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As a rental property owner, you have the option of keeping your books using either the cash-basis or accrual-basis method. The accounting method you choose determines how your income and expenses are recognized for your tax returns. Although the cash-basis method is most popular for landlords, understanding the differences between cash and accrual accounting will help you determine which method is best for your books.
Today, we’ll introduce you to accrual and cash accounting, the advantages and disadvantages of each method, best practices for cash accounting, and a way to simplify your bookkeeping with rental property accounting software.
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Key Takeaways
- Accrual accounting recognizes income and expenses when they’re earned or incurred.
- Cash-basis accounting records transactions when money changes hands.
- Cash accounting provides flexibility for tax planning since rental property owners can strategically manage taxable income.
The Cash and Accrual Accounting Methods
To begin with, let’s get clear on a key term. An accounting method determines when a business recognizes income and expenses in its financial records. Typically, businesses can choose between two accounting methods: accrual or cash. The exceptions are if a company tracks inventory or if it has a gross annual income of more than $26 million. The IRS requires those companies to use accrual accounting.
Accrual Accounting
The most important thing to remember about accrual accounting is that it recognizes income and expenses when they are earned or incurred — not when you exchange funds. Let’s look at two common situations landlords face and how accrual accounting would affect the books.
First, let’s say you pay your annual insurance premium for your rental property. Even though you only pay once a year, the expense is broken down and recognized monthly, which spreads the cost out evenly during your coverage period.
Second, if your tenant pays the July rent in August, you would record that rent payment as income for July, not August, when you received the money.
Advantages of Accrual Accounting
With accrual accounting, you report income when you earn it — even if you haven’t received the funds. So if your tenant doesn’t pay rent for a month, that means you can deduct the uncollectible rent check from your gross income. That uncollectible rent counts as a bad business debt, as long as you can prove that you made reasonable efforts to collect it.
Ultimately, accrual accounting provides a clearer picture of a company’s financial operations because your reports show more accurately when you incur income and expenses. It’s useful for budgeting costs like bimonthly utilities and yearly insurance premiums. The accrual method also produces a more helpful (P&L) statement. The increased level of detail makes this method more popular with larger-scale landlords or property management companies.
Disadvantages of Accrual Accounting
The accrual method is more involved and complex. You’ll need to deal with prepaid expenses and journal entries to recognize costs in the appropriate months. That takes time, plus to understand your rental’s cash position, you’ll have to work with a cash flow statement.
Cash Accounting
With cash-basis accounting, you record transactions when money changes hands. Let’s go back to our two example scenarios to see how this affects the books.
For cash-basis books, you record tenant payments when you receive them, regardless of what period the rent covers. Did your tenant skip paying rent for July? If so, the P&L statement won’t show any income for July, even though the tenant owes you rent. If the tenant pays both July and August rent in August, your P&L will show the rent for both months as August income.
And when you pay the annual insurance premium, the entire amount is reflected in the P&L statement for that month, even though the expenditure applies to the entire year.
Advantages of Cash Accounting
Cash accounting is a more straightforward method — you don’t need to worry about prepaid expenses or deducting unpaid rents. With the cash-basis method, you can easily track your cash flow without needing an extra report. This clear-cut approach makes it a popular choice for small-scale rental property owners.
The cash-basis accounting method also has several tax benefits. Cash accounting lets you manage your taxable income and specify which expenses you want to deduct on your tax return. The cash-basis method gives you the flexibility to defer income for a later period or to accelerate cash payments to take advantage of higher deductible benefits. That flexibility makes cash accounting a strong option for rental property owners.
Let’s say you’ve gone over your planned income for the year and you’re in a higher tax bracket. You can manage your taxable income for the period by paying off additional expenses. For instance, you could make an extra principal payment on the mortgage or pay off a credit card. You could also pay in advance for a service. Any of these payments would lower your tax liability for the year.
Disadvantages of Cash Accounting
A drawback of cash accounting is the varying monthly costs associated with your rental properties. A single month may not reflect the average expenses for your unit, especially if you have an emergency repair or if you forget an invoice. This can make it difficult to build your budget, and these variances can cause you to over- or understate your cash flow for the month.
These variances are especially noticeable with utility bills that cover more than one month in one billing cycle. With cash accounting, your P&L will show no utility costs for one month, then 2 months’ usage for the next month.
