Cash basis, almost always — and the A/R you still track

Cash basis is the practice most solo owners run

A solo practice typically keeps its books on the cash basis: income counts the day it's actually received, and expenses count the day they're actually paid. That mirrors how a Schedule C return works for a self-employed clinician 1Ref 1Internal Revenue Service (2026).Self-employed individuals tax center.That self-employed clinicians file Schedule C, the return cash-basis bookkeeping is built to feed., and it's simpler to run without a bookkeeper on staff — no accruals, no matching revenue to the date you performed the service rather than the date you got paid.

Accrual accounting exists and has its uses — it's built for businesses carrying inventory or running at a scale where matching revenue to the period it was earned matters to lenders or investors. A service-based solo practice rarely has a reason to run that way. Almost any clinical or billing-of-one operation qualifies for cash basis and stays there for the life of the practice; the trade-off is what cash basis doesn't show you, which is the rest of this page.

What 'cash basis' actually changes about your revenue

Cash basis means a claim you billed in December but weren't paid on until February counts as February income, not December — the date of the deposit is what matters, not the date of the visit. That single rule is why cash-basis net income can swing month to month even when your clinical volume stays flat, and why a slow-paying claim can make a strong clinical month look weak on paper.

It also runs the other direction for what you owe. Ordinary and necessary business expenses are deductible the year you actually pay them under cash accounting, not the year you incur the obligation 2Ref 2Internal Revenue Service (2026).Guide to business expense resources.That ordinary and necessary business expenses are deductible, the standard governing when a cash-basis practice can deduct a paid expense. — a supply order charged in December but paid in January is a January deduction. Refunds work the same direction: a patient refund is recorded as an expense the day the money actually goes back out, not the day you decide to issue it — refunds on the books walks through getting that entry right.

The A/R gap cash basis doesn't show you

Cash-basis books tell you what landed in the bank; they don't tell you what's still owed. A claim sitting with a payer for six weeks, or a patient balance nobody has followed up on, doesn't show up anywhere in a pure cash-basis ledger — which is why relying on your bank balance alone leaves you blind to money you're actually owed.

That's why most solo practices run two systems side by side, not one:

two a/r numbers covers why those two figures rarely match and why that's normal rather than a sign something's broken. Checking your practice management system's aging report weekly — even for five minutes — catches a stalled claim while there's still time to appeal or resubmit it, instead of finding it six months later when the timely-filing window has already closed.

Equipment purchases are the exception to 'pay it, deduct it'

Cash basis doesn't mean every purchase is deductible the instant you pay for it. Equipment above a certain cost — an exam table, a server, imaging or diagnostic hardware — generally has to be capitalized and depreciated over its useful life under MACRS, or expensed up front through the Section 179 election if you qualify, rather than deducted in one lump the day you wrote the check 3Ref 3Internal Revenue Service (2026).Publication 946, How To Depreciate Property.MACRS depreciation and the Section 179 election as the exception to pay-it-deduct-it for capital equipment on cash-basis books..

Software subscriptions, supplies, and most day-to-day operating costs stay simple: pay it, deduct it, same year. It's the larger capital purchases where cash-basis simplicity runs into a separate set of rules, and where a conversation with your preparer before a big purchase — not after — decides whether you're spreading the deduction over several years or taking more of it now.

What an audit expects your cash-basis records to look like

If a return is examined, an auditor working from cash-basis records expects your bank deposits, card statements, and expense receipts to line up cleanly with what you reported 4Ref 4Internal Revenue Service (2026).IRS audits.What an IRS audit examines and expects records to demonstrate, applied to what a reviewer wants from cash-basis bank and card records.. The IRS generally wants supporting records kept for three years, longer if income was substantially underreported or the return involved employment taxes 5Ref 5Internal Revenue Service (2026).Recordkeeping.The 3/6/4-year financial-record retention windows that apply to cash-basis bank and expense records. — which for cash-basis books usually means keeping the underlying bank and card statements, not just a summary spreadsheet.

An audit-ready file is what a reviewer actually expects, not a single summary spreadsheet — audit-ready books covers what to keep and how to organize it before a request ever arrives. Financial-record retention and clinical-record retention also run on separate clocks: a behavioral-health record is commonly held years longer than a bank statement, always subject to your state's specific rule 6Ref 6American Psychological Association (2007).Record Keeping Guidelines.That clinical-record retention runs on a separate, typically longer schedule than financial records, always deferring to the reader's state rule. — so don't let one retention schedule substitute for the other.

Setting up the books: a real chart of accounts

A cash-basis practice still needs a real chart of accounts — separate categories for clinical revenue, contractual write-offs, supplies, payroll, and owner draws — rather than one undifferentiated business checking account. Getting that structure right once, before your first tax season, saves hours of reclassifying transactions every January and gives your preparer numbers they can actually use.

Choosing books software matters less than making sure it actually talks to your practice management system, rather than leaving you to re-enter the same deposit twice — most general small-business platforms handle cash basis natively. If a payment processor issues you a 1099-K, reconciling it against what actually hit your bank account is the 1099-k check worth running once a year, before you file rather than after a mismatch notice arrives.

Do this setup work before your first tax season rather than during it: a chart of accounts built in April, under deadline pressure, tends to collapse everything into a handful of vague categories that are hard to untangle later. An hour spent setting up clean categories in January pays for itself many times over by the time your preparer asks for a profit-and-loss statement.