Recording income when earned and expenses when incurred, rather than when cash moves. Required for some businesses and common for those with inventory or outside investors.
Accrual books match revenue to the period it was earned, which is what lenders and investors expect and what the IRS requires above certain revenue thresholds or when inventory is a material factor. Switching methods requires an accounting method change on Form 3115.
Most small businesses can use cash basis: for 2026 the gross receipts test is $32 million in average annual receipts over the prior three years (Rev. Proc. 2025-32), inflation-adjusted each year. Above it, or for businesses that must account for inventory and exceed the test, accrual is generally required.
Last reviewed September 15, 2026. Tax rules change; confirm current law before acting.
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