Accounting Methods An accounting method is a set of rules used to determine when andhow income and expenses are reported. The term "accounting method"includes not only the overall method of accounting you use, but alsothe accounting treatment you use for any material item. You choose your method of accounting when you file your first taxreturn. If you want to change your accounting method after that, youmust get IRS approval. See Change in Accounting Method,later. No single accounting method is required of all taxpayers. You mustuse a system that clearly shows your income and expenses, and you mustmaintain records that will enable you to file a correct return. Inaddition to your permanent books of account, you must keep any otherrecords necessary to support the entries on your books and taxreturns. You must use the same accounting method from year to year. Anaccounting method clearly shows income only if all items of grossincome and all expenses are treated the same from year to year. If you do not regularly use an accounting method that clearly showsyour income, your income will be figured under the method that, in theopinion of the IRS, clearly shows your income. Methods you can use.Subject to the preceding rules, you can compute your taxable incomeunder any of the following accounting methods. Cash method. Accrual method. Special methods of accounting for certain items of incomeand expenses. Combination (hybrid) method using elements of two or more ofthe above. The cash and accrual methods of accounting are explained later. Special methods.This publication does not discuss special methods of accounting forcertain items of income or expenses. For information on reportingincome using one of the long-term contract methods, see section 460and its regulations, and section 1.451-3 of the regulations.Publication 535, Business Expenses, discusses methods fordeducting amortization and depletion. The following publications alsodiscuss special methods of reporting income or expenses. Publication 225, Farmer's Tax Guide. Publication 537, Installment Sales. Publication 946, How To Depreciate Property. Combination (hybrid) method.Generally, you can use any combination of cash, accrual, andspecial methods of accounting if the combination clearly shows incomeand you use it consistently. However, the following restrictionsapply. If an inventory is necessary to account for your income, youmust use an accrual method for purchases and sales. You can use thecash method for all other items of income and expenses. SeeInventories, later. If you use the cash method for figuring your income, youmust use the cash method for reporting your expenses. If you use an accrual method for reporting your expenses,you must use an accrual method for figuring your income. Any combination that includes the cash method is treated asthe cash method. Business and personal items.You can account for business and personal items under differentaccounting methods. For example, you can figure your business incomeunder an accrual method, even if you use the cash method to figurepersonal items. Two or more businesses.If you operate two or more separate and distinct businesses, youcan use a different accounting method for each if the method clearlyreflects the income of each business. They are separate and distinctif books and records are maintained for each business. If you use the accounting methods to create or shift profits orlosses between businesses (for example, through inventory adjustments,sales, purchases, or expenses) so that income is not clearlyreflected, the businesses will not be considered separate anddistinct.