7 Types of Accounting Methods Every Business Should Know

Table of Contents

• Introduction
• Why Accounting Methods Matter More Than You Think
• The 7 Types of Accounting Methods Every Business Should Know
  • Cash Basis Accounting
  • Accrual Basis Accounting
  • Modified Cash Basis Accounting
  • Tax-Basis Accounting
  • Installment Method
  • Completed Contract Method
  • Percentage-of-Completion Method
• How to Choose the Right Accounting Method for Your Business
• Switching Accounting Methods Without Creating Reporting Chaos
• How Atidiv Can Help You Apply the Right Accounting Methods in 2025
• FAQs

The accounting method you use determines when revenue and expenses hit your books, how your financial performance appears, and how predictable your reporting becomes. Understanding the most common accounting methods helps you align operations with compliance, cash planning, and decision-making. Below, you will learn seven widely used approaches, with clear business examples and selection guidance.

Introduction

Selecting accounting methods is not a “finance-only” decision. It shapes how your leadership team interprets performance, how lenders view risk, and how your tax position is calculated. In practice, accounting methods determine whether you recognize revenue when cash arrives, when an invoice is issued, or when project milestones are reached. That timing difference can materially change your monthly reporting, your covenant calculations, and the story your numbers tell.

You also do not operate in a vacuum. Tax rules, industry norms, and reporting expectations all influence which accounting methods are practical, permitted, or required. For example, U.S. tax rules often allow smaller businesses (such as consumer brands with 3+ employees) to use the cash method if they meet the gross receipts test, which is inflation-adjusted (and is $31,000,000 for tax years beginning in 2025). Meanwhile, GAAP reporting for public companies requires accrual accounting rather than pure cash basis reporting. 

The goal of this guide is straightforward: you will understand seven accounting methods, where each fits, what tradeoffs to expect, and how to choose the accounting methods that match your business model and reporting needs.

Why Accounting Methods Matter More Than You Think

Accounting methods drive three outcomes you care about, even if you do not think of them as “accounting problems.”

First, accounting methods impact how stable and comparable your reporting looks from month to month. Cash basis results can swing based on payment timing, while accrual basis results typically track business activity more consistently. Second, accounting methods influence tax timing. Depending on your structure and eligibility, a method can accelerate or defer taxable income. Third, accounting methods affect operational discipline. If your method requires you to track receivables, retainage, inventory, WIP, or contract costs, your systems and controls must match that complexity.

Here’s a snapshot that compares the seven accounting methods:

You do not need all accounting methods at once, but you do need to understand the consequences of choosing one set of accounting methods over another.

At Atidiv, we help you select and operationalize accounting methods that match your business model and reporting expectations. With several years of finance and accounting expertise and a 95% client retention rate, we build reporting you can run your business on.

The 7 Types of Accounting Methods Every Business Should Know

• Cash Basis Accounting

Cash basis is one of the simplest accounting methods: you record income when you receive cash and record expenses when you pay cash. If a client pays you in January, revenue appears in January, even if the work happened in December. If you pay a vendor in February, the expense appears in February, even if the bill arrived in January.

Where this fits: Cash basis is common for smaller service businesses with low complexity, limited inventory, and a preference for easy reconciliation against bank activity. Many companies like this method because it maps closely to cash planning and feels intuitive.

Key trade-offs: Cash basis accounting methods can distort performance in any single period. A strong month of collections can make you look unusually profitable, while a month where you prepay annual software licenses can make you look unprofitable. Cash basis is also not GAAP for public company reporting.

• Accrual Basis Accounting

Accrual is one of the most widely used accounting methods for growing businesses and D2C companies earning $5M+ in revenue. You recognize revenue when it is earned (often when invoiced or when performance obligations are satisfied) and recognize expenses when they are incurred, not when cash moves.

Where this fits: If you invoice customers, extend payment terms, hold inventory, or manage payables strategically, accrual accounting methods typically produce a more accurate picture of operations.

Why it is commonly required: GAAP requires accrual basis accounting for public companies because it provides a more consistent, decision-useful picture of economic activity than cash-basis reporting. 

Key trade-offs: Accrual accounting methods demand stronger systems. You must track accounts receivable, accounts payable, deferrals, accruals, and reconciliations with discipline. Poor execution can hide cash issues because the income statement may look healthy while collections lag.

• Modified Cash Basis Accounting

Modified cash basis (sometimes called hybrid in practice, though terminology varies) blends accounting methods. You may record day-to-day income and expenses on a cash basis, but treat certain items, like fixed assets, depreciation, and long-term liabilities, using accrual-style rules.

Where this fits: Modified cash is often used internally by businesses that want simpler operations but need more structure than pure cash provides. It can also be a stepping stone when you are moving from cash to accrual.

Key trade-offs: Modified cash accounting methods are generally not considered GAAP-compliant financial reporting, and you must document clear internal rules so your reports remain consistent and auditable in practice (even if not formally audited).

• Tax-Basis Accounting

Tax-basis accounting methods align your bookkeeping and reporting with tax rules rather than GAAP presentation. You recognize income and deductions according to tax regulations, often creating differences from accrual GAAP financials.

Where this fits: If your priority is to streamline tax preparation and keep internal books close to the tax return, tax-basis accounting methods can reduce year-end surprises and rework.

Key trade-offs: Tax-basis financials can be harder to compare with peers, lender expectations, or investor requests, especially if they want accrual-style statements for performance analysis. If you use tax-basis accounting methods, you typically need a clear translation process when stakeholders ask for GAAP-like reporting.

• Installment Method (for Certain Sales)

The installment method is a specific tax-focused approach used for qualifying installment sales, where at least one payment is received after the tax year of the sale. Under this method, income (gain) is generally recognized as payments are received, using a gross profit ratio approach. 

