Keeping your books and doing your taxes based on the same method of accounting will facilitate your financial reporting and preparation of tax returns. But differences in the treatment of some items will undoubtedly arise, when the tax rules specifically define how certain types of transactions must be reported for income tax purposes.
One of the decisions you will have to make, when you set up your accounting and record-keeping for a new business, is whether you will keep your books on a cash basis or accrual basis. This same decision applies to how you will report your earnings for income tax purposes. There are basically two methods of accounting - the cash method and the accrual method. Under the cash method, you record income in the year it is received and expenses in the year they are paid. Under the accrual method, you record income in the year it is earned, regardless of when it is received, and expenses in the year they are incurred, regardless of when they are paid.
The U.S. Internal Revenue Service (IRS) does not require taxpayers to use one method or the other. What the IRS does require is that the method you use must clearly reflect your income and expenses, and enable you to file a correct income tax return. The method you use must be supported by your permanent books of account, and you must keep all records necessary to support the entries on your books and the amounts reported on your tax returns.
You choose the accounting method you are going to use when you file your first tax return. You must then continue to use this method consistently from year to year. If you later want to change your accounting method, you will need to get IRS approval.
If you have more than one business, you can use different accounting methods for each business, provided the method you use clearly reflects your income and expenses for that business. You should keep complete and separate sets of books and accounts for each of your businesses.