 Most of this information comes from the tax guide for small business for individuals who use Schedule C, Publication 334, Tax Year 2022. You can find on the IRS website, irs.gov, irs.gov. Looking at the income tax formula, we're focused on line one income. Remembering that the first half of the income tax formula is, in essence, an income statement, although just an outline of scaffolding other forms and schedules flowing into it. For example, the Schedule C, the business income, which is, in essence, another form of income statement, having income minus expenses or business deductions, the net income then flowing into line one income of the income tax formula. This is page one of the 1040. We're focused on line number eight. Schedule C would flow into the Schedule One, which would flow into here, page one of the form 1040. This is a Schedule C form, profit or loss from business where we can see, in essence, an income statement, income minus expenses or business deductions. All right, let's talk about the accounting methods now. Accounting methods, remember the main two that should kind of come to mind is an accrual accounting method and a cash-based accounting method. Many people think of those things as complete opposites of each other, but they're not really opposites of each other. You could have a combination of the two methods and that will often be dependent upon the type of industry that someone is in. So for example, small businesses might be paying their expenses on a cash-based type of system and that would be an easy thing to do oftentimes from a bookkeeping perspective, but sometimes they might not be able to be on a cash-based system for the receipts on the revenue side, because possibly they are in the type of industry where they have to invoice their clients and deal with accounts receivable, which is an accrual kind of component. So then the question is, are we on a cash-based system? Are we on an accrual-based system? Sometimes inventory, for example, is something that pushes us over to needing to have more of an accrual-based system, like with the accounting- The account, like CPA account? Periods, it's important to get the accounting method correct if we can the first time because the IRS is gonna be skeptical of us changing accounting methods. It may be possible to do it, but we might have to request a change in accounting method, the IRS being skeptical of people changing accounting methods because you can kind of manipulate the cutoff dates and manipulate your tax bills if you were able to constantly change from say an accrual method to a cash-based method. Now note, when you look at most of the income tax other than a schedule C, most of the times we're on a cash-based system. So when we pay for things like on a schedule A, can we deduct our sale, our taxes for the state taxes on the schedule A or charitable contributions and so on and so forth, those are typically drawn from a cash-based system. We have to actually have paid them in the tax year in order to deduct them. And that's usually an easier system to use because we can track the cash payments that took place. So we may be able to do that on the business side as well, but when you look at bigger businesses then usually the standard method to be used there is an accrual method which is thought to be more accurate because in an accrual method, we record income and expenses when we have earned the income and when we have incurred the expense. Notice that if you have a cash-based system, you can actually do more manipulative stuff. You can basically try to prepay that your cash or delay the payments that you're gonna be receiving and try to manipulate the cutoff dates which can manipulate your taxes by just basically adjusting when you're gonna be paying and receiving instead of tying the expenses and income to when you actually earned the revenue and when you actually incurred the expense. However, the cash-based method is often easier. So therefore there's this back and forth this interplay between a cash-based and an accrual-based method. Sometimes the IRS will require an accrual-based method under certain circumstances such as possibly if you had a lot of inventory, they might say, hey, look, inventory is an accrual type of thing because you have to track the inventory as an asset. Those are assets, undeniable assets. And therefore it's more likely that you would be on an accrual system than a cash system.