An accounting method is the set of rules a business uses to decide when income and expenses are recorded in its books and on its tax returns. The two main methods are the cash method, which records items when money is received or paid, and the accrual method, which records them when they are earned or incurred, whatever the timing of payment. Some businesses use a hybrid of the two.
The term is used in two related settings. In financial reporting, standards such as US GAAP and IFRS require accrual accounting for most companies. In tax, the Internal Revenue Service treats the accounting method as a formal choice that also covers specific items, such as how inventory is valued, and it must be applied consistently from year to year.
Accounting method in plain terms
Imagine a gardener who mows a lawn in December and is paid in January. Under the cash method the income belongs to January, because that is when the money arrived. Under the accrual method it belongs to December, because that is when the work was done. Same job, same money, different month in the books.
That choice matters more than it seems. It changes which year's profit includes the income, which year's tax bill is affected, and how healthy the business looks at any moment. Picking a method is like choosing which calendar to use for your money, and once chosen, you are expected to stick with it.
How the main methods differ
| Feature | Cash method | Accrual method |
|---|---|---|
| Income recorded | When cash is received | When earned |
| Expenses recorded | When paid | When incurred |
| Tracks receivables and payables | No | Yes, through accounts receivable and accounts payable |
| Typical users | Sole traders, small service firms | Companies, larger businesses, all GAAP and IFRS reporters |
The accrual method follows the revenue recognition and matching principle rules, pairing expenses with the revenue they help produce. This gives a truer picture of performance but requires more bookkeeping. A hybrid method might use accrual accounting for inventory and sales while handling other expenses on a cash basis.
Tax rules in the United States
US tax law lets many small businesses choose the cash method if their average annual gross receipts over the previous three years stay below an inflation-adjusted threshold, which is set by the IRS each year. Larger corporations and partnerships with corporate partners must generally use accrual accounting. A taxpayer adopts a method by using it on the first return for the activity, and changing method later usually requires IRS consent through Form 3115, Application for Change in Accounting Method, with adjustments so that no income is counted twice or skipped. Specific items have their own method rules, including inventory valuation under first in, first out or last in, first out, and depreciation methods for fixed assets.
Accounting methods and crypto
Crypto holders and businesses face their own method questions. For tax purposes, the IRS treats digital assets as property, so each sale or swap can create a gain or loss that must be calculated using a cost basis. Taxpayers need a consistent way to identify which units were sold, such as first in, first out or specific identification, and from 2025 US rules require that choice to be applied wallet by wallet or account by account rather than across all holdings. Businesses that accept crypto must also decide when to record revenue and at what value, which under accrual accounting is generally when the goods or services are delivered.
Choosing a method and its limits
No method is perfect. The cash method is simple and can let small firms time income and deductions, but it can show strong results in a month when cash arrives even if the business is losing money overall. The accrual method gives better information for investors and lenders but can show profits while the business is short of cash, which is why companies also publish a statement of cash flows. Accountants stress the principle of consistency: whatever method is used, applying it the same way each fiscal year is essential for comparisons over time. Lenders and investors usually ask for accrual-based statements even from small firms that file taxes on a cash basis, so many businesses keep two sets of figures reconciled to each other, one for the tax return and one for management and financing purposes.