Cash vs. Accrual Quick-Reference Chart
| Category | Cash-Basis Accounting | Accrual-Basis Accounting |
|---|---|---|
| When income is recorded | When income is recorded | When payment is actually received When income is earned, even if not yet received |
| When expenses are recorded | When payment is made | When expense is incurred, even if not yet paid |
| Example: Rent payment | Recorded when tenant pays (e.g., August 5) | Recorded when rent is due (e.g., July 1), even if late |
| Example: Insurance premium | Full cost recorded when paid | Cost spread out over coverage period (e.g., monthly) |
| Ease of use | Simple and intuitive for beginners | More complex; better suited for detailed financial tracking |
| Best for | Small-scale landlords and sole proprietors | Large-scale property businesses with multiple units or staff |
| Financial visibility | Shows actual cash flow | Shows the full financial picture, including outstanding items |
| IRS default for landlords | Allowed for most small-scale landlords | Required if you track inventory or have average annual gross receipts over $26 million (2025 limit) |
| Tax flexibility | Allows control over income/expense timing for deductions | Less flexibility in deferring or accelerating transactions |
Cash Accounting Best Practices
Consistent Recordkeeping
In most cases, the IRS lets you choose the accounting method that works best for you. However, once you decide on either cash or accrual accounting, be sure to use that method consistently. The IRS recognizes the method you use to first file your taxes, and you have to keep using that method from then on. You have to get IRS approval before you can switch methods.
Pro tip: Talk with your CPA or tax preparer about which accounting method is best for your situation.
Constructive Receipts
With cash-basis accounting, you record income when you receive it and report it in your gross income. That includes any constructive receipts or income that’s available to you or in your control, even if you haven’t touched it yet.
For example, let’s say your tenant gave their rent to the property manager. The rent money isn’t yet in your possession, but your agent accepted it on your behalf. You’d report that income, even though it hasn’t been deposited yet.
The same principle applies to rent checks left on your desk or in your mailbox. Report the funds when received, regardless of when you deposit them or when they clear your bank account. For cash-basis landlords, this is especially important at the end of the year.
If any tenants pay January rents in December, those funds count for this year. You can’t just skip or hold off on reporting a rent payment to reduce your income. This means advance rent payments are also reportable income for the year you receive the payment.
Bartered Payments
Sometimes, tenants offer goods or services instead of rent, a practice known as bartering. The IRS counts bartered payments as taxable income, so you’ll need to report any noncash income as well. For rental property owners, this means you’ll include the fair market value of the goods or services received in your reported income.
For example, let’s say your tenant is a plumber and offers to repair a plumbing problem in lieu of paying the full monthly rent. The fair market value of the repair is $450. You would record a journal entry like this:
| Account | Debit | Credit |
|---|---|---|
| Rental Income | $450.00 | |
| Total | $450.00 | $450.00 |
This entry increases your repairs and maintenance expense account by $450 because the tenant made the repair for you. Your income line also increases by $450 to account for the value of the rent.
Keep in mind that if you receive bartered services worth $600 or more, you may need to issue a 1099-NEC form in January.
Security Deposits
How you manage security deposits determines how you’ll record and report them.
When the deposit acts as the last month’s rent, that’s an advance payment, and you’ll report the deposit as income for the year you received the payment. If you plan to return the deposit once the lease ends, however, the deposit isn’t reportable income.
But if you keep all or part of the deposit, whether because of a lease violation, property damage, etc., any funds that you keep are considered reportable income.
Should landlords use cash or accrual accounting?
Real estate investors can benefit from either cash or accrual accounting, but before you decide on either method, ask yourself these questions:
- Are you okay with working with cash flow statements?
- Do you have the time and experience necessary to create more detailed bookkeeping entries?
Did you answer no? The cash-basis method could be a better option for you if you’re a small-scale real estate investor who needs straightforward tracking and reporting. Many rental property owners favor cash accounting because it offers simple bookkeeping, understandable reports, and tax advantages.
If you have a larger portfolio or need a more complete financial picture for long-term planning or reporting, accrual accounting might be the right fit for you.
Your specific situation will determine which method is best for you. Check with your accountant or tax preparer to find the best option for your rental property business.
Make Cash-Basis Accounting Even Easier with TurboTenant
At TurboTenant, we know that landlords like you value simplicity, clarity, and flexibility for managing rental finances. That’s why our platform defaults to the cash-basis accounting method. It’s the most popular choice for landlords, and for good reason: It’s easy to understand, helps you stay on top of your cash flow, and offers potential tax advantages.
With TurboTenant Accounting, you don’t need to worry about complex bookkeeping or setting up spreadsheets. Our system supports cash-basis accounting right out of the box. From automated imports and customizable rules to clear reports at the unit, property, or portfolio level, we built our platform to save you time and reduce stress.
Prefer accrual accounting? No problem — TurboTenant Accounting offers the flexibility to use either method so you can use the system that best fits your rental business. You can even work with your accountant directly in the platform by adding them as a user, making collaboration seamless during tax season or financial reviews.
Whether you’re just starting out with your first rental or managing a growing portfolio, TurboTenant makes accounting more accessible. With built-in templates, easy transaction tracking, and intuitive financial reports, you’ll have everything you need to stay organized and confident at tax time and beyond.
Don’t let bookkeeping hold you back. Set your rentals up for success with TurboTenant’s accounting tools — built for landlords like you.
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