Most small businesses should use cash accounting. It’s simpler to maintain, easier to understand, and the IRS allows it for businesses with average annual gross receipts under $27 million.

Cash accounting records income when you receive payment and expenses when you pay them. If you invoice a client in December and they pay in January, that income shows up in January. Accrual accounting records income when you earn it and expenses when you incur them, regardless of when money changes hands. That same December invoice would count as income in December under accrual, even though the check doesn’t arrive until the new year.

The practical difference affects your tax bill and your financial picture. With cash accounting, you have some control over timing. Having a high-income year? Delay sending late-December invoices to push that revenue into next year. Want more deductions this year? Prepay your insurance or stock up on supplies in December. Accrual accounting removes this flexibility because revenue is recorded when earned, not when collected.

Accrual gives you a more accurate view of profitability when there are timing differences between doing work and getting paid. Job costing for contractors often works better under accrual because you’re matching costs to the revenue they generate. A contractor working a three-month project under cash accounting might show losses for two months and then a huge profit when the final payment arrives. Accrual spreads the revenue across the period you’re actually earning it, making job-level profitability easier to see.

The IRS requires accrual for C corporations over the revenue threshold and for some businesses that carry inventory, though exceptions exist for small businesses. If you’re a sole proprietor, partnership, or S corp under the threshold without significant inventory, you can choose either method.

For most service businesses, freelancers, and small contractors in Santa Fe and Northern New Mexico, cash accounting works well. Your bank balance roughly matches your reported income, and you don’t need to track receivables and payables as rigorously. A QuickBooks bookkeeper in Santa Fe can configure either method properly in your accounting system from the start.

Consider accrual if you need financial statements for a bank loan, have investors who expect GAAP-compliant financials, or you want accurate profitability on projects that span multiple months. The choice isn’t permanent since you can change methods with IRS approval through Form 3115, but it’s easier to start with the right method than to switch later. If you’re setting up new books or just getting started, think through which approach fits your business before you begin.