Why it matters
Cash basis is simpler, and many small businesses use it for tax. It can also make a profitable month look unprofitable, or the reverse, because the timing of a large payment can move the result from one period to another.
Example
A contractor finishes a job in December and receives the payment in January. Under cash basis, the income is recorded in January, even though the work was done in December.
Related terms
Questions about Cash basis accounting
Can a business switch from cash to accrual?
A change in accounting method usually requires the tax preparer to file the right form and may require an adjustment. The firm should review the change before the next return.