As an Advanced QuickBooks ProAdvisor based in New York City with 20+ years of hands-on experience, one of the first questions I ask every new small business client is: “Are you on cash or accrual basis accounting in QuickBooks Online?”
Most of the time, they don’t know. And in many cases, QuickBooks has been set up on the wrong method for their business — silently distorting their financial reports for months or even years without them realizing it.
The choice between cash and accrual accounting is one of the most important decisions you will make in QuickBooks Online. It affects how your Profit & Loss report looks, how your CPA files your taxes, how banks and investors evaluate your financials, and whether your books accurately reflect the true health of your business.
In this guide I will explain both methods clearly, show you real examples from the types of businesses I work with in New York City and across the US, tell you exactly which method is right for your specific situation, and show you step-by-step how to set it up correctly in QuickBooks Online.
Cash basis accounting is the simpler of the two methods. In QuickBooks Online, cash basis means you record income when you actually receive payment and record expenses when you actually pay them. Nothing hits your Profit & Loss report until money physically moves in or out of your bank account.
A real example from my practice:
I have worked with restaurant owners here in New York City. A restaurant is a perfect cash basis business — customers pay immediately at the point of sale, food suppliers are paid weekly, and there are very few outstanding invoices or delayed payments to track. Every dollar in and every dollar out happens quickly and consistently.
For a restaurant owner using cash basis in QuickBooks Online:
This simplicity is the greatest strength of cash basis accounting. At any moment the restaurant owner can look at their QuickBooks Profit & Loss and know exactly how much money came in and went out — no guesswork, no timing adjustments.
Cash basis works best for:
The limitation of cash basis:
The weakness of cash basis is that it can give a misleading picture of your financial health if you have outstanding invoices or unpaid bills. Here are two common examples I see in practice:
If you invoice a client $10,000 in December but don’t get paid until January, that revenue doesn’t appear in December — making December look worse than it actually was and January look better.
Similarly, if you receive goods from a vendor in December and pay by check on delivery, but that check does not clear your bank account until January, the expense is not recorded in December — the month you actually used those goods. It only hits your books when the check clears in January. This means your December costs are understated and your January costs are overstated, even though the goods were consumed in December.
For businesses with significant Accounts Receivable or Accounts Payable, cash basis can create a distorted view of profitability — and in some cases lead to business decisions based on financial reports that don’t accurately reflect what actually happened that month.
Accrual basis accounting is the more sophisticated of the two methods. In QuickBooks Online, accrual basis means you record income when it is earned — regardless of when you receive payment — and record expenses when they are incurred — regardless of when you actually pay them. Revenue and costs are matched to the period they belong to, not the period the cash moves.
A real example from my practice:
I have worked with many startup founders and ex-investment bankers turned consultants here in Manhattan, NYC. A consulting business is a classic accrual basis scenario — large invoices are sent at the end of a project, clients often pay on 30, 60 or even 90-day payment terms, and significant expenses like software subscriptions, contractor fees, and office costs are incurred throughout the month before any bills are actually paid.
For a consultant using accrual basis in QuickBooks Online:
This matching of income and expenses to the correct period is the greatest strength of accrual basis accounting. It gives you — and your CPA, your bank, and your investors — an accurate picture of how the business actually performed in any given month or quarter.
Accrual basis works best for:
The limitation of accrual basis:
The primary challenge of accrual basis is that your Profit & Loss report can show strong revenue and profitability while your bank account tells a very different story. If you have invoiced $50,000 in December but none of it has been collected yet, your books show $50,000 in income — but your bank account may be nearly empty. This is why businesses on accrual basis must monitor their Accounts Receivable Aging report closely at all times. As I covered in my post on common QuickBooks bookkeeping mistakes, ignoring Accounts Receivable is one of the most costly mistakes a small business owner can make.
This is the section neither Intuit nor any generic bookkeeping blog will tell you — because they have never sat across from a small business owner whose books are a complete mess because their QuickBooks was set up on the wrong accounting method from day one.
I have.
In my 20+ years of working with startup founders, consultants, and small business owners here in New York City and across the US, the wrong accounting method is one of the most common — and most costly — root causes of messy QuickBooks books.
Here is what typically happens:
Scenario 1 — The Consultant on Cash Basis
A Manhattan consultant invoices corporate clients on 60-day payment terms. Their bookkeeper sets up QuickBooks on cash basis — the simpler option. For the first year everything looks fine. But by year two, with $200,000 in outstanding invoices at any given time, the Profit & Loss report bears no resemblance to actual business performance. December shows a terrible month because three large clients paid late — but January looks artificially strong when those payments finally land. The CPA cannot use the reports. The bank cannot evaluate the business. The consultant has no idea if the business is actually profitable. A full QuickBooks cleanup and method conversion is required.
