Running a therapy practice means more than focusing on sessions with clients.

Behind the scenes, your method of accounting changes how your income, expenses, and tax return look. It also impacts how you manage money, view your financial health, and plan for the future.

Choosing between cash basis accounting and accrual accounting for therapists is one of the most important financial decisions for a practice.

What Is Cash Basis Accounting?

Cash basis accounting records revenue when you receive payment and records expenses when you pay bills.

If a client pays by card in January for December sessions, the income shows up in January. This method of accounting is often used in small therapy practices because the books stay simple.

Pros of Cash Basis Accounting for Therapists:

• Easy to maintain with single-entry bookkeeping or spreadsheets.
• Matches closely with your bank account, which makes reconciliation easier.
• Defers income recognition until cash is in hand, which may lower taxes in the short term.

Cons of Cash Basis Accounting for Therapists:

• Fails to reflect accounts receivable or accounts payable.
• Can make your financial statements misleading if payments are delayed.
• Limited insight into earnings and long-term financial planning.

What Is Accrual Accounting for Therapists?

Accrual basis accounting records revenue when it is earned and expenses when incurred, regardless of payment.

For example, if you complete a session in December but do not receive payment until January, the entry is recorded in December under accrual books.

Pros of Accrual Accounting for Therapists:

• Creates accurate financial statements that include assets, liabilities, accounts receivable, and accounts payable.
• Aligns earnings with related expenses, giving a clearer picture of financial health.
• Useful for corporations, group practices, or therapists who rely on insurance billing.

Cons of Accrual Accounting for Therapists:

• Requires double-entry bookkeeping, ledger entries, and regular bank reconciliation statements.
• Takes more time and often requires professional bookkeepers.
• Can show profit on paper while actual money flow is delayed, creating a double-edged sword for planning.

Cash vs. Accrual Comparison Table

Component	Cash Basis Accounting	Accrual Basis Accounting
Income	Recorded when payment is received	Recorded when services are provided
Expenses	Recorded when bills are paid	Recorded when costs are incurred
Financial Statements	Focuses on cash flow statement	Includes Balance Sheet, accrual books, and liabilities
Simplicity	Easier with cash basis books and spreadsheets	More complex, requires accrual method demands
Tax Return	Recognizes income later, deferring taxes	Recognizes income sooner, which can increase taxable income
Planning Insight	Provides limited details for business finances	Helps therapists make long-term planning decisions

How IRS Rules Affect Therapists in 2025

As of 2025, therapy practices with average gross receipts under $30 million can legally use the cash basis method.

This threshold allows many therapists to continue with simple cash basis books without breaking tax law.

However, if your practice is structured as a corporation or relies on insurance reimbursements, the accrual method may be required.

Insurance claims, unpaid invoices, and regular business expenses such as office maintenance are essential components of accrual accounting. These elements shape both your tax return and your Balance Sheet.

When Cash Basis Works Well

Cash basis accounting often suits therapists in solo private practice who collect client payments at the time of service.

If your business finances are straightforward, with expenses limited to office supplies, regular bills, and professional liability insurance, cash basis can keep operations simple. It allows you to reconcile your bank account quickly and gives you a clear sense of cash in hand.

For therapists who run their practice day by day with minimal staff, this option reduces complexity and keeps bookkeeping habits manageable.

When Accrual Accounting is the Better Choice

Accrual basis is more appropriate for therapy practices that handle delayed client payments, bill insurance, or employ contractors and part-time assistants.

If your office runs multiple sessions daily and invoices clients, accrual books help capture accounts receivable and accounts payable accurately. Financial statements under the accrual basis provide lenders, attorneys, or tax advisors with reliable data for decision-making.

For therapists considering expansion, the accrual method is often the only way to present a true picture of business operations.

Practical Factors to Consider

When deciding between the cash basis method and the accrual basis method of accounting, therapists should weigh three things:

• Taxes
• Complexity
• Growth

Cash basis may reduce taxable income in the short term, while accrual provides more accurate financial statements for long-term planning.

Accrual accounting concepts like accounts payable, ledger entries, and reconciliation might sound complex, but they become essential when practices grow beyond single-entry bookkeeping.

Once your practice exceeds IRS thresholds, switching requires approval and can no longer be handled with simple spreadsheets or historical bookkeeping.

Common Traps Therapists Should Avoid

• Ignoring accounts receivable in accrual books, which distorts the Balance Sheet.
• Skipping regular bank reconciliation statements, leading to potential errors in financial statements.
• Using single-entry bookkeeping when double-entry is required for accrual books.
• Confusing billable hours, session notes, or emails with actual money flow and cash flow statements.

Final Thoughts

The choice between cash basis and accrual accounting for therapists depends on the size, structure, and complexity of your practice.

Cash basis accounting works for many solo therapists because it keeps books simple, ties directly to cash flow, and makes reconciliation easy.

On the other hand, accrual basis provides deeper insight into business finances, accounts receivable, and overall financial health, but it requires time, regular ledger entries, and often professional bookkeepers.

Both methods carry benefits and drawbacks, and both can become traps if chosen without understanding the differences.

If you want expert guidance on the right method of accounting for your therapy practice, our accounting team is ready to help.

Ready to make the right accounting decisions? Leichter CPA can help.