the Code of Federal Regulations by the Office of the Federal Register and the U.S. Government Publishing Office — 26 CFR 1.446-1 - General rule for methods of accounting](https://www.govinfo.gov/content/pkg/CFR-2025-title26-vol8/pdf/CFR-2025-title26-vol8-sec1-446-1.pdf), 2025-04-01; § 1.446-1(c)(2)(i) Special rules (the sentence runs from the second column of printed page 52 to the first column of printed page 53; the quoted span therefore contains the intervening page furniture) [The pinned text file is a two-column CFR page whose columns are interleaved line by line, so a byte-exact quote of a sentence in one column necessarily carries the adjacent column's text (and any page furniture) inside it. Read only the column named in this locator.]. Verified 2026-09-08.
_Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._
- Most individuals and many small businesses use the cash method; a taxpayer who produces, purchases or sells merchandise must generally keep an inventory and use an accrual method for merchandise sales and purchases. _(jurisdiction: United States (federal income tax), entity_scope: All taxpayers (individuals and business entities) filing U.S. federal income tax returns, conditions: subject to the exceptions the document notes under Inventories)_ `CG-MCE-005#S28`
> “Most individuals and many small businesses (as explained under Excluded Entities and Exceptions , later) use the cash method of accounting. Generally, if you produce, purchase, or sell merchandise, you must keep an inventory and use an accrual method for sales and purchases of merchandise.” — [Internal Revenue Service, United States Department of the Treasury — Publication 538, Accounting Periods and Methods](https://www.irs.gov/publications/p538), 2026-04-30; Publication 538 - Main Contents > Accounting Methods > Cash Method. Verified 2026-09-08.
_Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._
- The CDC's repayment ability analysis must include a balance sheet and income statement dated within 120 days prior to submission to SBA, together with an analysis of debt service coverage and an aging of accounts receivable and accounts payable. _(jurisdiction: United States, entity_scope: 504 loan applicants, effective_from: 2025-06-01)_ `CG-MCE-005#S72`
> “Balance sheet and income statement dated within 120 days prior to submission to SBA , including analysis of debt service coverage , aging of accounts receivable and accounts payable .” — [U.S. Small Business Administration, Office of Capital Access — SOP 50 10 8, Lender and Development Company Loan Programs (with Technical Updates)](https://legacy.sba.gov/sites/default/files/2025-05/SOP%2050%2010%208%20Technical%20Updates%20effective%206.1.2025.docx), 2025-06-01; Section C, 504 Loan Program Specific Requirements, Credit Standards — CDC Credit Memorandum, Repayment Ability Analysis. Verified 2026-09-08.
_Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._
- Small businesses commonly use the cash basis because it requires only limited accounting expertise. _(jurisdiction: not stated, entity_scope: small businesses, accounting_basis: cash basis)_ `CG-MCE-005#S78`
> “The cash basis is commonly used in small businesses, since it requires only a limited amount of accounting expertise.” — [AccountingTools, Inc. — How to convert cash basis to accrual basis accounting](https://www.accountingtools.com/articles/how-to-convert-cash-basis-to-accrual-basis-accounting.html), 2026-08-29; Section: Cash vs. Accrual Basis Accounting. Verified 2026-09-08.
_Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._
- The cash basis is simpler to maintain and suits small businesses without extensive reporting needs; the accrual basis is more complex and requires adjusting entries and the tracking of receivables and payables. _(jurisdiction: not stated, entity_scope: small businesses without extensive financial reporting needs (for the cash-basis limb), accounting_basis: cash basis vs accrual basis)_ `CG-MCE-005#S81`
> “Complexity level . The cash basis of accounting is simpler to maintain, and so is suitable for small businesses without extensive financial reporting needs. The accrual basis of accounting is more complex and requires adjusting entries and tracking receivables and payables.” — [AccountingTools, Inc. (Steven Bragg) — Cash basis vs. accrual basis](https://www.accountingtools.com/articles/cash-basis-vs-accrual-basis-accounting.html), 2026-01-14; Section: Comparing the Cash Basis and Accrual Basis of Accounting — Complexity level. Verified 2026-09-08.
_Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._
- The cash basis may appropriately be used by a business that is small, closely held and has relatively simple transactions. _(jurisdiction: not stated, entity_scope: small, closely held businesses with relatively simple transactions, accounting_basis: cash basis)_ `CG-MCE-005#S82`
> “A business may appropriately use the cash basis when it is small, closely held, and has relatively simple transactions.” — [AccountingTools, Inc. (Steven Bragg) — Cash basis vs. accrual basis](https://www.accountingtools.com/articles/cash-basis-vs-accrual-basis-accounting.html), 2026-01-14; Section: FAQs — When might a business appropriately use the cash basis despite its limitations?. Verified 2026-09-08.
_Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._
- The usefulness of the cash basis declines as transaction volume, complexity or external reporting needs increase. _(jurisdiction: not stated, entity_scope: not stated, accounting_basis: cash basis)_ `CG-MCE-005#S83`
> “However, its usefulness declines as transaction volume, complexity, or external reporting needs increase.” — [AccountingTools, Inc. (Steven Bragg) — Cash basis vs. accrual basis](https://www.accountingtools.com/articles/cash-basis-vs-accrual-basis-accounting.html), 2026-01-14; Section: FAQs — When might a business appropriately use the cash basis despite its limitations?. Verified 2026-09-08.
_Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._
_Required authority: authoritative lender insurer or program documentation, authoritative professional or accounting standard, primary regulator or government. Highest achieved: high quality professional secondary reference, primary regulator or government._
## Are you even free to choose?
- Except as otherwise provided in section 448, in the case of a C corporation, a partnership which has a C corporation as a partner, or a tax shelter, taxable income shall not be computed under the cash receipts and disbursements method of accounting. _(jurisdiction: United States (federal income tax), entity_scope: C corporations; partnerships having a C corporation as a partner; tax shelters, accounting_basis: cash receipts and disbursements method)_ `CG-MCE-005#S21`
> “Except as otherwise provided in this section, in the case of a—
(1) C corporation,
(2) partnership which has a C corporation as a partner, or
(3) tax shelter,
taxable income shall not be computed under the cash receipts and disbursements method of accounting.” — [Office of the Law Revision Counsel, U.S. House of Representatives; published on govinfo by the U.S. Government Publishing Office — 26 U.S.C. 448 - Limitation on use of cash method of accounting](https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleA-chap1-subchapE-partII-subpartA-sec448.htm), United States Code, 2024 Edition; 26 U.S.C. 448(a) General rule. Verified 2026-09-08.
_Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._
- Paragraphs (1) and (2) of subsection (a) shall not apply to any corporation or partnership for any taxable year if such entity (or any predecessor) meets the gross receipts test of subsection (c) for such taxable year. _(jurisdiction: United States (federal income tax), entity_scope: corporations and partnerships that meet the gross receipts test of subsection (c))_ `CG-MCE-005#S22`
> “Paragraphs (1) and (2) of subsection (a) shall not apply to any corporation or partnership for any taxable year if such entity (or any predecessor) meets the gross receipts test of subsection (c) for such taxable year.” — [Office of the Law Revision Counsel, U.S. House of Representatives; published on govinfo by the U.S. Government Publishing Office — 26 U.S.C. 448 - Limitation on use of cash method of accounting](https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleA-chap1-subchapE-partII-subpartA-sec448.htm), United States Code, 2024 Edition; 26 U.S.C. 448(b)(3) Entities which meet gross receipts test. Verified 2026-09-08.
_Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._
- For taxable years beginning in 2026, a corporation or partnership meets the section 448(c) gross receipts test if its average annual gross receipts for the 3-taxable-year period ending with the preceding taxable year do not exceed $32,000,000. _(jurisdiction: United States (federal), entity_scope: a corporation or partnership, effective_from: taxable years beginning in 2026)_ `CG-MCE-005#S23`
> “.30 Limitation on Use of Cash Method of Accounting. For taxable years beginning in 2026, a corporation or partnership meets the gross receipts test of § 448(c) for any taxable year if the average annual gross receipts of such entity for the 3-taxable-year period ending with the taxable year which precedes such taxable year does not exceed $32,000,000.” — [Internal Revenue Service, United States Department of the Treasury — Rev. Proc. 2025-32](https://www.irs.gov/pub/irs-drop/rp-25-32.pdf), Code provisions as in effect on October 9, 2025; Section 4.30 — Limitation on Use of Cash Method of Accounting (§ 448). Verified 2026-09-08.
_Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._
- Paragraphs (1) and (2) of subsection (a) shall not apply to any farming business. _(jurisdiction: United States (federal income tax), entity_scope: farming businesses)_ `CG-MCE-005#S24`
> “Paragraphs (1) and (2) of subsection (a) shall not apply to any farming business.” — [Office of the Law Revision Counsel, U.S. House of Representatives; published on govinfo by the U.S. Government Publishing Office — 26 U.S.C. 448 - Limitation on use of cash method of accounting](https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleA-chap1-subchapE-partII-subpartA-sec448.htm), United States Code, 2024 Edition; 26 U.S.C. 448(b)(1) Farming business. Verified 2026-09-08.
_Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._
- Paragraphs (1) and (2) of subsection (a) shall not apply to a qualified personal service corporation, and such a corporation shall be treated as an individual for purposes of determining whether paragraph (2) of subsection (a) applies to any partnership. _(jurisdiction: United States (federal income tax), entity_scope: qualified personal service corporations)_ `CG-MCE-005#S25`
> “Paragraphs (1) and (2) of subsection (a) shall not apply to a qualified personal service corporation, and such a corporation shall be treated as an individual for purposes of determining whether paragraph (2) of subsection (a) applies to any partnership.” — [Office of the Law Revision Counsel, U.S. House of Representatives; published on govinfo by the U.S. Government Publishing Office — 26 U.S.C. 448 - Limitation on use of cash method of accounting](https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleA-chap1-subchapE-partII-subpartA-sec448.htm), United States Code, 2024 Edition; 26 U.S.C. 448(b)(2) Qualified personal service corporations. Verified 2026-09-08.
_Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._
- See above: In any case in which it is necessary to use an inventory, the accrual method of accounting must be used with regard to purchases and sales, unless the taxpayer qualifies as a small business taxpayer for the taxable year under section 471(c), or is otherwise authorized under paragraph (c)(2)(ii) of this section. ([CG-MCE-005#S26](#s-CG-MCE-005-S26))
- A small business taxpayer may choose not to keep an inventory but must still use an inventory accounting method that clearly reflects income. _(jurisdiction: United States (federal income tax), entity_scope: Small business taxpayers as defined in this publication)_ `CG-MCE-005#S27`
> “If you are a small business taxpayer (defined below), you can choose not to keep an inventory, but you must still use a method of accounting for inventory that clearly reflects income.” — [Internal Revenue Service, United States Department of the Treasury — Publication 538, Accounting Periods and Methods](https://www.irs.gov/publications/p538), 2026-04-30; Publication 538 - Main Contents > Inventories > Exception for Small Business Taxpayers. Verified 2026-09-08.
_Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._
- See above: Most individuals and many small businesses use the cash method; a taxpayer who produces, purchases or sells merchandise must generally keep an inventory and use an accrual method for merchandise sales and purchases. ([CG-MCE-005#S28](#s-CG-MCE-005-S28))
- Except for deviations permitted or required by special accounting treatment, taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books. _(jurisdiction: United States (federal income tax), entity_scope: taxpayers computing taxable income for Federal income tax purposes)_ `CG-MCE-005#S29`
> “Except for deviations permitted or re-
(ii) Taxable years beginning prior to quired by such special accounting
January 1, 2002. An S corporation de- treatment, taxable income shall be
scribed in paragraph (c)(1) of this sec- computed under the method of ac-
tion that requests, in accordance with counting on the basis of which the tax-
this paragraph, that a termination of payer regularly computes his income in
its election under section 444 be dis- keeping his books.” — [Internal Revenue Service, Department of the Treasury; published in the Code of Federal Regulations by the Office of the Federal Register and the U.S. Government Publishing Office — 26 CFR 1.446-1 - General rule for methods of accounting](https://www.govinfo.gov/content/pkg/CFR-2025-title26-vol8/pdf/CFR-2025-title26-vol8-sec1-446-1.pdf), 2025-04-01; § 1.446-1(a)(1) [The pinned text file is a two-column CFR page whose columns are interleaved line by line, so a byte-exact quote of a sentence in one column necessarily carries the adjacent column's text (and any page furniture) inside it. Read only the column named in this locator.]. Verified 2026-09-08.
_Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._
- No method of accounting is acceptable unless, in the opinion of the Commissioner, it clearly reflects income. _(jurisdiction: United States (federal income tax), entity_scope: taxpayers computing taxable income for Federal income tax purposes)_ `CG-MCE-005#S30`
> “However, no method of account-
(iii) Section 7519: required payments ing is acceptable unless, in the opinion
and returns. The Internal Revenue of the Commissioner, it clearly reflects
Service waives any requirement for an income.” — [Internal Revenue Service, Department of the Treasury; published in the Code of Federal Regulations by the Office of the Federal Register and the U.S. Government Publishing Office — 26 CFR 1.446-1 - General rule for methods of accounting](https://www.govinfo.gov/content/pkg/CFR-2025-title26-vol8/pdf/CFR-2025-title26-vol8-sec1-446-1.pdf), 2025-04-01; § 1.446-1(a)(2) [The pinned text file is a two-column CFR page whose columns are interleaved line by line, so a byte-exact quote of a sentence in one column necessarily carries the adjacent column's text (and any page furniture) inside it. Read only the column named in this locator.]. Verified 2026-09-08.
_Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._
- A taxpayer filing his first return may adopt any permissible method of accounting in computing taxable income for the taxable year covered by such return. _(jurisdiction: United States (federal income tax), entity_scope: a taxpayer filing his first return)_ `CG-MCE-005#S32`
> “(e) Requirement respecting the adoption
applicable to consolidated return years or change of accounting method. (1) A
beginning on or after November 7, 2001. taxpayer filing his first return may
(3) Applicability date. The first sen- adopt any permissible method of ac-
tence of paragraph (a)(4)(i) of this sec- counting in computing taxable income
tion and paragraph (c)(2)(i) of this sec- for the taxable year covered by such re-
tion apply to taxable years beginning turn.” — [Internal Revenue Service, Department of the Treasury; published in the Code of Federal Regulations by the Office of the Federal Register and the U.S. Government Publishing Office — 26 CFR 1.446-1 - General rule for methods of accounting](https://www.govinfo.gov/content/pkg/CFR-2025-title26-vol8/pdf/CFR-2025-title26-vol8-sec1-446-1.pdf), 2025-04-01; § 1.446-1(e)(1) Requirement respecting the adoption or change of accounting method [The pinned text file is a two-column CFR page whose columns are interleaved line by line, so a byte-exact quote of a sentence in one column necessarily carries the adjacent column's text (and any page furniture) inside it. Read only the column named in this locator.]. Verified 2026-09-08.
_Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._
- Except as otherwise expressly provided in chapter 1 of the Code and the regulations thereunder, a taxpayer who changes the method of accounting employed in keeping his books shall, before computing his income upon such new method for purposes of taxation, secure the consent of the Commissioner. _(jurisdiction: United States (federal income tax), entity_scope: taxpayers changing the method of accounting employed in keeping their books)_ `CG-MCE-005#S33`
> “(2)(i) Except as otherwise expressly item of income or deduction that does
provided in chapter 1 of the Code and not involve the proper time for the in-
the regulations thereunder, a taxpayer clusion of the item of income or the
who changes the method of accounting taking of a deduction. For example,
employed in keeping his books shall, corrections of items that are deducted
before computing his income upon such as interest or salary, but that are in
new method for purposes of taxation, fact payments of dividends, and of
secure the consent of the Commis- items that are deducted as business ex-
sioner.” — [Internal Revenue Service, Department of the Treasury; published in the Code of Federal Regulations by the Office of the Federal Register and the U.S. Government Publishing Office — 26 CFR 1.446-1 - General rule for methods of accounting](https://www.govinfo.gov/content/pkg/CFR-2025-title26-vol8/pdf/CFR-2025-title26-vol8-sec1-446-1.pdf), 2025-04-01; § 1.446-1(e)(2)(i) [The pinned text file is a two-column CFR page whose columns are interleaved line by line, so a byte-exact quote of a sentence in one column necessarily carries the adjacent column's text (and any page furniture) inside it. Read only the column named in this locator.]. Verified 2026-09-08.
_Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._
- Failing the gross receipts test removes the freedom to use the cash method: the entity must change to an accrual method effective for the tax year of failure, and must file Form 3115 to request the change. _(jurisdiction: United States (federal income tax), entity_scope: Corporations and partnerships failing the gross receipts test, effective_from: the tax year in which the entity fails to meet the gross receipts test)_ `CG-MCE-005#S34`
> “A corporation or partnership that fails to meet the gross receipts test for any tax year cannot use the cash method and must change to an accrual method of accounting, effective for the tax year in which the entity fails to meet this test. The entity must file Form 3115 to request the change.” — [Internal Revenue Service, United States Department of the Treasury — Publication 538, Accounting Periods and Methods](https://www.irs.gov/publications/p538), 2026-04-30; Publication 538 - Main Contents > Accounting Methods > Cash Method > Exceptions > Change to accrual method.. Verified 2026-09-08.
_Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._
- A taxpayer who uses the cash method of accounting in computing gross income from his trade or business shall use the cash method in computing expenses of such trade or business. _(jurisdiction: United States (federal income tax), entity_scope: taxpayers computing taxable income for Federal income tax purposes, accounting_basis: cash receipts and disbursements method)_ `CG-MCE-005#S35`
> “However,
taxpayer any earlier than the taxable a taxpayer who uses the cash method
year in which those amounts are in- of accounting in computing gross in-
curred. come from his trade or business shall
(C) No method of accounting is ac- use the cash method in computing ex-
ceptable unless, in the opinion of the penses of such trade or business.” — [Internal Revenue Service, Department of the Treasury; published in the Code of Federal Regulations by the Office of the Federal Register and the U.S. Government Publishing Office — 26 CFR 1.446-1 - General rule for methods of accounting](https://www.govinfo.gov/content/pkg/CFR-2025-title26-vol8/pdf/CFR-2025-title26-vol8-sec1-446-1.pdf), 2025-04-01; § 1.446-1(c)(1)(iv)(a) [The pinned text file is a two-column CFR page whose columns are interleaved line by line, so a byte-exact quote of a sentence in one column necessarily carries the adjacent column's text (and any page furniture) inside it. Read only the column named in this locator.]. Verified 2026-09-08.
_Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._
- A taxpayer who uses an accrual method of accounting in computing business expenses shall use an accrual method in computing items affecting gross income from his trade or business. _(jurisdiction: United States (federal income tax), entity_scope: taxpayers computing taxable income for Federal income tax purposes, accounting_basis: accrual method)_ `CG-MCE-005#S36`
> “Simi-
Commissioner, it clearly reflects in- larly, a taxpayer who uses an accrual
come. The method used by the tax- method of accounting in computing
payer in determining when income is business expenses shall use an accrual
to be accounted for will generally be method in computing items affecting
acceptable if it accords with generally gross income from his trade or busi-
accepted accounting principles, is con- ness.” — [Internal Revenue Service, Department of the Treasury; published in the Code of Federal Regulations by the Office of the Federal Register and the U.S. Government Publishing Office — 26 CFR 1.446-1 - General rule for methods of accounting](https://www.govinfo.gov/content/pkg/CFR-2025-title26-vol8/pdf/CFR-2025-title26-vol8-sec1-446-1.pdf), 2025-04-01; § 1.446-1(c)(1)(iv)(a) [The pinned text file is a two-column CFR page whose columns are interleaved line by line, so a byte-exact quote of a sentence in one column necessarily carries the adjacent column's text (and any page furniture) inside it. Read only the column named in this locator.]. Verified 2026-09-08.
_Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._
## What the tax rules allow, and what depends on your entity, activity and size
- See above: Except as otherwise provided in section 448, in the case of a C corporation, a partnership which has a C corporation as a partner, or a tax shelter, taxable income shall not be computed under the cash receipts and disbursements method of accounting. ([CG-MCE-005#S21](#s-CG-MCE-005-S21))
- See above: Paragraphs (1) and (2) of subsection (a) shall not apply to any corporation or partnership for any taxable year if such entity (or any predecessor) meets the gross receipts test of subsection (c) for such taxable year. ([CG-MCE-005#S22](#s-CG-MCE-005-S22))
- See above: For taxable years beginning in 2026, a corporation or partnership meets the section 448(c) gross receipts test if its average annual gross receipts for the 3-taxable-year period ending with the preceding taxable year do not exceed $32,000,000. ([CG-MCE-005#S23](#s-CG-MCE-005-S23))
- See above: Paragraphs (1) and (2) of subsection (a) shall not apply to any farming business. ([CG-MCE-005#S24](#s-CG-MCE-005-S24))
- See above: Paragraphs (1) and (2) of subsection (a) shall not apply to a qualified personal service corporation, and such a corporation shall be treated as an individual for purposes of determining whether paragraph (2) of subsection (a) applies to any partnership. ([CG-MCE-005#S25](#s-CG-MCE-005-S25))
- See above: In any case in which it is necessary to use an inventory, the accrual method of accounting must be used with regard to purchases and sales, unless the taxpayer qualifies as a small business taxpayer for the taxable year under section 471(c), or is otherwise authorized under paragraph (c)(2)(ii) of this section. ([CG-MCE-005#S26](#s-CG-MCE-005-S26))
- See above: A small business taxpayer may choose not to keep an inventory but must still use an inventory accounting method that clearly reflects income. ([CG-MCE-005#S27](#s-CG-MCE-005-S27))
- See above: Most individuals and many small businesses use the cash method; a taxpayer who produces, purchases or sells merchandise must generally keep an inventory and use an accrual method for merchandise sales and purchases. ([CG-MCE-005#S28](#s-CG-MCE-005-S28))
- See above: Except for deviations permitted or required by special accounting treatment, taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books. ([CG-MCE-005#S29](#s-CG-MCE-005-S29))
- See above: No method of accounting is acceptable unless, in the opinion of the Commissioner, it clearly reflects income. ([CG-MCE-005#S30](#s-CG-MCE-005-S30))
- See above: A taxpayer filing his first return may adopt any permissible method of accounting in computing taxable income for the taxable year covered by such return. ([CG-MCE-005#S32](#s-CG-MCE-005-S32))
- See above: Except as otherwise expressly provided in chapter 1 of the Code and the regulations thereunder, a taxpayer who changes the method of accounting employed in keeping his books shall, before computing his income upon such new method for purposes of taxation, secure the consent of the Commissioner. ([CG-MCE-005#S33](#s-CG-MCE-005-S33))
- See above: Failing the gross receipts test removes the freedom to use the cash method: the entity must change to an accrual method effective for the tax year of failure, and must file Form 3115 to request the change. ([CG-MCE-005#S34](#s-CG-MCE-005-S34))
- See above: A taxpayer who uses the cash method of accounting in computing gross income from his trade or business shall use the cash method in computing expenses of such trade or business. ([CG-MCE-005#S35](#s-CG-MCE-005-S35))
- See above: A taxpayer who uses an accrual method of accounting in computing business expenses shall use an accrual method in computing items affecting gross income from his trade or business. ([CG-MCE-005#S36](#s-CG-MCE-005-S36))
## Why the same period shows two different profits
- A cash-method report counts income or expenses only once a payment is received or a bill is paid. _(jurisdiction: United States, entity_scope: QuickBooks users, platform: QuickBooks Online, accounting_basis: cash)_ `CG-MCE-005#S47`
> “This report counts income or expenses only once you get a payment or pay a bill.” — [Intuit Inc. — Choose between cash and accrual accounting methods in QuickBooks Online](https://quickbooks.intuit.com/learn-support/en-us/help-article/product-preferences/choose-cash-accrual-accounting-methods-reports/L64yocn6B_US_en_US), 2026-08-05; Which accounting method should I use? — Cash Method — The cash method in reports. Verified 2026-09-08.
