The two main options are cash basis and accrual basis. Cash method records income when you receive payment and expenses when you pay them. Accrual method records income when you earn it and expenses when you incur them, regardless of when money actually changes hands.

For most small service businesses with straightforward operations, cash basis works fine. It’s simpler to maintain, easier to understand, and your bank balance roughly reflects your taxable income. If you’re a solo operator getting paid quickly and paying bills as they come in, cash basis keeps things simple.

The IRS requires accrual method for certain larger businesses, but most small businesses fall under the threshold and can choose either method freely. Your accountant can help you determine if any requirements apply to your situation.

Where it gets more interesting is for contractors and project-based businesses. Cash basis can seriously distort your view of profitability. You might collect a big draw on one project while spending heavily on another. Cash method shows you flush with money, but the project you’re billing might be losing money while the one eating up cash might actually be profitable. You can’t tell because the timing of payments doesn’t match the timing of work.

Accrual method paired with proper job costing shows you the real picture. When you complete work, you recognize revenue even if you haven’t invoiced yet. When you receive materials for a job, you recognize the expense even if you haven’t paid the supplier. This matches income and expenses to the actual work, which is what you need to see whether a project made or lost money.

For real estate investors and developers, accrual typically makes more sense for the same reason. Projects span months or years, and cash timing tells you almost nothing about actual profitability.

The tradeoff is complexity. Accrual requires tracking accounts receivable and accounts payable carefully. You’re recognizing income before you have the cash, which can create tax liability before you’ve collected. This is manageable with good bookkeeping systems but adds overhead.

A practical middle ground some contractors use is cash basis for tax purposes but accrual-style job costing for internal management. You track work in progress and job profitability using accrual logic, then adjust for taxes based on what actually hit the bank. This gives you visibility without the tax timing issues, though it requires careful tracking.

The right answer depends on your business. Simple service business with fast payment cycles? Cash is probably fine. Project-based business with jobs spanning weeks or months? You likely need accrual, at least for internal reporting, or you’ll never really know which projects are profitable. A construction bookkeeper in American Fork familiar with your industry can help you set up the right approach and maintain it properly so you actually see the numbers that matter.