Scenario 2 — The SaaS Startup on Cash Basis
A SaaS startup sells annual subscriptions for $12,000 per year. A customer pays the full $12,000 upfront in January. On cash basis, the entire $12,000 hits January revenue — making January look like a blockbuster month and every other month look flat. Investors reviewing the financials cannot get an accurate picture of monthly recurring revenue. Switching to accrual — where $1,000 is recognized each month over 12 months — requires going back and restating months of revenue. Another cleanup project.
Scenario 3 — The Real Estate Investor on Accrual Basis
A New York City real estate investor with six rental properties is set up on accrual basis. Each month QuickBooks records rental income when invoiced — but two tenants consistently pay late. The books show $18,000 in monthly revenue that is not actually in the bank. Cash flow is tight but the books say otherwise. The investor makes decisions based on accrual profits that do not exist yet. Cash basis would have been the right choice — and switching requires a cleanup of historical data.
The lesson from all three scenarios:
Getting the accounting method right from the very beginning — before a single transaction is recorded — is one of the most important things an Advanced QuickBooks ProAdvisor can do for a small business. Changing it later is possible, but it is never free. It always requires time, money, and in most cases a professional QuickBooks cleanup.
Here is how I approach this question with every new client. It comes down to four key factors:
Factor 1 — How do your clients pay you?
If your clients pay immediately — at the point of sale, on delivery, or within a few days — cash basis is likely the right choice. If your clients pay on terms — 30, 60, or 90 days after invoicing — accrual basis will give you a more accurate picture of your business performance.
Factor 2 — Do you carry inventory?
If your business buys and sells physical goods — retail, wholesale, manufacturing, e-commerce — the IRS requires accrual basis accounting once you cross the $31 million gross receipts threshold. Even below that threshold, accrual basis is strongly recommended for inventory-based businesses because it matches the cost of goods sold to the revenue in the same period.
Factor 3 — Do you need outside financing?
If you are planning to apply for a business loan, an SBA loan, or seek outside investment, your lender or investor will almost certainly require accrual basis financial statements. I have seen SBA loan applications stall — and in some cases fail — because a small business owner’s books were on cash basis and could not present the financial picture lenders needed. Clean accrual basis books prepared by an Advanced QuickBooks ProAdvisor have helped my clients here in New York City secure seven-figure SBA loans.
Factor 4 — What is the size and complexity of your business?
For very simple businesses — a solo consultant who invoices and collects quickly, a freelancer, a one-person service business with minimal expenses — cash basis is simpler to manage and perfectly adequate. As your business grows in complexity — more clients, more vendors, more employees, multiple revenue streams — accrual basis becomes increasingly important for accurate financial management.
| Business Type | Recommended Method |
| NYC Restaurant or cafe | Cash Basis |
| Retail store | Accrual Basis |
| Solo consultant — quick paying clients | Cash Basis |
| Consultant on 30-60-90 day payment terms | Accrual Basis |
| SaaS startup — annual subscriptions | Accrual Basis |
| Real estate investor — rental income | Cash Basis |
| E-commerce business with inventory | Accrual Basis |
| Construction or project-based business | Accrual Basis |
| Freelancer or sole proprietor | Cash Basis |
| Any business seeking SBA loan or investment | Accrual Basis |
Many small business owners choose their accounting method based on what is easier — without realizing that for some businesses, the IRS mandates a specific method. Here is what you need to know:
The $31 Million Gross Receipts Threshold
Under the Tax Cuts and Jobs Act (TCJA), businesses with average annual gross receipts of $31 million or less over the prior three tax years are generally permitted to use cash basis accounting — even if they carry inventory. Businesses that exceed this threshold are required to use accrual basis accounting. You can find the current IRS guidance on this threshold in IRS Instructions for Form 8990.
Inventory-Based Businesses
If your business purchases, produces, or sells merchandise, the IRS has specific rules about how inventory must be accounted for. Even below the $31 million threshold, inventory-based businesses must carefully consider whether cash basis accounting accurately reflects their cost of goods sold. In most cases an Advanced QuickBooks ProAdvisor will recommend accrual basis for any business that carries inventory — regardless of size.
Changing Your Accounting Method
If you are already using the wrong method and need to switch, the IRS requires you to file Form 3115 — Application for Change in Accounting Method. This is not a simple form — it requires calculating a Section 481(a) adjustment to account for the cumulative effect of the change on prior years’ income. This is not something to do without professional guidance. I have helped clients through this process — and it always begins with a QuickBooks cleanup to ensure the historical data is accurate before the method change is filed.