- An accrual-method report counts income and expenses regardless of whether the invoice or bill was paid. _(jurisdiction: United States, entity_scope: QuickBooks users, platform: QuickBooks Online, accounting_basis: accrual)_ `CG-MCE-005#S48`
> “This report counts income and expenses regardless of if the invoice or bill was paid or not.” — [Intuit Inc. — Choose between cash and accrual accounting methods in QuickBooks Online](https://quickbooks.intuit.com/learn-support/en-us/help-article/product-preferences/choose-cash-accrual-accounting-methods-reports/L64yocn6B_US_en_US), 2026-08-05; Which accounting method should I use? — Accrual Method — The accrual method in reports. Verified 2026-09-08.
- A cash basis report shows income only if cash has been received and expenses only if cash has been paid. _(jurisdiction: United States, entity_scope: QuickBooks Desktop reports, platform: QuickBooks Desktop, platform_edition: QuickBooks Desktop for Windows, accounting_basis: cash)_ `CG-MCE-005#S49`
> “A cash basis report only shows income if you have received cash and expenses if you have paid cash.” — [Intuit Inc. — Differentiate Cash and Accrual basis](https://quickbooks.intuit.com/learn-support/en-us/help-article/report-management/differentiate-cash-accrual-basis/L3RvRm1vW_US_en_US), 2026-08-04; Cash basis. Verified 2026-09-08.
- An accrual basis report shows income whether or not customers have paid their invoices, and expenses whether or not the user has paid their bills. _(jurisdiction: United States, entity_scope: QuickBooks Desktop reports, platform: QuickBooks Desktop, platform_edition: QuickBooks Desktop for Windows, accounting_basis: accrual)_ `CG-MCE-005#S50`
> “An accrual basis report shows income regardless of whether your customers have paid your invoices and expenses regardless of whether you have paid all your bills.” — [Intuit Inc. — Differentiate Cash and Accrual basis](https://quickbooks.intuit.com/learn-support/en-us/help-article/report-management/differentiate-cash-accrual-basis/L3RvRm1vW_US_en_US), 2026-08-04; Accrual basis. Verified 2026-09-08.
- After the accounting method is changed, accounts and balances in the user's reports might show up differently. _(jurisdiction: United States, entity_scope: QuickBooks users, platform: QuickBooks Online, conditions: after the accounting method has been changed)_ `CG-MCE-005#S51`
> “Once you change your accounting method, accounts and balances in your reports might show up differently.” — [Intuit Inc. — Choose between cash and accrual accounting methods in QuickBooks Online](https://quickbooks.intuit.com/learn-support/en-us/help-article/product-preferences/choose-cash-accrual-accounting-methods-reports/L64yocn6B_US_en_US), 2026-08-05; Introduction. Verified 2026-09-08.
- A user can customize an individual report to use a different accounting method and compare the results, in order to see the difference the other method makes in reporting. _(jurisdiction: United States, entity_scope: QuickBooks users, platform: QuickBooks Online)_ `CG-MCE-005#S52`
> “To see the difference another accounting method will make in your reporting, you can customize an individual report to use a different accounting method and compare the results.” — [Intuit Inc. — Choose between cash and accrual accounting methods in QuickBooks Online](https://quickbooks.intuit.com/learn-support/en-us/help-article/product-preferences/choose-cash-accrual-accounting-methods-reports/L64yocn6B_US_en_US), 2026-08-05; Change the method on a report. Verified 2026-09-08.
- In QuickBooks 2018 and later a report can be toggled between cash and accrual views, but the report reverts to the default basis set in the preferences once it is closed. _(jurisdiction: United States, entity_scope: QuickBooks Desktop reports, platform: QuickBooks Desktop, platform_edition: QuickBooks 2018 and later, effective_from: QuickBooks 2018)_ `CG-MCE-005#S53`
> “In QuickBooks 2018 and later, you can easily toggle a report between cash and accrual views . However, the report reverts to the default basis that was set up in the preferences once it is closed.” — [Intuit Inc. — Differentiate Cash and Accrual basis](https://quickbooks.intuit.com/learn-support/en-us/help-article/report-management/differentiate-cash-accrual-basis/L3RvRm1vW_US_en_US), 2026-08-04; Report preferences — Important. Verified 2026-09-08.
_Partly established. Established: the report is re-presenting the same recorded transactions under a different recognition rule (S52, S53). Missing: no transaction has changed._
## Which items the switch actually moves
- Accrual is the process of recognising assets or liabilities, and the related changes in revenues, expenses, gains, losses or equity, for amounts expected to be received or paid (usually in cash) in the future. _(jurisdiction: United States, entity_scope: reporting entities providing general purpose financial reports (FASB conceptual framework; Concepts Statements are not part of the FASB Accounting Standards Codification), accounting_basis: accrual)_ `CG-MCE-005#S38`
> “Accrual is the accounting process of recognizing assets or liabilities and the
related changes in revenues, expenses, gains, losses, or equity for amounts
expected to be received or paid, usually in cash, in the future.” — [Financial Accounting Standards Board — Statement of Financial Accounting Concepts No. 8, As Amended, Conceptual Framework for Financial Reporting — Chapter 1, The Objective of General Purpose Financial Reporting](https://storage.fasb.org/Concepts%20Statement%208%E2%80%94Chapter%201%20(As%20Amended).pdf), 2021-12; Front matter, “Accrual, Deferral, and Allocation (Including Amortization)”. Verified 2026-09-08.
- Deferral is the process of recognising a liability from a current cash receipt, or an asset from a current cash payment, while deferring recognition of the related revenues, expenses, gains or losses. _(jurisdiction: United States, entity_scope: reporting entities providing general purpose financial reports (FASB conceptual framework; Concepts Statements are not part of the FASB Accounting Standards Codification), accounting_basis: accrual)_ `CG-MCE-005#S39`
> “Deferral is concerned with past cash receipts and payments—and with
prepayments received or paid; deferral is the accounting process of recognizing a
liability resulting from a current cash receipt (or the equivalent) or an asset
resulting from a current cash payment (or the equivalent) with deferred recognition
of related revenues, expenses, gains, or losses.” — [Financial Accounting Standards Board — Statement of Financial Accounting Concepts No. 8, As Amended, Conceptual Framework for Financial Reporting — Chapter 1, The Objective of General Purpose Financial Reporting](https://storage.fasb.org/Concepts%20Statement%208%E2%80%94Chapter%201%20(As%20Amended).pdf), 2021-12; Front matter, “Accrual, Deferral, and Allocation (Including Amortization)”. Verified 2026-09-08.
- In a deferral, recognition of the related revenue or expense waits until the obligation is partly or wholly satisfied or the asset's economic benefit is partly or wholly used or lost; prepaid expenses and customer deposits are given as common examples. _(jurisdiction: United States, entity_scope: reporting entities providing general purpose financial reports (FASB conceptual framework; Concepts Statements are not part of the FASB Accounting Standards Codification), accounting_basis: accrual)_ `CG-MCE-005#S40`
> “Recognition of those related
elements is deferred until the obligation underlying the liability is partly or wholly
satisfied or until the economic benefit underlying the asset is partly or wholly used
or lost. Common examples of deferrals include prepaid expenses and customer
deposits.” — [Financial Accounting Standards Board — Statement of Financial Accounting Concepts No. 8, As Amended, Conceptual Framework for Financial Reporting — Chapter 1, The Objective of General Purpose Financial Reporting](https://storage.fasb.org/Concepts%20Statement%208%E2%80%94Chapter%201%20(As%20Amended).pdf), 2021-12; Front matter, “Accrual, Deferral, and Allocation (Including Amortization)”. Verified 2026-09-08.
- At conversion, accounts receivable and the corresponding sales are recorded for all customer billings issued for which no cash has yet been received. _(jurisdiction: not stated, entity_scope: not stated, accounting_basis: cash basis to accrual basis)_ `CG-MCE-005#S42`
> “Record accounts receivable and sales for all billings issued to customers and for which no cash has yet been received from them.” — [AccountingTools, Inc. — How to convert cash basis to accrual basis accounting](https://www.accountingtools.com/articles/how-to-convert-cash-basis-to-accrual-basis-accounting.html), 2026-08-29; Section: How to Switch from Cash to Accrual Basis Accounting — Add Accounts Receivable. Verified 2026-09-08.
