Your life will be complicated considerably if you try keep two sets of records for your business. For example, the federal government has very specific rules on how much depreciation you can deduct each year on equipment, vehicles, and buildings. You can use depreciation methods for your own financial reporting purposes that differ from Uncle Sam's tax rules. But using two separate depreciation methods will either cost you a lot more time keeping track, or will cost you more money as you pay your accountant to keep track of them for you. Another example is the use of the cash or accrual accounting methods .
Most small businesses can use the cash method for tax purposes .
However, some businesses must use the accrual method. We recommend the accrual method for all businesses, for both tax purposes and financial reporting. The accrual method gives you a clearer picture of the financial status of your business, and it's just too expensive, in terms of time and money, to keep two separate sets of books. If you are thinking about using the cash method of accounting for tax purposes, you should discuss these rules with your accountant. If you do use the accrual method, one adjustment you'll have to make to your books for tax reporting purposes involves your treatment of bad debts .