J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Accounting Methods

An accounting method is a set of rules used to determine when and how to record income and expenses on your books and for tax-reporting purposes.

There are 2 principal methods of accounting: cash basis and accrual basis. Use of a particular method determines when a deduction can be claimed. However, restrictions apply for both methods of accounting. Also, the form of business organization may preclude the use of the cash method of accounting even though it may be the method of choice.

Cash Method

Cash method is the simpler accounting method. Income is reported when it is actually or constructively received and a deduction can be claimed when and to the extent the expense is paid.

Example

You are a consultant. You perform services and send a bill. You report the income when you receive payment. Similarly, you buy business cards and stationery. You can deduct this expense when you pay for the supplies.

Actual receipt is the time when income is in your hands. Constructive receipt occurs when you have control over the income and can reduce it to an actual receipt.

Example

You earn a fee for services rendered but ask your customer not to pay you immediately. Since the customer was ready and able to pay immediately, you are in constructive receipt of the fee at that time.

Payments received by check are income when the check is received even though you may deposit it some time later. However, if the check bounces, then no income results at the time the ...