Under the cash method of accounting, income is generally recorded when you actually receive it, and expenses are generally recorded when you actually pay them.
However, there are exceptions:
- Under the doctrine of constructive receipt, you must record income when it's made available to you for your use
- Example: A customer pays you on December 30, 2023for services you performed, but you don't deposit the check until January 2, 2024. You must record the payment as 2023 income. You can't defer it until 2024 just because you deposited the check in 2024.
- Similarly, if you prepay certain expenses that benefit you in the two years following the year of payment (for example, payment made in 2023 that gives you a benefit in 2025) or you made payment more than 12 months in advance, you can't deduct the entire expense right away
- Example: On July 1, 2023, you pay for a two-year subscription to a trade journal. You can deduct 1/4 of the payment in 2023, 1/2 in 2024, and 1/4 in 2025. You can't deduct the entire amount in 2023.
Many businesses without inventories use the cash method because it's fairly simple. Farming businesses with gross receipts of $27 million or less, qualified personal service corporations, and entities with average annual gross receipts of $27 million or less in the prior three-year period, may use the cash method.
