Cash-basis accounting records revenue when money arrives and expenses when money leaves your bank account. Accrual-basis accounting records revenue when it is earned (or unconditionally pledged) and expenses when they are incurred, regardless of when cash changes hands. Modified cash sits in between — mostly cash, with a few accrual adjustments.
Most small nonprofits start on cash because it is simple and matches the checkbook. But U.S. Generally Accepted Accounting Principles (GAAP) require the accrual basis, and accrual becomes effectively mandatory once you need an independent audit, accept significant government grants, or grow past the point where cash hides too much. The IRS lets you file Form 990 on either basis, so the trigger is usually an external requirement, not the IRS.
Quick answer
- Cash = simple, matches your bank balance, fine for very small all-cash organizations.
- Accrual = GAAP-compliant, shows receivables, payables, and pledges — needed for audits and most larger grants.
- The single audit threshold is $1 million in federal awards expended (as of 2026 — verify), and a single audit means GAAP/accrual.
- You can keep cash books day-to-day and convert to accrual at year-end with a CPA — a common, legitimate path.
The core difference: timing
Both methods record the same total dollars over the life of your organization. The only thing that changes is which period a transaction lands in. That timing difference is what makes accrual more accurate — and more work.
Cash basis asks one question: did money move? You book a grant payment when the check clears and a utility bill when you pay it. Your books always equal your bank balance (minus uncleared items), which is why founders and volunteer treasurers find cash intuitive.
Accrual basis asks a different question: was it earned or incurred? A foundation that signs an unconditional grant agreement in December creates revenue in December under accrual, even if the money arrives in March. A caterer who works your December gala but bills you in January creates a December expense. Accrual records these as receivables (money owed to you), payables (money you owe), and pledges receivable (promised gifts).
| Event | Cash basis records it | Accrual basis records it |
|---|---|---|
| Unconditional grant signed Dec, paid Mar | March | December |
| Program supplies bought on account in Nov, paid Jan | January | November |
| Membership dues collected for next year | When received | Deferred, recognized as earned |
| Donated audit services (in-kind) | Not recorded | Recorded as revenue and expense |
Accrual is built on the matching principle: revenue and the expenses that produced it belong in the same period, so each year's surplus or deficit reflects real activity rather than the accident of when checks cleared.
Modified cash: the common middle ground
Many nonprofits in the roughly $250k–$2M range run on modified cash basis — essentially cash bookkeeping with a handful of accrual-style adjustments layered on. It is a practical compromise that gives leadership better information without the full overhead of a complete accrual system.
Typical modifications include:
- Recording payroll liabilities — wages earned but not yet paid, and the related payroll taxes.
- Tracking large receivables and payables — a signed grant award or a big unpaid invoice, even if smaller items stay cash.
- Capitalizing and depreciating fixed assets rather than expensing a vehicle or equipment all at once.
- Deferring restricted or future-period revenue so a multi-year gift is not booked entirely in year one.
Why the $500k zone matters
Practitioners often note that the pull toward accrual adjustments grows once an organization's budget clears roughly $500,000 (as of 2026 — verify), because the gaps between cash and economic reality get large enough to mislead the board. There is no legal line at $500k — it is a rule of thumb, not a requirement.
Modified cash is not full GAAP. It is fine for internal management and many state filings, but if an auditor is issuing an opinion, they will generally need true accrual statements (or will state that the financials follow a special-purpose, non-GAAP framework). Treat modified cash as a stepping stone, not the destination, if an audit or major grant is on your horizon.
When accrual (GAAP) becomes required
The IRS does not force accrual — Form 990 accepts cash, accrual, or "other." The pressure almost always comes from third parties who require GAAP-compliant, audited financials. Here are the most common triggers.
1. A federal single audit. Under the federal Uniform Guidance (2 CFR Part 200), any non-federal entity that expends $1 million or more in federal awards in its fiscal year must obtain a single audit (as of 2026 — verify; the threshold rose from $750,000 effective for fiscal years beginning on or after October 1, 2024). "Expended" includes direct federal grants and federal money passed through your state or a larger nonprofit. A single audit is performed under GAAP, which means accrual. See the eCFR text of 2 CFR Part 200 to confirm current figures.
2. An independent financial statement audit. Many foundations, banks (for a line of credit), and state charity regulators require audited financial statements above a revenue threshold that varies by state — commonly in the $250,000 to $1,000,000+ range (as of 2026 — verify your state). An auditor issuing a clean (unqualified) opinion on GAAP financials needs accrual books.
