Cash vs. Accrual Accounting: Which is Right for Your Nonprofit?

When managing a nonprofit's finances, one critical decision is choosing between cash accounting and accrual accounting. Each method has pros and cons—and the right choice depends on your organization's size, complexity, and reporting needs.

This guide breaks down both methods, IRS considerations, and how to pick the best approach for your mission.

1. What’s the Difference?

Cash Accounting

Records transactions when money changes hands (when received or paid).
Simple and intuitive—ideal for small nonprofits with straightforward finances.

Example: You record a donation when the check hits your bank account, not when the donor pledges it.

Accrual Accounting

Records revenue when earned and expenses when incurred (regardless of cash flow).
Provides a more accurate financial picture—used by larger nonprofits and those with grants or multi-year projects.

Example: You record a grant when awarded (not when received) and recognize expenses when billed (not when paid).

2. Pros and Cons of Each Method

Cash Accounting: The Simpler Choice

✅ Easy to understand – No need to track receivables/payables.
✅ Better for cash flow tracking – Shows actual money available.
❌ Limited financial insight – Doesn’t show future obligations (like unpaid bills).
❌ Can misrepresent long-term grants – A large multi-year grant looks like a single-year windfall.

Best for: Small nonprofits, all-volunteer groups, or those with minimal grants or contracts.

Accrual Accounting: The Big-Picture Approach

✅ Matches revenue with related expenses (e.g., a 3-year grant is recognized over its lifespan).
✅ Required for GAAP compliance (needed for audited financial statements).
✅ Shows true financial health – Includes pending income and liabilities.
❌ More complex – Requires tracking receivables, payables, and deferrals.

Best for: Larger nonprofits, organizations with grants, or those planning to grow.

3. What Does the IRS Require?

Most small nonprofits can use cash accounting for tax filings (Form 990).
Nonprofits with $10M+ in annual revenue must use accrual accounting (per IRS rules).
Grant-funded organizations often need accrual to comply with funder reporting.

📌 Tip: Even if you use cash accounting for taxes, consider accrual for internal management.

4. How to Choose the Right Method

Ask these questions:

🔹 Do you have grants or multi-year funding? → Accrual gives better clarity.
🔹 Are you applying for large grants or loans? → Lenders prefer accrual-based reports.
🔹 Is your team financially savvy? → Cash is simpler for volunteers.
🔹 Do you need audited financials? → Accrual is required.

Switching Methods? You’ll need IRS approval (Form 3115 for most changes).

5. Hybrid Approach: Best of Both Worlds?

Some nonprofits use:

Cash for day-to-day tracking (simpler budgeting).
Accrual for grant reporting & board updates (more accurate).

Tools like QuickBooks Nonprofit let you run both reports from the same data.

Final Recommendation

Start with cash if you’re small and cash-strapped.
Switch to accrual as you grow or take on restricted grants.
Consult a nonprofit CPA if unsure—they can help align books with funding needs.

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