Accounting methods

There are two principal methods of accounting: cash basis and accrual basis. Use of a particular method determines when deductions and income can be claimed.

Generally speaking, with accrual-basis accounting, revenues are recognized when they are earned (meaning when products or services are delivered or provided) and realized (meaning cash has been received or will be received in the near future). Expenses are recognized during the time period when all related revenues are recognized. With cash-basis accounting, revenues are recognized when cash has been received. Expenses are recognized when cash is paid.

Restrictions apply for both methods of accounting. Also, the form of business organization may preclude the use of the cash method of accounting. Consult with your tax professional to make the accounting method that fits your business and circumstances.