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What is the accrual method of accounting?

by TurboTax Updated 5 months ago

Unlike the cash method of accounting, which reports income when it's received, the accrual method reports income when it's earned, regardless of when payment is collected.

For example, if you installed tile for a customer in December of 2023 and got paid in January of 2024, you'd report the income for 2023 under the accrual method because that's when you performed the work. In contrast, if you were using the cash method, you'd report the income in 2024 because that's when you got paid.

Same goes with expenses—under the accrual method, expenses are deducted when you received the goods or services, not when you paid for them. So if you bought the tile on credit in 2023 but didn't pay the invoice until 2024, you'd deduct the cost of the tile in 2023, the year you received them.

Generally speaking, larger businesses use the accrual method, whereas smaller, "mom and pop" establishments use the cash method. If your business carries inventory and earned over $26 million in gross receipts in the prior three-year period, you'll generally use the accrual method for sales and related costs. However, for most small businesses, the cash method is simpler and makes more sense.

A business can use the accrual method for bookkeeping purposes and the cash method for tax purposes, but this is not common.

If you want to change your accounting method for tax purposes, file IRS Form 3115, Application for Change in Accounting Method (included in TurboTax Business).

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