- Converting from cash to accrual requires adding back all expenses for which a benefit has been received but the supplier or employee has not yet been paid. _(jurisdiction: not stated, entity_scope: not stated, accounting_basis: cash basis to accrual basis)_ `CG-MCE-005#S43`
> “Add back all expenses for which the company has received a benefit but has not yet paid the supplier or employee .” — [AccountingTools, Inc. — How to convert cash basis to accrual basis accounting](https://www.accountingtools.com/articles/how-to-convert-cash-basis-to-accrual-basis-accounting.html), 2026-08-29; Section: How to Switch from Cash to Accrual Basis Accounting — Add Accrued Expenses. Verified 2026-09-08.
- At conversion, expenditures made during the period are reviewed for prepaid expenses and the unused portion is moved into an asset account. _(jurisdiction: not stated, entity_scope: not stated, accounting_basis: cash basis to accrual basis)_ `CG-MCE-005#S44`
> “Review expenditures made during the accounting period to see if there are any prepaid expenses , and move the unused portion of these items into an asset account .” — [AccountingTools, Inc. — How to convert cash basis to accrual basis accounting](https://www.accountingtools.com/articles/how-to-convert-cash-basis-to-accrual-basis-accounting.html), 2026-08-29; Section: How to Switch from Cash to Accrual Basis Accounting — Add Prepaid Expenses. Verified 2026-09-08.
- Customer prepayments recorded as sales under the cash basis are re-recorded as short-term liabilities until the related goods are shipped or services provided. _(jurisdiction: not stated, entity_scope: not stated, accounting_basis: cash basis to accrual basis)_ `CG-MCE-005#S45`
> “Customers may have paid in advance for their orders, which would have been recorded as sales under the cash basis of accounting. Record them as short-term liabilities until such time as the company has shipped the related goods or provided the indicated services.” — [AccountingTools, Inc. — How to convert cash basis to accrual basis accounting](https://www.accountingtools.com/articles/how-to-convert-cash-basis-to-accrual-basis-accounting.html), 2026-08-29; Section: How to Switch from Cash to Accrual Basis Accounting — Subtract Customer Prepayments. Verified 2026-09-08.
_Not established from an authoritative source._
_Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference._
## The categories that sit between the two presentations
- See above: Accrual is the process of recognising assets or liabilities, and the related changes in revenues, expenses, gains, losses or equity, for amounts expected to be received or paid (usually in cash) in the future. ([CG-MCE-005#S38](#s-CG-MCE-005-S38))
- See above: Deferral is the process of recognising a liability from a current cash receipt, or an asset from a current cash payment, while deferring recognition of the related revenues, expenses, gains or losses. ([CG-MCE-005#S39](#s-CG-MCE-005-S39))
- See above: In a deferral, recognition of the related revenue or expense waits until the obligation is partly or wholly satisfied or the asset's economic benefit is partly or wholly used or lost; prepaid expenses and customer deposits are given as common examples. ([CG-MCE-005#S40](#s-CG-MCE-005-S40))
- See above: At conversion, accounts receivable and the corresponding sales are recorded for all customer billings issued for which no cash has yet been received. ([CG-MCE-005#S42](#s-CG-MCE-005-S42))
- See above: Converting from cash to accrual requires adding back all expenses for which a benefit has been received but the supplier or employee has not yet been paid. ([CG-MCE-005#S43](#s-CG-MCE-005-S43))
- See above: At conversion, expenditures made during the period are reviewed for prepaid expenses and the unused portion is moved into an asset account. ([CG-MCE-005#S44](#s-CG-MCE-005-S44))
- See above: Customer prepayments recorded as sales under the cash basis are re-recorded as short-term liabilities until the related goods are shipped or services provided. ([CG-MCE-005#S45](#s-CG-MCE-005-S45))
_Not established from an authoritative source._
_Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference._
## Itemising the difference so you can explain it
- See above: At conversion, accounts receivable and the corresponding sales are recorded for all customer billings issued for which no cash has yet been received. ([CG-MCE-005#S42](#s-CG-MCE-005-S42))
- See above: Converting from cash to accrual requires adding back all expenses for which a benefit has been received but the supplier or employee has not yet been paid. ([CG-MCE-005#S43](#s-CG-MCE-005-S43))
- See above: At conversion, expenditures made during the period are reviewed for prepaid expenses and the unused portion is moved into an asset account. ([CG-MCE-005#S44](#s-CG-MCE-005-S44))
- See above: Customer prepayments recorded as sales under the cash basis are re-recorded as short-term liabilities until the related goods are shipped or services provided. ([CG-MCE-005#S45](#s-CG-MCE-005-S45))
- Any significant differences between the IRS tax data and the applicant's financial data must be resolved to the SBA lender's satisfaction, and, on non-delegated loans, to the satisfaction of the SBA loan processing center. _(jurisdiction: United States, entity_scope: SBA 7(a) and 504 loan applicants, effective_from: 2025-06-01)_ `CG-MCE-005#S71`
> “Any significant differences must be resolved to the satisfaction of the SBA Lender, and, if processing the loan under non-delegated procedures, to the SBA loan processing center.” — [U.S. Small Business Administration, Office of Capital Access — SOP 50 10 8, Lender and Development Company Loan Programs (with Technical Updates)](https://legacy.sba.gov/sites/default/files/2025-05/SOP%2050%2010%208%20Technical%20Updates%20effective%206.1.2025.docx), 2025-06-01; Section A, Ch. 5, Para. B, IRS Tax Transcript/Verification of Financial Information. Verified 2026-09-08.
_Partly established. Established: how to reconcile the two presentations for a single period (S42, S43, S44, S45). Missing: the reconciling items to be identified._
_Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference._
## Neither figure is wrong - which one to act on
- See above: Information about economic resources and claims and their changes during a period is a better basis for assessing past and future performance than information solely about the period's cash receipts and payments. ([CG-MCE-005#S15](#s-CG-MCE-005-S15))
- See above: Information about cash flows during a period helps users assess the ability to generate future net cash inflows and shows how the entity obtains and spends cash, including borrowing and repayment and distributions to investors, and other factors affecting liquidity or solvency. ([CG-MCE-005#S16](#s-CG-MCE-005-S16))
- See above: The cash basis is often used by small businesses and individuals because it is simple and makes cash flow easy to track. ([CG-MCE-005#S19](#s-CG-MCE-005-S19))
- See above: The accrual basis gives a more accurate picture of financial performance and position because economic events are recognised in the periods to which they relate. ([CG-MCE-005#S20](#s-CG-MCE-005-S20))
- The cash basis does not adhere to GAAP, whereas the accrual basis does. _(jurisdiction: GAAP (as named by the document), entity_scope: not stated, accounting_basis: cash basis vs accrual basis)_ `CG-MCE-005#S79`
> “Unlike the accrual basis of accounting, the cash basis does not adhere to generally accepted accounting principles (GAAP).” — [AccountingTools, Inc. (Steven Bragg) — Cash basis vs. accrual basis](https://www.accountingtools.com/articles/cash-basis-vs-accrual-basis-accounting.html), 2026-01-14; Section: What is the Cash Basis of Accounting?. Verified 2026-09-08.
- Small businesses often use the cash basis for tax purposes because of its simplicity and immediate recognition of cash flows. _(jurisdiction: not stated, entity_scope: small businesses, accounting_basis: cash basis)_ `CG-MCE-005#S80`
> “Tax implications . The cash basis of accounting is often used by small businesses for tax purposes due to its simplicity and the immediate recognition of cash flows.” — [AccountingTools, Inc. (Steven Bragg) — Cash basis vs. accrual basis](https://www.accountingtools.com/articles/cash-basis-vs-accrual-basis-accounting.html), 2026-01-14; Section: Comparing the Cash Basis and Accrual Basis of Accounting — Tax implications. Verified 2026-09-08.
