Should I choose cash or accrual accounting when I’m setting up my business? Can I choose?

First, make sure you understand the difference between cash and accrual accounting. Read this. Then, it depends what kind of entity your business is. Most of the small businesses that I work with are sole props or LLCs, and they use the cash method of accounting. 

Cash accounting is easier. With accrual accounting, you always have to be thinking through when a transaction should take place in the books. With cash accounting, it’s pretty straightforward. So why would you even want accrual accounting? It does a better job of assigning income and expenses to specific periods. If you were looking super closely at monthly or quarterly profits, for example, it would be very important to get the all the income and expenses just right. And make sure that only one month’s worth of any particular expense is in any given month (in cash accounting you can easily end up with two month’s worth of rent in June and no rent in July, for example). But for most businesses, you can just alter the numbers you are looking at on a report to see what profitability would have looked like if you got everything just right. Or look at YTD numbers. Getting the precision of accrual accounting is just not worth it for most smaller, simpler operations.

Some businesses aren’t allowed to use the cash method. (C Corps that make more than an average of $25M per year; tax shelters; and partnerships where one of the partners is a C Corp and the partnership makes more than an average of $25M per year).

You can switch from one method to another, but you have to get IRS approval. 

I recommend using the cash method unless you can’t or you know a very good reason why you shouldn’t.