When you first join Finaloop, you’ll be asked to choose your accounting method: cash or accrual. This choice should align with the method you use for your tax returns. In this article, we’ll walk you through how to decide which method is best for you.

Understanding the difference between accrual and cash basis accounting can help you choose the right method for your business:

With accrual accounting, you record income and expenses when they are earned or incurred, not when the cash actually changes hands. This method gives you a more accurate picture of your financial health over time, since it matches income and expenses to the period they relate to.

Cash accounting records income and expenses only when the money is received or paid. This method is simpler and can be more straightforward for small businesses, as it tracks the actual flow of cash in and out of your accounts, but it can sometimes result in a lack of visibility into the real health of your business.

Essentially, one of the main differences between cash and accrual basis is whether you recognize accounts receivable (sales you made / invoices you sent out but for which you still haven't received the payment) or accounts payable (bills you received from vendors but still haven't paid).

For example:

You sell a product through a B2B channel on Feb 1 and receive the payment from your customer on March 1. You receive a vendor bill on April 1 and pay the vendor on May 1.

Generally, we recommend you set your books to the same method you use for filing your tax return. Here’s why:

Similar to other accounting software like QuickBooks or Xero, Finaloop lets you choose between cash and accrual accounting. However, with those other platforms, when you switch, only a couple of changes happen:

But accounting isn’t just about timing. There are other important differences between cash and accrual accounting that generic software might not fully account for, such as how COGS (Cost of Goods Sold), payroll, and loans are handled.

How Finaloop is different

Finaloop isn’t just software; we’re a full-service bookkeeping team. This means that when we conduct your year-end closing process to prepare your books for tax filing, we review everything to ensure your books are completely tax-ready.

To make sure your books are accurate for tax purposes, the year-end closing should be done in the same method you plan to file your taxes so you have access to consistent books all year.

If you are just starting your business, how do you choose the best accounting method? The real answer is, it depends. There are pluses and minuses to both:

The general recommendation is that if you have significant timing differences between when you issue B2B invoices and when you actually receive payment, or between when you receive vendor bills and actually pay them, accrual is a better option to give you more visibility into the health of your business. If these timing differences are minimal, cash basis makes a lot of sense.

Once your business earns, on average, more than $25 million in gross receipts over the previous 3 years, the IRS takes this decision out of your hands and requires you to choose accrual.

Note: There are other, less common, type of accounting methods as well. One example is a modified cash method which is a blend between cash and accrual, depending on the types of accounts. If you are using another type of accounting method that is not cash or accrual, please reach out to [email protected] to let us know and we'll advise on the best method to apply in Finaloop.

If you prefer to keep your books in one method and file taxes in another, we recommend sticking to one method throughout the year and letting your CPA handle the tax adjustments outside of Finaloop. This way, you maintain full visibility without your numbers changing or reconciliation issues if we would switch over only for year-end review and closing.

For example:

If your books are kept on an accrual basis, but you want to file taxes on a cash basis, your CPA or tax preparer can make the necessary adjustments to convert the numbers to cash basis.

This process ensures higher accuracy for tax filing and gives you and your CPA confidence in the numbers they’re working with. 😊

If it's your first year in business and you haven't yet filed a tax return, choose the best option for your brand based on the explanations above.

If you've already filed a tax return in the past: you already chose cash or accrual on your past tax return. We'll show you exactly where you can find this info. Find your entity type below with the exact instructions on where to look.

Page 4, Schedule K, Question 1

Page 2, Schedule B, Question 1

Page 1, Question H

Page 1, Question F

When you first onboard with Finaloop, the default setting of your account will be cash basis. The first time you enter your P&L, we’ll ask you for input on the accounting method you want to choose.

Select the relevant option and follow the flow to complete your method selection.

Choosing an accounting method can have a significant impact on your books and your numbers. Please make sure to add the input so we can ensure your books are tax-ready!

To change your accounting method in Finaloop, please contact support at [email protected] to help you understand the impact to your books and your taxes.