Start A Business

Step 1: Accounting Method

An accounting method is a set of rules used to determine when and how to report income and expenses in your books and on your income tax returns. The two basic accounting methods are the:

1. Cash method
2. Accrual method

Under the cash method, you report income you receive during the year. You usually deduct expenses in the tax year you pay them.

Under the accrual method, you generally report income when you earn it, even though you may receive payment in a later year. You deduct expenses in the tax year you incur them, whether or not you pay them in the same year.

If you need inventories to show income correctly, you must generally use an accrual method of accounting for purchases and sales. Inventories include goods held for sale in the normal course of business. They also include raw materials and supplies that will physically become a part of merchandise intended for sale.