In general there are two methods of accounting available for use by a business. Below is information on both the "cash method" and "accrual method" of accounting and also on how to change your method of accounting if necessary.
Per IRS Instructions for Schedule C (Form 1040) Profit or Loss From Business, starting on page C-3:
Generally, you can use the cash method, an accrual method, or any other method permitted by the Internal Revenue Code. In all cases, the method used must clearly reflect income. Unless you are a small business taxpayer (defined later in Part III), you must use an accrual method for sales and purchases of inventory items. Special rules apply to long-term contracts (see section 460 for details).
If you use the cash method, show all items of taxable income actually or constructively received during the year (in cash, property, or services). Income is constructively received when it is credited to your account or set aside for you to use. Also, show amounts actually paid during the year for deductible expenses. However, if the payment of an expenditure creates an asset having a useful life that extends beyond 12 months or the end of the next taxable year, it may not be deductible or may be deductible only in part for the year of the payment. See chapter 1 of Pub. 535.
For amounts includible in income and deductible as expense under an accrual method, see Pub. 538.
To change your accounting method, you generally must file Form 3115. You also may have to make an adjustment to prevent amounts of income or expense from being duplicated or omitted. This is called a section 481(a) adjustment.
To access Form 3115 Application for Change in Accounting Method in the TaxAct® program:
Note. If you see a message indicating you have not paid your return fees, click the View/Pay your return fees link, which will direct you through the Paper Filing steps. Continue through the screens until you have processed the payment for your product fees and then repeat the steps to print.
Form 3115 can be e-filed with the return, along with most of the Statement of Explanations associated with this form. You can access the Statement of Explanations worksheet by clicking on the blue Attachment(s) appearing on the Form 3115, then clicking the manila folder icon.
Alternatively, if you need to attach additional documentation, you can do so by mailing Form 8453 U.S. Individual Income Tax Transmittal for an IRS e-file Return. Note. The rest of the return can still be e-filed. To indicate this form will be attached and mailed with Form 8453, along with any additional documentation:
Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.