Accrual Method

The tax laws provide sets of rules for determining when you can claim a deduction and when you must report income. There are two major sets of rules. The simplest, which is used by individuals, is called the cash method of accounting. Under the cash method of accounting, you generally report income for tax purposes when you receive it and generally deduct expenses for the year you pay it. Under the accrual method of accounting, which is used by many businesses, partnerships, corporations, and so forth, income is reported and expenses deducted in the year to which they relate rather than the year when paid.