Tax Year and Accounting Method Choices

An accounting method is a set of rules used to determine when income and expenses are reported on the taxpayer's tax return. His or her accounting method includes not only the overall method of accounting, but also the accounting treatment he or she uses for any material item.
The taxpayer can choose an accounting method when he or she files his or her first tax return. If the taxpayer later wants to change his or her accounting method, he or she must get IRS approval.
No single accounting method is required of all taxpayers. The taxpayer must use a system that clearly reflects his or her income and expenses and he or she must maintain records that will enable him or her to file a correct return. In addition to the taxpayer's permanent accounting books, he or she must keep any other records necessary to support the entries on his or her books and tax returns.
The taxpayer must use the same accounting method from year to year. An accounting method clearly reflects income only if all items of gross income and expenses are treated the same from year to year.
If the taxpayer does not regularly use an accounting method that clearly reflects his or her income, the taxpayer's income will be refigured under the method that, in the opinion of the IRS does clearly reflect income. In general, a taxpayer  can compute his or her taxable income under any of the following accounting methods:

• Cash method;
• Accrual method;
• Special methods of accounting for certain items of income and expenses;
• A hybrid method which combines elements of two or more of the above accounting methods.