Bookkeeping Basics
Cash vs Accrual Accounting for Service Businesses
Short answer
Cash basis records revenue when you get paid and expenses when you pay them. Accrual records revenue when you invoice and expenses when you incur them. Most small service businesses can use cash basis. The IRS requires accrual once you carry inventory or exceed $29M average revenue (2024 limit).
This single decision affects your tax bill, how your reports look, and whether your books match your bank. Pick the wrong method and your P&L will lie to you every month.
Quick comparison
| Cash Basis | Accrual Basis |
|---|---|
| Simpler, matches your bank account | More accurate picture of profitability |
| Tax due only on money received | Tax due on money earned, even if unpaid |
| Best for sub-$1M service businesses | Required if you carry inventory > $1M |
| Can hide cash flow problems | Highlights AR/AP timing issues |
How to choose
- If you're paid mostly at job completion (residential trades, retail, beauty) — pick cash basis.
- If you bill net-30 to commercial customers and have receivables open every month — pick accrual.
- If you carry parts/product inventory — IRS may require accrual; ask your CPA.
- Switching methods later requires filing IRS Form 3115. Decide carefully up front.
Frequently asked questions
Can I use both?
Internally you can run accrual reports while filing taxes on cash basis. Most invoicing software supports both views. Pick one method for your tax return.
Bookkeeping, done for you.
Glo Invoice keeps your P&L, AR, and expenses in sync automatically — no spreadsheets, no surprises.
Sources & further reading
Primary sources we consulted when writing and reviewing this guide.