Cash or accrual

What each basis counts#

An accounting method is the rule for when income and costs count. EscBooks keeps both views of the same records, and your business picks one as its method.

• Cash basis: income counts on the day it's paid, and a cost on the day you pay it. An invoice you've sent isn't income until the client pays it, and a bill isn't a cost until you pay it. Most small businesses file this way.
• Accrual basis: income counts when you invoice it, and a cost when it's billed, whatever day the money moves. What clients owe you is Accounts receivable, an asset; what you owe on bills is Accounts payable, a liability. Lenders, investors and larger businesses usually read accrual statements, because they show what was earned and owed in a period, not only what was paid.

On accrual, a short payment you write off is Returns and allowances, which lowers income, and an invoice that won't be paid is Bad debts, an expense: the invoice was counted as income when it was sent, so the write-off takes it back. A payment after that is Bad debt recovered. On cash basis none of these are needed, because unpaid money was never counted. The accounts are in Reports and taxes.

Your business might call clients or projects something else; the words can be changed in Terms and features, and everything here works the same.

Setting your method#

1. Open Settings → Business and go to Accounting Method. It shows the method now, such as Cash, the default or Accrual from 2027.
2. Pick Cash basis or Accrual basis, and the year it applies from under From which year?
3. Click Change Method, then Change Method again to confirm.

• A new business is on cash basis until it picks.
• Until the business has a finished year with records in it, any year can be picked: you're setting the method you started with. After that, a change applies from this year or next, never to a year already finished.
• A change can be undone the same day, with Undo on the card. Each change is listed in Recent Activity, in Settings → Security.
• The method is kept by year, so a year before a change keeps its method.

The method is the one on your tax return. It changes how your records are counted, never the records themselves.

What follows the method#

• Reports → Taxes: the year's figures by line, and the accounting method box on your return filled in (line F of Schedule C, Schedule K line 1 of Form 1120, Schedule B line 1 of Form 1120-S, item H of Form 1065). On accrual, Returns and allowances and Bad debts go on their own lines. A tax-exempt organization's Form 990 worksheet shows its method too.
• Estimated taxes on Quarterly: on accrual, each period's profit counts what you invoiced in it, paid or not.
• The Accountant Packet, and the year's chart on the dashboard.
• Reports on Annual, Quarterly and Advanced open on it. Their Basis choice switches a report to the other basis for that view, so a business that files on cash can still read accrual statements, for a lender say, and the other way round.

What stays cash#

Some things count money as it moves, whatever the method:

• Income is money received, and the dashboard's Paid this month is what came in. Income as invoiced is in Reports.
• 1099-NEC figures: a 1099 reports what you paid a subcontractor, so a bill counts once it's paid.
• Bank and card accounts, statements and reconciliation, and client trust accounts.
• Rent, gifts to a nonprofit, platform payouts, interest and other income count the day they're received.
• An invoice in another currency counts when it's paid, in the dollars you received.

Reopening an invoice on accrual#

On accrual, an invoice counts in the year it was issued. So when your business is on accrual, an invoice from a past year can't be reopened as a draft: that year's income already counts it, and its return may be filed. Void it and send a new one. A void in a later year comes off on its void date, so the past year stays as it was.

Sales tax is a liability#

Sales tax you charge on an invoice is never your income, on either basis. You collect it for the state, so it's Sales tax payable, a liability, until you pay it over.

1. When you pay the state, open Reports → Quarterly and use Record a Tax Payment, with Sales tax as its kind.
2. It pays down Sales tax payable. It isn't estimated income tax, a cost or an owner draw.

The Sales Tax report on Advanced shows, by month, the tax charged on invoices, the tax collected in payments, and the tax paid to the state.

Changing your method with the IRS#

A business picks its method on its first return, by filing that way. Changing it later is a request to the IRS on Form 3115, Application for Change in Accounting Method, for the year of change. For a small business, moving between cash and accrual is usually an automatic change: there's no fee and no approval to wait for. The form is attached to that year's return, with a copy sent to the IRS. You can file it yourself or hand it to your accountant.

A change brings a Section 481(a) adjustment. Switching from cash to accrual, money clients owed you on January 1 wasn't counted last year, because it wasn't paid, and won't be counted this year, because it was invoiced last year. Bills you owed on January 1 are the same on the cost side. The adjustment counts them once: receivables less payables on January 1 of the year of change. Switching from accrual to cash, it's the reverse: payables less receivables.

• A positive adjustment (more income) is usually spread over four years: a quarter in the year of change and in each of the next three.
• A negative adjustment (less income) is taken all in the year of change.

In the year your method changes, Reports → Taxes shows a change-of-method worksheet: receivables, payables and the adjustment on January 1, and how it spreads, for Form 3115.

Who has to use accrual#

Under Section 448, a C corporation, or a partnership with a C corporation as a partner, must use accrual once its average annual gross receipts for the three tax years before pass the IRS threshold: $31 million for 2025 and $32 million for 2026 (the IRS figures, as of November 2026). A tax shelter must use accrual at any size. Everyone else chooses, sole proprietors and S corporations among them.