- See above: The cash basis is simpler to maintain and suits small businesses without extensive reporting needs; the accrual basis is more complex and requires adjusting entries and the tracking of receivables and payables. ([CG-MCE-005#S81](#s-CG-MCE-005-S81))
- See above: The cash basis may appropriately be used by a business that is small, closely held and has relatively simple transactions. ([CG-MCE-005#S82](#s-CG-MCE-005-S82))
- See above: The usefulness of the cash basis declines as transaction volume, complexity or external reporting needs increase. ([CG-MCE-005#S83](#s-CG-MCE-005-S83))
_Not established from an authoritative source._
_Required authority: authoritative lender insurer or program documentation, authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference._
## Changing a report setting has not converted your books
- See above: A user can customize an individual report to use a different accounting method and compare the results, in order to see the difference the other method makes in reporting. ([CG-MCE-005#S52](#s-CG-MCE-005-S52))
- See above: In QuickBooks 2018 and later a report can be toggled between cash and accrual views, but the report reverts to the default basis set in the preferences once it is closed. ([CG-MCE-005#S53](#s-CG-MCE-005-S53))
- The summary reports basis preference applies to most summary reports and does not affect reports listing individual transactions, 1099 reports, or sales tax liability reports. _(jurisdiction: United States, entity_scope: QuickBooks Desktop company files, platform: QuickBooks Desktop, platform_edition: QuickBooks Desktop Mac Plus; QuickBooks Desktop Premier Plus; QuickBooks Desktop Pro Plus (as listed by the article))_ `CG-MCE-005#S55`
> “It applies to most summary reports but does not affect reports that list individual transactions, 1099 reports or sales tax liability reports.” — [Intuit Inc. — Set report preferences](https://quickbooks.intuit.com/learn-support/en-us/help-article/product-preferences/set-report-preferences/L3RJCV0b8_US_en_US), 8/5/2026 04:12 (as stated: 'by Intuit • 3 • Updated 8/5/2026 04:12'); Company Preferences (bullet: Summary reports basis). Verified 2026-09-08.
- The Company Preferences tab sets default report preferences for all user accounts, and only the QuickBooks Desktop administrator can change them. _(jurisdiction: United States, entity_scope: QuickBooks Desktop company files, platform: QuickBooks Desktop, platform_edition: QuickBooks Desktop Mac Plus; QuickBooks Desktop Premier Plus; QuickBooks Desktop Pro Plus (as listed by the article), conditions: user is the QuickBooks Desktop administrator)_ `CG-MCE-005#S56`
> “This tab allows you to set default report preferences for all user accounts. You can only change Company Preferences if you are the QuickBooks Desktop administrator.” — [Intuit Inc. — Set report preferences](https://quickbooks.intuit.com/learn-support/en-us/help-article/product-preferences/set-report-preferences/L3RJCV0b8_US_en_US), 8/5/2026 04:12 (as stated: 'by Intuit • 3 • Updated 8/5/2026 04:12'); Company Preferences (introductory sentence). Verified 2026-09-08.
- The report-basis preference in QuickBooks Desktop is reached through Reports & Graphs, on the Company Preferences tab. _(jurisdiction: United States, entity_scope: QuickBooks Desktop company file, platform: QuickBooks Desktop, platform_edition: QuickBooks Desktop for Windows)_ `CG-MCE-005#S57`
> “Select Reports & Graphs, then go to the Company Preferences tab.” — [Intuit Inc. — Differentiate Cash and Accrual basis](https://quickbooks.intuit.com/learn-support/en-us/help-article/report-management/differentiate-cash-accrual-basis/L3RvRm1vW_US_en_US), 2026-08-04; Report preferences — To set your preferences (step 3). Verified 2026-09-08.
- The QuickBooks Desktop company preference that carries the basis is named Summary Report Basis, and it is set to either Accrual or Cash. _(jurisdiction: United States, entity_scope: QuickBooks Desktop company file, platform: QuickBooks Desktop, platform_edition: QuickBooks Desktop for Windows)_ `CG-MCE-005#S58`
> “In the Summary Report Basis section, select Accrual or Cash .” — [Intuit Inc. — Differentiate Cash and Accrual basis](https://quickbooks.intuit.com/learn-support/en-us/help-article/report-management/differentiate-cash-accrual-basis/L3RvRm1vW_US_en_US), 2026-08-04; Report preferences — To set your preferences (step 4). Verified 2026-09-08.
- The Footer setting controls whether the date prepared, the time prepared and the cash or accrual report basis are displayed on a report, and the footer alignment. _(jurisdiction: United States, entity_scope: QuickBooks users, platform: QuickBooks Online, platform_edition: QuickBooks Online Advanced; Intuit Enterprise Suite)_ `CG-MCE-005#S59`
> “Select if you want to display the date prepared, time prepared, the cash or accrual report basis, and decide the footer alignment.” — [Intuit Inc. — Set your standard and custom report preferences](https://quickbooks.intuit.com/learn-support/en-us/help-article/customize-reports/set-standard-custom-report-preferences/L3QpiUjdf_US_en_US), 2026-08-03; Change or Update Your Report Settings — Formatting — Footer. Verified 2026-09-08.
_Partly established. Established: that the basis the books run on is set elsewhere (S53, S58); how the reader can tell which basis their books are actually on (S57, S58). Missing: that changing a report's basis leaves the books unchanged._
## Where the basis lives in QuickBooks, and how to tell which one a report used
- See above: A cash-method report counts income or expenses only once a payment is received or a bill is paid. ([CG-MCE-005#S47](#s-CG-MCE-005-S47))
- See above: An accrual-method report counts income and expenses regardless of whether the invoice or bill was paid. ([CG-MCE-005#S48](#s-CG-MCE-005-S48))
- See above: A cash basis report shows income only if cash has been received and expenses only if cash has been paid. ([CG-MCE-005#S49](#s-CG-MCE-005-S49))
- See above: An accrual basis report shows income whether or not customers have paid their invoices, and expenses whether or not the user has paid their bills. ([CG-MCE-005#S50](#s-CG-MCE-005-S50))
- See above: A user can customize an individual report to use a different accounting method and compare the results, in order to see the difference the other method makes in reporting. ([CG-MCE-005#S52](#s-CG-MCE-005-S52))
- See above: In QuickBooks 2018 and later a report can be toggled between cash and accrual views, but the report reverts to the default basis set in the preferences once it is closed. ([CG-MCE-005#S53](#s-CG-MCE-005-S53))
- See above: The summary reports basis preference applies to most summary reports and does not affect reports listing individual transactions, 1099 reports, or sales tax liability reports. ([CG-MCE-005#S55](#s-CG-MCE-005-S55))
- See above: The Company Preferences tab sets default report preferences for all user accounts, and only the QuickBooks Desktop administrator can change them. ([CG-MCE-005#S56](#s-CG-MCE-005-S56))
- See above: The report-basis preference in QuickBooks Desktop is reached through Reports & Graphs, on the Company Preferences tab. ([CG-MCE-005#S57](#s-CG-MCE-005-S57))
- See above: The QuickBooks Desktop company preference that carries the basis is named Summary Report Basis, and it is set to either Accrual or Cash. ([CG-MCE-005#S58](#s-CG-MCE-005-S58))
- See above: The Footer setting controls whether the date prepared, the time prepared and the cash or accrual report basis are displayed on a report, and the footer alignment. ([CG-MCE-005#S59](#s-CG-MCE-005-S59))
- A journal entry that hits both a Balance Sheet account and an income/expense account affects QuickBooks Desktop reports on both the cash and the accrual basis. _(jurisdiction: United States, entity_scope: QuickBooks Desktop journal entries touching a Balance Sheet account and an income/expense account, platform: QuickBooks Desktop, platform_edition: QuickBooks Desktop for Windows)_ `CG-MCE-005#S61`
> “Journal entries that impact a Balance Sheet account, as well as an income/expense account, affect both cash and accrual basis reports.” — [Intuit Inc. — Differentiate Cash and Accrual basis](https://quickbooks.intuit.com/learn-support/en-us/help-article/report-management/differentiate-cash-accrual-basis/L3RvRm1vW_US_en_US), 2026-08-04; Report preferences — Important. Verified 2026-09-08.
