Types of accounting methods.
Generally, you can use either of the following accounting methods.
- Cash method (Most common)
- Accrual method
Under the cash method, include income when you actually receive it and deduct expenses when you pay them during the tax year.
You generally report income in the year earned - not necessarily received and deduct expenses in the year incurred - not necessarily when paid.
Once you have set up your accounting method, you must receive approval from the IRS before you can change it.
For additional information about Accounting Methods see Publication 225