2.1.1.3. Accounting Method
An accounting method is a set of rules used to determine when and how income and expenses are reported to the tax authorities. The two most common accounting methods are the cash method and the accrual method. Under the cash accounting method, income is reported when a payment is actually received. Expenses are reported when they have been paid. Under the accrual accounting method, income is reported when it has been earned or is due. Expenses are recognized when they are incurred, whether or not they have been recorded as paid.
Example: Arturo’s Five and Dime acquires merchandise costing $50,000 in December, of which $20,000 is paid in cash and $30,000 on account. It also had paid the last three months’ rent for the storefront in late September, amounting to $30,000. Sales in December were $80,000, with $25,000 in cash payment and the rest on credit.
With cash accounting, Arturo must record for the month of December $20,000 in expenses and $25,000 in revenue received. No cash was paid in December for rent, having been paid and recorded back in October. If there were nothing else on his income statement, he wo