One of the first financial decisions you'll face when running a U.S. business is how to track income and expenses: using cash basis or accrual basis accounting.
This choice affects everything from how your profits look to when you owe taxes, and it's a decision every founder—especially non-U.S. owners—needs to understand.
In this article, we’ll break down both methods, explain when and why you might choose one over the other, and help you make a more confident decision about your accounting.
What Is Cash Basis Accounting?
Cash basis accounting is the most common starting point for small businesses and startups. It's simple: you only recognize income when you actually receive the money, and you record expenses when the money leaves your account.
There’s no tracking of invoices that haven’t been paid or bills that haven’t been settled yet. If cash hasn’t moved, it doesn’t appear in your records.
This method is especially useful for service-based businesses, solo consultants, or small ecommerce shops using payment platforms like Stripe or PayPal. If your client pays you in February for work done in January, you report that income in February—the month you got paid.
Most new businesses use cash accounting because it's easy to understand, easier to maintain, and typically what the IRS expects for companies earning under $25 million in revenue. At Bookmate, this is what we recommend for founders just getting started.
What Is Accrual Basis Accounting?
Accrual accounting is more complex, but it gives a fuller picture of your business’s financial performance. Under this method, income is recorded when it is earned—not when it is paid. Expenses are tracked when they are incurred, even if the money hasn’t gone out yet.
This approach is often used by businesses with inventory, large B2B contracts, or deferred billing cycles. If you run a SaaS company that invoices a client in December for a year-long subscription, you would recognize that revenue in December, even if the customer pays in January.
Similarly, if you order inventory in March but don’t pay the supplier until April, the cost is logged in March.
Accrual is a better fit for founders who need to report a more accurate financial story—especially those raising capital, preparing for audits, or working with investors who want consistent month-over-month reporting.
Which Method Should You Choose?
Most small businesses and startups go with the cash method when first starting out. It’s easier to manage and usually meets IRS requirements for companies earning less than $25 million annually. Cash basis lets you see how much money is really in your account, which makes managing cash flow easier.
However, if you run a business where timing differences between earning and receiving money are significant—like product-based companies or subscription models—accrual accounting might make more sense, even early on.
It’s also worth considering if you plan to scale fast, seek investment, or manage more complex revenue.
You don’t need to decide alone. At Bookmate, we help founders weigh the pros and cons based on how their business earns money, collects payments, and plans for growth.
Can You Switch Later?
Yes, switching from cash to accrual—or vice versa—is possible. But it does require approval from the IRS and a formal process through Form 3115 (Application for Change in Accounting Method).
It’s not a decision to make mid-year without planning, so it’s best to decide early and stick with it unless your business needs change significantly.
How Bookmate Can Help
If you're not sure which method suits your business, we’re here to help. We work with hundreds of founders—many of them non-U.S. owners—who face this same decision.
We’ll walk you through the basics, help you choose the right method, and make sure your bookkeeping and federal filings reflect your choice correctly from the beginning. Our team handles everything from annual 1120, 5472, or 1065 filings to IRS correspondence.
Our Process
We make the entire tax and accounting process remote, simple, and reliable:
- Free consultation: We start with a call to understand your company, structure, and goals.
- Engagement & invoice: If it’s a good fit, we send a service agreement and payment details.
- Secure onboarding: We gather your financials, ownership docs, and tax history (if any).
- We prepare your filings: Our CPAs take care of your tax returns, accounting method setup, and more.
- We submit and support: We file everything on your behalf and respond to IRS notices if needed.
Not Sure Where to Start?
This may seem like a small decision, but choosing your accounting method lays the foundation for everything that comes next—reporting, taxes, fundraising, and peace of mind.
Book a free consultation to speak with our team or visit trybookmate.co to learn more.
Disclaimer: This article is for educational purposes and does not constitute legal or tax advice. Please speak to a licensed professional before making accounting decisions.