3. Larger government and foundation grants. Government contracts and many institutional funders ask for accrual-basis financial statements, an indirect cost rate, and the ability to report on a reimbursement basis — all of which assume accrual. If you are pursuing this funding, build accrual capacity before you apply, not after the award. Our grant-readiness guide covers the broader checklist.
4. Size and complexity. Once you carry significant receivables, payables, multi-year pledges, or restricted funds, cash basis simply stops telling the truth about your financial position. At that point boards and lenders expect accrual regardless of any legal mandate.
Hedge this carefully
State audit thresholds, single audit rules, and individual funder requirements change and differ widely. Confirm the current numbers with the Uniform Guidance, your state charity office, and each funder's guidelines before relying on any figure here.
How the choice shapes your statements and grant readiness
Your accounting basis flows straight through to the four GAAP financial statements and to how funders read your organization. The differences are not cosmetic.
| Statement / item | On cash basis | On accrual basis |
|---|---|---|
| Statement of Financial Position (balance sheet) | Cash and few other balances; no receivables or payables | Shows pledges receivable, grants receivable, accounts payable, deferred revenue, net assets with/without restrictions |
| Statement of Activities (income statement) | Surplus/deficit swings with payment timing | Surplus/deficit reflects activity actually performed in the period |
| Net assets with donor restrictions | Hard to present accurately | Properly separated — critical for restricted grants |
| Audit opinion | Cannot get an unqualified GAAP opinion | Eligible for an unqualified GAAP opinion |
For grant readiness, accrual matters because it lets you (a) present net assets with and without donor restrictions the way funders expect, (b) match grant expenses to grant periods for accurate reporting, and (c) support an indirect cost rate. If you want to understand how the statements fit together, see our overviews of fund accounting and financial statements and functional expense allocation.
Cash basis is not "wrong" — for a small, all-cash organization it can be perfectly adequate and is far cheaper to maintain. The question is whether the people who fund and govern you need the accuracy accrual provides.
Worked example: same transaction, two bases
Imagine a small youth-services nonprofit with a December 31 fiscal year-end. Three things happen in December:
- A foundation signs an unconditional $30,000 grant on Dec 15; the check arrives Feb 10.
- The org runs a December program and incurs $4,000 in supplies bought on account; the vendor invoice is paid Jan 20.
- It pays $6,000 of December rent and payroll in cash during December.
Here is how the books look for the year ending December 31:
| Line item | Cash basis (this year) | Accrual basis (this year) |
|---|---|---|
| Grant revenue | $0 (cash arrives next year) | $30,000 (earned/pledged in Dec) |
| Supplies expense | $0 (paid next year) | $4,000 (incurred in Dec) |
| Rent & payroll expense | $6,000 | $6,000 |
| Reported surplus / (deficit) | ($6,000) | $20,000 |
| Grants receivable (balance sheet) | Not shown | $30,000 |
| Accounts payable (balance sheet) | Not shown | $4,000 |
Same three transactions, two very different stories. Cash basis reports a $6,000 deficit and an empty-looking balance sheet — a board could panic over a year that was actually strong. Accrual basis reports a $20,000 surplus and shows the $30,000 the org is genuinely owed. Over the two years combined, both methods net to the same place; accrual just puts the activity in the year it happened.
Year-end conversion checklist (cash → accrual)
- List all unconditional pledges and grants receivable signed but not yet collected.
- List all unpaid invoices (accounts payable) for goods/services already received.
- Record accrued payroll and payroll taxes earned but unpaid at year-end.
- Identify deferred revenue — cash received for a future period or a future deliverable.
- Capitalize fixed assets and record depreciation; reverse anything double-counted.
- Separate net assets with and without donor restrictions.
- Have a CPA review the entries and prepare the Schedule D reconciliation for Form 990 if audited.
Choosing your basis and converting later
A reasonable default progression for a growing nonprofit:
- Very small / all-cash: Cash or modified cash is fine. Keep clean records and a chart of accounts that can grow — see our chart of accounts guide.
- Growing, some grants and payables: Move to modified cash so the board sees payroll liabilities and major receivables, while day-to-day stays simple.
- Audit or major grants in sight: Convert to full accrual / GAAP, ideally with a nonprofit CPA, before the requirement is binding.
