What is the 'Accounting Method'

The accounting method is the method by which income and expenses are reported for taxation purposes. The Internal Revenue Service requires taxpayers to choose an accounting method that accurately reflects their income and to be consistent in their choice of accounting method from year to year. IRS approval is required to change methods. The chosen accounting method is based on regulation and tax minimization strategies.

BREAKING DOWN 'Accounting Method'

The two primary accounting methods in North America are cash and accrual accounting. Cash accounting reports income and expenses in the year they are received and paid; accrual accounting reports income and expenses in the year they are earned and incurred.

Cash, accrual, special and hybrid methods are all allowable choices if specified requirements are met.

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RELATED FAQS
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    Learn why the Internal Revenue Service cares about accounting practices, as these ensure the accurate reporting of financial ... Read Answer >>
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    Understand the differences between the two basic methods of accounting commonly used by businesses: cash accounting and accrual ... Read Answer >>
  3. How does accrual accounting differ from cash basis accounting?

    The main difference between accrual and cash basis accounting is the timing of when revenue and expenses are recognized. ... Read Answer >>
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