_Not established from an authoritative source._
## The half-and-half books, and what has to be true for a basis to really be in effect
- See above: The term 'method of accounting' includes not only the overall method of accounting of the taxpayer but also the accounting treatment of any item; examples of such over-all methods are the cash receipts and disbursements method, an accrual method, combinations of such methods, and combinations of the foregoing with various methods provided for the accounting treatment of special items. ([CG-MCE-005#S11](#s-CG-MCE-005-S11))
- See above: A taxpayer who uses the cash method of accounting in computing gross income from his trade or business shall use the cash method in computing expenses of such trade or business. ([CG-MCE-005#S35](#s-CG-MCE-005-S35))
- See above: A taxpayer who uses an accrual method of accounting in computing business expenses shall use an accrual method in computing items affecting gross income from his trade or business. ([CG-MCE-005#S36](#s-CG-MCE-005-S36))
- See above: A journal entry that hits both a Balance Sheet account and an income/expense account affects QuickBooks Desktop reports on both the cash and the accrual basis. ([CG-MCE-005#S61](#s-CG-MCE-005-S61))
- See above: The modified cash basis combines elements of the cash basis and the accrual basis. ([CG-MCE-005#S62](#s-CG-MCE-005-S62))
- Under the modified cash basis, short-term items are recorded on cash movement, so nearly all income-statement elements are on the cash basis and accounts receivable and inventory do not appear on the balance sheet. _(jurisdiction: not stated, entity_scope: not stated, accounting_basis: modified cash basis)_ `CG-MCE-005#S64`
> “Records short-term items when cash levels change (the cash basis). This means that nearly all elements of the income statement are recorded using the cash basis, and that accounts receivable and inventory are not recorded on the balance sheet .” — [AccountingTools, Inc. — Modified cash basis of accounting definition](https://www.accountingtools.com/articles/what-is-the-modified-cash-basis-of-accounting.html), 2026-02-27; Section: Features of the Modified Cash Basis of Accounting — first feature. Verified 2026-09-08.
- Under the modified cash basis, longer-term balance-sheet items are recorded on the accrual basis: fixed assets and long-term debt appear on the balance sheet and the related depreciation and amortisation on the income statement. _(jurisdiction: not stated, entity_scope: not stated, accounting_basis: modified cash basis)_ `CG-MCE-005#S65`
> “Records longer-term balance sheet items with accruals (the accrual basis). This means that fixed assets and long-term debt are recorded on the balance sheet, while the related fixed asset depreciation and amortization are recorded on the income statement.” — [AccountingTools, Inc. — Modified cash basis of accounting definition](https://www.accountingtools.com/articles/what-is-the-modified-cash-basis-of-accounting.html), 2026-02-27; Section: Features of the Modified Cash Basis of Accounting — second feature. Verified 2026-09-08.
- The modified cash basis may be acceptable where the financial statements need not comply with GAAP or IFRS — for instance where they are used only internally, most commonly in a privately held business with no need for financing. _(jurisdiction: GAAP and IFRS (as named by the document), entity_scope: privately held businesses with no need for financing (as the stated common case), accounting_basis: modified cash basis, conditions: no need for GAAP/IFRS-compliant statements; statements used only internally)_ `CG-MCE-005#S67`
> “Conversely, the modified cash basis may be acceptable as long as there is no need for the financial statements to be compliant with GAAP or IFRS; this may be the case if the financial statements are only to be used internally; this situation most commonly arises when a business is privately held and has no need for financing.” — [AccountingTools, Inc. — Modified cash basis of accounting definition](https://www.accountingtools.com/articles/what-is-the-modified-cash-basis-of-accounting.html), 2026-02-27; Section: Disadvantages of the Modified Cash Basis. Verified 2026-09-08.
_Partly established. Established: how that mixed state shows up in the reports (S61); what has to be true for a basis to be genuinely in effect (S35, S36). Missing: the mixed state in which the books are nominally on one basis while transactions are entered as though on the other._
_Required authority: authoritative professional or accounting standard, official platform documentation. Highest achieved: high quality professional secondary reference, official platform documentation, primary regulator or government._
## What a lender or an SBA programme asks you to hand over
- The lender must obtain tax transcripts and either business financial statements or tax returns for the last 3 years plus interim financial statements for the applicant and any affiliates, with interim financial statements dated within 120 days prior to submission to SBA. _(jurisdiction: United States, entity_scope: Standard 7(a) loan applicants and their affiliates, effective_from: 2025-06-01)_ `CG-MCE-005#S69`
> “Tax transcripts in accordance with Section A, Ch . 5, Para. B, IRS Tax Transcript/Verification of Financial Information and either b usiness financial statements o r tax returns for the last 3 years and interim financial statements for the Applicant and any a ffiliates . For start-ups, new businesses, changes of ownership, and other applications based on projections, include detailed projections, including the supporting assumptions that reflect a debt service coverage equal to or greater than 1.15 within 2 years from loan funding or, for construction projects, within 2 years from the end of construction . Interim f inancial statements must be dated within 120 days prior to submission to SBA . The following information must be provided :” — [U.S. Small Business Administration, Office of Capital Access — SOP 50 10 8, Lender and Development Company Loan Programs (with Technical Updates)](https://legacy.sba.gov/sites/default/files/2025-05/SOP%2050%2010%208%20Technical%20Updates%20effective%206.1.2025.docx), 2025-06-01; Section B, Ch. 1, Standard 7(a) Loans, Para. D, Submission of Application for Guaranty. Verified 2026-09-08.
- The stated purpose of SBA's tax verification process is to determine whether the applicant filed business tax returns and whether the financial statements the applicant provided with its application agree with the business tax returns submitted to the IRS. _(jurisdiction: United States, entity_scope: SBA 7(a) and 504 loan applicants, effective_from: 2025-06-01)_ `CG-MCE-005#S70`
> “The purpose of SBA’s Tax Verification process is to determine if:
The Applicant filed business tax returns; and
The Applicant’s financial statements provided as part of the application agree with the business tax returns submitted to the IRS .” — [U.S. Small Business Administration, Office of Capital Access — SOP 50 10 8, Lender and Development Company Loan Programs (with Technical Updates)](https://legacy.sba.gov/sites/default/files/2025-05/SOP%2050%2010%208%20Technical%20Updates%20effective%206.1.2025.docx), 2025-06-01; Section A, Ch. 5, Para. B, IRS Tax Transcript/Verification of Financial Information. Verified 2026-09-08.
- See above: Any significant differences between the IRS tax data and the applicant's financial data must be resolved to the SBA lender's satisfaction, and, on non-delegated loans, to the satisfaction of the SBA loan processing center. ([CG-MCE-005#S71](#s-CG-MCE-005-S71))
- See above: The CDC's repayment ability analysis must include a balance sheet and income statement dated within 120 days prior to submission to SBA, together with an analysis of debt service coverage and an aging of accounts receivable and accounts payable. ([CG-MCE-005#S72](#s-CG-MCE-005-S72))
- When 7(a) loan proceeds are used to purchase an existing business, the seller's financial statements for the last 3 complete fiscal years (or the number of years in business if fewer) must be provided, dated and either signed or certified by the seller within 120 days prior to submission to SBA. _(jurisdiction: United States, entity_scope: 7(a) loans financing the purchase of an existing business, effective_from: 2025-06-01)_ `CG-MCE-005#S74`
> “Copy of seller’s financial statements for the last 3 complete fiscal years or for the number of years in business if less than 3 years . The financial statements must be dated and either signed or certified by the seller within 120 days prior to submission to SBA ; and” — [U.S. Small Business Administration, Office of Capital Access — SOP 50 10 8, Lender and Development Company Loan Programs (with Technical Updates)](https://legacy.sba.gov/sites/default/files/2025-05/SOP%2050%2010%208%20Technical%20Updates%20effective%206.1.2025.docx), 2025-06-01; Section B, Ch. 1, Standard 7(a) Loans, Para. D, Submission of Application for Guaranty. Verified 2026-09-08.