A practical, money-saving pattern many organizations use: keep the books on cash or modified cash all year (easy for staff and volunteers), then have a CPA convert to accrual at year-end for the audit and financial statements. You get accurate annual GAAP reporting without retraining everyone on accrual bookkeeping.
Converting is a defined accounting exercise — the checklist above is the core of it — but the first conversion, the audit-year conversion, and any indirect cost rate work are where a nonprofit CPA earns their fee. For the foundational concepts behind all of this, our financial management basics page is a good companion, and audit preparation walks through the audit itself.
What the IRS Form 990 expects
The IRS is more flexible than many board members assume. On Form 990, you check the accounting method you actually use — cash, accrual, or other (where you would note "modified cash") — and you must use that same method consistently year to year unless you formally change it. Filing on cash does not put you out of compliance with the IRS.
Two important wrinkles:
- Reconciliation when audited. If you have audited GAAP (accrual) financial statements but file the 990 on a different basis, you generally reconcile the differences on Schedule D, Parts XI–XII. Keep a clear reconciliation between your books and the return.
- State filings often require accrual. A number of states that accept the Form 990 for charitable registration require amounts on an accrual basis, which can differ from how you file federally. Check your state's charity office.
Always confirm current rules against the primary source — the IRS Instructions for Form 990 — because line references and requirements are updated annually (as of 2026 — verify).
Bottom line
The IRS rarely forces the choice. Your auditor, your funders, and your size do. If an audit or significant government grant is realistic in the next year or two, plan and budget for accrual now.
Recurring, unrestricted revenue you can actually forecast
Accrual accounting rewards predictable, recognizable revenue — and that is exactly what Good Circles provides. Supporters pick your cause once, then a share of their everyday local spending funds you automatically: about $72 per active supporter per year (roughly $36,000/yr from 500 supporters), recurring and unrestricted, at no cost to your nonprofit. Figures are an estimate.
Claim a Founding Nonprofit spot →Sources & tools
Free first
- Propel Nonprofits — Plain-language nonprofit finance guides and a glossary covering cash vs. accrual, financial statements, and basis concepts.
- AICPA Not-for-Profit Resources — Authoritative guidance on GAAP, accrual accounting, audits, and single audits for nonprofit organizations.
- IRS — Instructions for Form 990 — Primary source for accounting-method reporting, Schedule D reconciliation, and what the IRS accepts on the 990.
Paid — optional labor-savers
- Nonprofit CPA / accounting firm — A CPA experienced with nonprofits to convert cash books to accrual, prepare GAAP statements, and handle audit or single-audit requirements. Worth it when You need an audit, are pursuing significant government grants, or are converting to accrual for the first time — the conversion and indirect cost work is where their fee pays off.
Last verified 2026-06-16. Figures and rules change — verify at the source before you act.
FAQ
Does the IRS require nonprofits to use accrual accounting?
No. The IRS lets you file Form 990 on a cash, accrual, or "other" (such as modified cash) basis, as long as you apply it consistently. The push toward accrual almost always comes from auditors, funders, or state regulators — not the IRS. If you have audited GAAP statements but file on a different basis, you reconcile the difference on Schedule D, Parts XI–XII (as of 2026 — verify with the current Form 990 instructions).
What is the single audit threshold, and does it require accrual?
Under the federal Uniform Guidance (2 CFR Part 200), a non-federal entity that expends $1 million or more in federal awards in its fiscal year must obtain a single audit (as of 2026 — verify; the threshold rose from $750,000 effective for fiscal years beginning on or after October 1, 2024). A single audit is conducted under GAAP, which is the accrual basis — so triggering it effectively requires accrual financial statements.
What is modified cash basis accounting?
Modified cash is cash-basis bookkeeping with a few accrual adjustments added — commonly recording payroll liabilities, large receivables and payables, deferred revenue, and depreciation of fixed assets. It gives boards a more accurate picture than pure cash without full accrual overhead, and it is common as budgets grow past roughly $500,000 (as of 2026 — verify). It is not full GAAP, so it generally will not support an unqualified audit opinion.
Can we keep cash books all year and switch to accrual only at year-end?
Yes — this is a common and legitimate approach. Many nonprofits maintain cash or modified cash records day-to-day because it is simpler for staff and volunteers, then have a nonprofit CPA convert to accrual at year-end to produce GAAP financial statements for the audit. The conversion records receivables, payables, accrued payroll, deferred revenue, depreciation, and the with/without-restriction split.