Where this fits: If you sell certain assets (for example, a business asset or property) and receive payments over time, installment accounting methods can better align tax recognition with cash collections.

Key trade-offs: You must manage contract terms carefully, track principal versus interest where applicable, and confirm eligibility and exceptions (some dealer dispositions and other categories are excluded).

When you use advanced accounting methods like the installment approach, precision matters. At Atidiv, our three-stage quality checks are designed to ensure 100% accuracy, so your reporting stays defensible for stakeholders and tax requirements. Book a free consultation to learn more!

• Completed Contract Method (CCM)

The completed contract method is one of the specialized accounting methods used for certain long-term contracts, often in construction. Under CCM, you generally defer recognizing contract revenue and expenses until the contract is completed (rather than recognizing results throughout the project). 

Where this fits: CCM can be used in specific situations and exemptions, typically tied to contract type and taxpayer eligibility. IRS materials describe CCM as deferring contract income and costs until completion for certain long-term contract contexts. 

Key trade-offs: CCM can create lumpy income recognition and requires strong job-cost tracking so the “big recognition event” at completion is accurate. It also must be evaluated carefully against applicable rules and exceptions for your facts and circumstances.

• Percentage-of-Completion Method (PCM)

The percentage-of-completion method is another specialized approach for long-term contracts. Under IRC §460, taxable income from many long-term contracts is determined under the percentage-of-completion method, recognizing income as work progresses, often using a cost-to-cost approach.

Where this fits: PCM is commonly relevant in construction and long-term manufacturing or installation arrangements where performance spans multiple tax years. IRS guidance and the statute establish PCM as the default approach for many long-term contracts, with specific exceptions. 

Key trade-offs: PCM requires accurate forecasting. If your estimated total costs are wrong, your recognized profit can swing materially, and you may need look-back adjustments in some cases. Strong cost controls, project accounting discipline, and governance are non-negotiable when you use these accounting methods.

How to Choose the Right Accounting Method for Your Business

Choosing accounting methods is less about preference and more about operational fit. Use the checklist below to guide your selection.

As you evaluate accounting methods, focus on three decision drivers:

• Reporting expectations: If lenders or investors want accrual financial statements, accrual accounting methods usually become the baseline, even if you still manage cash carefully.
• Operational complexity: The more moving parts you have (projects, inventory, subscriptions, multiple entities), the more you need accounting methods supported by disciplined processes and controls.
• Tax and compliance requirements: Certain accounting methods are restricted or required depending on your entity type, inventory, and contract profile. For instance, the gross receipts test under §448(c) is inflation-adjusted, and for 2025, the threshold is $31,000,000.

If you want accounting methods that stand up to growth, audits, and stakeholder scrutiny, Atidiv can help you operationalize them end-to-end. With several years of expertise and a 95% client retention rate, we build finance workflows that stay reliable as you scale.

Switching Accounting Methods Without Creating Reporting Chaos

Switching accounting methods is a real change-management project, not a quick settings update. From a U.S. tax perspective, changes in accounting method often require filing Form 3115 (Application for Change in Accounting Method) and computing a Section 481(a) adjustment to prevent duplication or omission of income or deductions. 

Operationally, successful transitions between accounting methods usually include:

• Parallel reporting (running old and new methods temporarily).
• A clear cutover date and documented policies.
• Reconciliation plans for AR/AP, deferred revenue, prepaid expenses, and inventory/WIP.
• Stakeholder alignment, so leaders interpret trends correctly during the transition period.

If you treat a method change casually, you can damage comparability, create tax risk, and lose confidence in the numbers at the exact time you need clarity.

How Atidiv Can Help You Apply the Right Accounting Methods in 2025

Accounting methods only work when your process, documentation, and data quality match the method’s demands. If your team is stretched thin, your close is inconsistent, or your reporting changes every month, the issue is often not the accounting methods themselves; it is the operating system around them.

At Atidiv, we help you implement accounting methods with the controls and cadence required for accurate reporting. Our finance and accounting services include proven experience, access to a wide network of chartered accountants and CPAs, and three-stage quality checks to ensure 100% accuracy. We also offer financial services starting at $15 per hour, which helps you scale capability without building an oversized in-house team. If you are a D2C brand operating in multiple regions, such as the UK, the US, and Australia, we’d love to hear from you!

Accounting Methods FAQs

• What are the most common accounting methods?

The most common accounting methods include cash basis, accrual basis, modified cash basis, and tax-basis reporting. Many businesses also encounter specialized accounting methods such as installment, completed contract, and percentage-of-completion.

• Are accounting methods the same as accounting types (like tax or managerial accounting)?

No. Accounting methods describe when you record revenue and expenses, while accounting types describe why and for whom you report (tax, financial, managerial, cost, project).

• Can you use cash basis accounting methods if you are a larger business?

Eligibility depends on business facts and tax rules. The gross receipts test under §448(c) is inflation-adjusted; for tax years beginning in 2025, the threshold is $31,000,000. 

• Why do GAAP financial statements typically use accrual accounting methods?

GAAP emphasizes accrual accounting methods because they better match revenues with related expenses and provide more decision-useful financial reporting than the pure cash basis in many cases. 

• What is Form 3115, and when do you need it?

Form 3115 is used to request a change in accounting method for tax purposes. Changes often involve a Section 481(a) adjustment to avoid duplicating or omitting income or deductions. 

• How do you know which accounting methods are right for your industry?

Start with your revenue model (cash vs. credit), inventory or project structure, stakeholder reporting requirements, and applicable tax rules. For long-term contracts, IRC §460 provides key guidance around percentage-of-completion rules.