_Partly established. Established: which presentation outside consumers of small-business financial statements expect to receive (S75). Missing: what those outside consumers do when offered the other presentation._
## What a preparer, an investor or a buyer expects to see
- Investors and lenders will want accrual-basis financial statements before they invest in or lend to a business. _(jurisdiction: not stated, entity_scope: businesses seeking investment or lending, accounting_basis: accrual basis)_ `CG-MCE-005#S75`
> “Any investor or lender will want to see financial statements that have been formulated under the accrual basis before they will either invest money in or lend it to a business.” — [AccountingTools, Inc. — How to convert cash basis to accrual basis accounting](https://www.accountingtools.com/articles/how-to-convert-cash-basis-to-accrual-basis-accounting.html), 2026-08-29; Section: Why Switch from Cash to Accrual Basis Accounting?. Verified 2026-09-08.
- Conversion to the accrual basis may be necessary in order to have the books audited in preparation for a sale of the company, to go public, or to obtain a loan. _(jurisdiction: not stated, entity_scope: not stated, accounting_basis: cash basis to accrual basis, conditions: audit in preparation for sale; going public; obtaining a loan)_ `CG-MCE-005#S76`
> “However, it may be necessary to convert to the accrual basis of accounting , perhaps to have the company's books audited in preparation for its sale, or to go public, or to obtain a loan .” — [AccountingTools, Inc. — How to convert cash basis to accrual basis accounting](https://www.accountingtools.com/articles/how-to-convert-cash-basis-to-accrual-basis-accounting.html), 2026-08-29; Section: Cash vs. Accrual Basis Accounting. Verified 2026-09-08.
- Switching to the accrual basis puts the accounting records in compliance with the applicable accounting framework, usually U.S. Generally Accepted Accounting Principles. _(jurisdiction: United States (as stated for the usual framework), entity_scope: not stated, accounting_basis: accrual basis)_ `CG-MCE-005#S77`
> “One is that doing so puts their accounting records in compliance with the applicable accounting framework, which is usually Generally Accepted Accounting Principles (in the United States).” — [AccountingTools, Inc. — How to convert cash basis to accrual basis accounting](https://www.accountingtools.com/articles/how-to-convert-cash-basis-to-accrual-basis-accounting.html), 2026-08-29; Section: Why Switch from Cash to Accrual Basis Accounting?. Verified 2026-09-08.
- See above: Small businesses commonly use the cash basis because it requires only limited accounting expertise. ([CG-MCE-005#S78](#s-CG-MCE-005-S78))
- See above: The cash basis does not adhere to GAAP, whereas the accrual basis does. ([CG-MCE-005#S79](#s-CG-MCE-005-S79))
- See above: Small businesses often use the cash basis for tax purposes because of its simplicity and immediate recognition of cash flows. ([CG-MCE-005#S80](#s-CG-MCE-005-S80))
_Not established from an authoritative source._
## Which presentation to give an outsider
- See above: The modified cash basis may be acceptable where the financial statements need not comply with GAAP or IFRS — for instance where they are used only internally, most commonly in a privately held business with no need for financing. ([CG-MCE-005#S67](#s-CG-MCE-005-S67))
- See above: The lender must obtain tax transcripts and either business financial statements or tax returns for the last 3 years plus interim financial statements for the applicant and any affiliates, with interim financial statements dated within 120 days prior to submission to SBA. ([CG-MCE-005#S69](#s-CG-MCE-005-S69))
- See above: The stated purpose of SBA's tax verification process is to determine whether the applicant filed business tax returns and whether the financial statements the applicant provided with its application agree with the business tax returns submitted to the IRS. ([CG-MCE-005#S70](#s-CG-MCE-005-S70))
- See above: Any significant differences between the IRS tax data and the applicant's financial data must be resolved to the SBA lender's satisfaction, and, on non-delegated loans, to the satisfaction of the SBA loan processing center. ([CG-MCE-005#S71](#s-CG-MCE-005-S71))
- See above: The CDC's repayment ability analysis must include a balance sheet and income statement dated within 120 days prior to submission to SBA, together with an analysis of debt service coverage and an aging of accounts receivable and accounts payable. ([CG-MCE-005#S72](#s-CG-MCE-005-S72))
- See above: When 7(a) loan proceeds are used to purchase an existing business, the seller's financial statements for the last 3 complete fiscal years (or the number of years in business if fewer) must be provided, dated and either signed or certified by the seller within 120 days prior to submission to SBA. ([CG-MCE-005#S74](#s-CG-MCE-005-S74))
- See above: Investors and lenders will want accrual-basis financial statements before they invest in or lend to a business. ([CG-MCE-005#S75](#s-CG-MCE-005-S75))
- See above: Conversion to the accrual basis may be necessary in order to have the books audited in preparation for a sale of the company, to go public, or to obtain a loan. ([CG-MCE-005#S76](#s-CG-MCE-005-S76))
- See above: Switching to the accrual basis puts the accounting records in compliance with the applicable accounting framework, usually U.S. Generally Accepted Accounting Principles. ([CG-MCE-005#S77](#s-CG-MCE-005-S77))
- See above: Small businesses often use the cash basis for tax purposes because of its simplicity and immediate recognition of cash flows. ([CG-MCE-005#S80](#s-CG-MCE-005-S80))
_Partly established. Established: what a lender typically expects to be given (S75). Missing: what a preparer typically expects to be given; what a prospective buyer typically expects to be given._
## Not yet fully established from an authoritative source
- Establish the recognition rule of each accounting basis - the event that causes income and cost to be recorded under each - and what each basis therefore represents about a period, and whether the two bases differ only in the period in which an amount is recorded rather than in the amounts a completed transaction eventually records. _(partly established; below the required authority class)_
- Establish what a report-basis setting in mainstream accounting software actually changes, where the basis the books run on is set, and how a user can determine which basis a given report was produced on. _(not established)_
- Establish which categories of recorded item move into or out of a period when the same records are presented under the other basis, so a difference between the two presentations can be itemised. _(not established; below the required authority class)_
- Establish which presentation outside consumers of small-business financial statements expect to receive and what they do when offered the other. _(partly established)_
- Establish which basis of presentation a tax preparer, and a prospective purchaser of a small business or their advisers, expect to be handed when they are given the business's financial statements, and what each of them does when offered the other presentation instead. _(not established)_
- Establish, for each basis, the event that causes income to be recorded and the event that causes a cost to be recorded, and show that the two bases differ only in timing rather than in the amounts eventually recorded. _(partly established; below the required authority class)_
- Establish what each basis is good at showing and what it obscures, so the reader can connect the basis to the decisions they make from the statements. _(not established; below the required authority class)_
- Establish the criteria for choosing the basis the books run on - whether the business carries amounts owed to and by it, whether it holds goods, how far apart the work and the money are, and who reads the statements - and apply them to a decision rather than listing them. _(established; below the required authority class)_
- Establish the mechanism that produces two different profit figures for the same period from the same books: the report is re-presenting the same recorded transactions under a different recognition rule, and no transaction has changed. _(partly established)_
- Identify which categories of recorded item the basis switch moves in or out of a period, so the reader can predict where their own difference comes from and locate it. _(not established; below the required authority class)_
- Establish that neither figure is wrong, that each is a correct answer to a different question, and give the criteria for deciding which figure to act on and which to hand over for a given purpose. _(not established; below the required authority class)_
- Establish how to reconcile the two presentations for a single period by identifying the reconciling items, so the difference can be itemised and explained to a lender, a preparer or an owner. _(partly established; below the required authority class)_
- Establish that changing a report's basis leaves the books unchanged, that the basis the books run on is set elsewhere, and how the reader can tell which basis their books are actually on. _(partly established)_
- Establish the mixed state in which the books are nominally on one basis while transactions are entered as though on the other, describe how it shows up in the reports, and state what has to be true for a basis to be genuinely in effect. _(partly established; below the required authority class)_
- Establish what an outside consumer of the statements - a preparer, a lender, a prospective buyer - typically expects to be given, so the reader knows which presentation to hand over and what to say about the other. _(partly established)_
## Related
- [How do I switch my books from cash basis to accrual (or from accrual to cash), and what has to change?](https://uppago.com/resources/how-do-i-switch-my-books-from-cash-basis-to-accrual-or-from-accrual-to-cash-and)
_Reference date 2026-09-07. Statements are quoted verbatim from their sources; scope and verification dates are shown on each._