An accounting method is a set of rules used to determine when and how income and expenses are reported. You must file your return using the same method you use for your tax records. An accrual method. Special methods for certain items of income and expenses.
Most farmers use the cash method because they find it easier to keep cash method records.
However, if you use an inventory to figure gross income, you must use an accrual method of accounting for purchases and sales. Certain farm corporations and partnerships, or any tax shelter, cannot use the cash method. If you receive property or services, you must include their fair market value in income. Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. The purpose of this method of accounting is to match income and expenses in the correct year.