The Bottom Line on IRS Requirements
For most small businesses in New York City and across the US — those under $31 million in annual revenue — the choice between cash and accrual is a business decision, not a legal one. But it is still one of the most consequential decisions you will make in QuickBooks Online. Getting it right from the start avoids a costly and time-consuming correction later.
Setting your accounting method correctly in QuickBooks Online before recording your first transaction is one of the most important setup steps. Here is exactly how to do it:
Step 1 — Go to Settings
Click the gear icon ⚙️ in the top right corner of QuickBooks Online to open your Company Settings.
Step 2 — Click Advanced
In the left menu of Company Settings, click Advanced.
Step 3 — Find Accounting Method
Under the Accounting section at the top of the Advanced page, you will see Accounting method. It will show either Cash or Accrual.
Step 4 — Select Your Method
Click the pencil icon ✏️ to edit. Select either Cash or Accrual based on the guidance in the sections above.
Step 5 — Save
Click Save then Done. Your accounting method is now set and will apply to all your QuickBooks Online reports by default.
One Important Caution:
If your company file already has months or years of transactions recorded, changing the accounting method here changes how QuickBooks reports your data — but it does not restate or reclassify your historical transactions. If you have been recording transactions under the wrong method for an extended period, simply flipping this switch will not fix the underlying data. That requires a proper QuickBooks cleanup and in some cases a formal IRS method change via Form 3115 as covered above.
This is one of the most common misunderstandings I encounter — small business owners who switch the setting in QuickBooks thinking their books are now correct, without realizing the historical data still reflects the old method.
One of the most useful — and underused — features in QuickBooks Online is the ability to toggle between cash and accrual basis on any individual report without permanently changing your company’s accounting method setting.
This means that even if your company is set up on accrual basis, you can run a cash basis Profit & Loss report at any time — for example to show your CPA a cash basis view for tax preparation purposes — without touching your company settings.
How to toggle on any QBO report:
When this is useful in practice:
One important note:
The toggle changes how the report displays your data — it does not change your underlying accounting method or reclassify any transactions. It is a reporting view only. Your actual company setting in Advanced — as set above — remains unchanged.
Some accounting method decisions are straightforward. Others are not. Here are the situations where I strongly recommend getting professional guidance before making any changes in QuickBooks Online:
You are setting up QuickBooks Online for the first time
This is the best and least expensive time to get it right. An Advanced QuickBooks ProAdvisor can review your business model, revenue streams, client payment terms, and industry requirements and recommend the correct method before a single transaction is recorded. Setting it up correctly from day one costs a fraction of what a cleanup and method conversion costs later.
You suspect you are on the wrong method
If your Profit & Loss report does not seem to reflect the reality of your business — if strong months look weak or weak months look strong — your accounting method may be the culprit. Before changing anything in QuickBooks, have a ProAdvisor review your setup and transaction history to confirm the diagnosis.
You have already changed the method yourself
As covered above, simply toggling the accounting method in QuickBooks Company Settings does not restate historical transactions. If you have already made this change, your reports may now be showing a mix of cash and accrual data without you realizing it. A ProAdvisor can assess the damage and advise on the correct remediation steps.
You need to file IRS Form 3115
Changing your accounting method officially with the IRS requires filing Form 3115 and calculating a Section 481(a) adjustment. This is not a DIY project. The consequences of filing it incorrectly — or not filing it at all when required — can include penalties, amended returns, and IRS scrutiny. I have guided clients through this process and it always begins with clean, accurate books in QuickBooks Online.
You are seeking a business loan or outside investment
Lenders and investors require accurate, method-appropriate financial statements. If your books are on the wrong method — or have been inconsistently maintained — a ProAdvisor can get them cleaned up and properly restated before you submit your application. As I mentioned in the Success Stories on this site, clean QuickBooks books have helped my clients here in New York City secure seven-figure SBA loans and attract significant outside investment.
Choosing between cash and accrual accounting in QuickBooks Online is not always a simple decision — and getting it wrong is one of the most common reasons small business owners and startup founders come to me for a QuickBooks cleanup.
The good news is that with the right guidance from the start, it is a decision you only have to make once.
I work with startup founders, consultants, real estate investors, restaurant owners and small businesses across New York City and the US. Whether you need help setting up QuickBooks Online correctly from scratch, cleaning up books that have been on the wrong method for years, or preparing financial statements for a bank or investor — I can help.
Every inquiry gets a personal reply the same business day.
Hiren Shah
Advanced QuickBooks ProAdvisor — New York City
Get in touch today
Disclaimer: The information provided in this blog is for general informational purposes only and should not be considered legal, accounting, or tax advice. Consult a qualified tax professional or CPA before making any changes to your accounting method, especially if an IRS filing such as Form 3115 may be required.
