Accrual accounting is the standard for manufacturing businesses. The IRS requires it in most cases, and even when cash basis is technically allowed, accrual gives you a clearer picture of your actual production costs and profitability.

The IRS rule comes down to inventory and revenue. If your business carries inventory and has average annual gross receipts above $29 million, you must use accrual. Below that threshold, the Tax Cuts and Jobs Act created a small business exception that allows cash basis even with inventory. But being allowed to use cash doesn’t mean it’s the right choice.

Manufacturing involves raw materials, work-in-progress, and finished goods. You purchase materials weeks or months before they become sellable products, and those products might sit in inventory before a customer buys them. Cash accounting records expenses when you pay and revenue when you collect. That timing gap makes it nearly impossible to understand whether a specific production run was profitable or whether you’re pricing jobs correctly.

Accrual accounting records revenue when earned and expenses when incurred. When you ship $80,000 worth of product in April, accrual shows $80,000 in revenue for April along with the materials and labor costs that went into those units. You can see actual margins by product line or job. Cash basis would show the revenue whenever the customer pays and the expenses whenever you paid for inputs. Your monthly financials would be meaningless for decision-making.

Working with a manufacturing-focused accounting team helps ensure your books reflect how production actually works, not just when cash moves.

Lenders and investors expect accrual-based financial statements. If you’re pursuing a line of credit, equipment financing, or outside investment, they want GAAP-compliant statements. That means accrual.

Inventory costing is a related decision. Once you’re on accrual, you choose how to value inventory: FIFO, LIFO, or weighted average. FIFO matches older costs against current sales. LIFO matches recent costs, which can reduce taxable income when material prices rise. Weighted average smooths fluctuations. The right choice depends on your cost trends and tax strategy.

If you’re a smaller manufacturer currently on cash basis and wondering whether to switch, the answer is usually yes. The operational clarity is worth more than the simplicity of cash accounting. Our Nampa tax and accounting team can help you evaluate the transition and set up your books to track costs the way manufacturing actually works.