Question: What is the difference between the cash method and the accrual method of accounting for my business?
Answer: Under the cash method, you report income on your tax return in the year you receive payment from customers. You deduct business expenses in the year you pay them.
Under the accrual method, you report income in the year the sale is made to a customer regardless of when you receive payment. You deduct your business expenses in the year you make the purchase and create the obligation to pay, regardless of when you actually pay the bill.
There are advantages and disadvantages to each method depending on the nature of your business. The accrual method presents a truer result of your operations since it matches the revenue and the corresponding expenses as they are incurred. The IRS requires certain businesses to be on the accrual method.