Glossary
Cash basis and accrual basis
Two ways of deciding which month a transaction belongs to. Cash basis records money when it moves; accrual records income when earned and expenses when incurred.
Cash basis is simpler and is what most small businesses use for tax. Accrual basis is what shows whether a month was actually good: a customer who paid twelve months upfront produces twelve months of revenue, not one, and a supplier invoice belongs to the month the work happened, not the month it was paid. The IRS lets most businesses under $31 million of receipts use either for tax, but inventory-heavy businesses and anyone preparing financials for investors or lenders usually need accrual.
Many businesses run accrual books for management and file tax on cash basis; the reconciliation between them is a routine year-end schedule.
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