by Gregory J. Cook, EA, CPA
Accredited Tax Advisor
You choose an accounting method for your business when you file your first income tax return. An accounting method is a set of rules used to determine when and how income and expenses are reported. There are two basic accounting methods.
Cash method - Under the cash method, you report income in the tax year you receive it. You usually deduct or capitalize expenses in the tax year you pay them.
Accrual method - Under an accrual method, you generally report income in the tax year you earn it, even though you may receive payment in a later year. You deduct or capitalize expenses in the tax year you incur them, whether or not you pay them that year.