 accounting for the change in the current year going forward. So change in payment schedule for services. So if you perform services for a basic rate specified in a contract, you must accrue the income at the basic rate, even if you agreed to receive payments at a lower rate until you complete the services and then receive the difference. So that might be applicable in more kind of a complex type of situation. Possibly you have a longer type of contract that would be involved. So change in the payment schedule. Advanced payments. Payment in advance flower. Generally you report an advanced payment as income in the year you receive the payment. Now notice on an accrual method, usually what happens in an accounting system is you get paid at the same point in time or you do the work first. That's what most businesses kind of do, right? Meaning I'm in a restaurant, I get paid at the same time I provide the food or I'm a bookkeeper or a lawyer, in which case I do the work first, figure out how many hours it took me and then I've got to bill the client, track the accounts receivable, get paid later. But you could have a situation where they give you money in advance. They give you money first before you do the work. Now in that case you wouldn't actually record the revenue on an accrual base system until you did the work. But now the IRS is saying, hey you've got the money, we want our piece of it when you get it. So you can see where the IRS would want to make an exception if you already got the money in advance of when you did the work and they might want their piece there. So however if you receive an advanced payment you can elect to postpone including the advanced payment in income until the next year. You cannot postpone including any payment beyond that tax year. So for more information see publication 538 and section 451 that's probably more of an unusual situation and or one that's going to be specific to a particular industries. So expenses under an accrual method of accounting you generally deduct or capitalize a business expense when both the following apply. One, the all events test has been met, the test has been met when a all the events have occurred that fix the fact of liability and two the liability can be determined with reasonable accuracy. So now we're on the expense side of things which at the end of the day you would think that cash would be going out of of the company but we're on an accrual method system so we're not going to record it simply when cash goes out although if it was an easy transaction you paid for something you got the services at that point in time the accrual and cash methods would be the same it's when there's a difference between when you incurred the expense and when you paid for the expense that the accrual and cash methods could come out to a different time frame in terms of when you would record the expense. So basically you want to record the expense when it has been incurred and that's why we have the events test all events have occurred that fixed the fact of a liability meaning you owe money at that point in time because you have incurred the services you have a contract the services have been done you owe the money even if you have not yet paid it at that point in time be the liability can be determined with reasonable accuracy meaning the contract is usually fairly straightforward before the work was done you could you know how much you're going to owe after the work is done and so on even if you have not yet paid it so you can determine how much to be it's going to be paid so number two economic performance has occurred meaning the work has actually been done meaning you have now incurred the liability because the work has been done that's usually going to be an increase in say accounts payable a liability and then recording the expense from a journal entry standpoint. So income performance you generally cannot deduct or capitalize a business expense until economic performance occurs if your expense for property or services provided to you or for your use of property economic performance occurs as the property or service are provided or as the property is used so so notice that with the expense side of things the IRS is going to be skeptical that you're going to over report your expenses reporting expenses early because expenses are actually good for taxes everything's flipped on its head so you got to keep that framework in mind for income they're going to probably be skeptical that you're going to try to delay the income and report the income later because income is bad for taxes right so if your expenses is for property or services you provide to others economic performance occurs as you provide the property or service so an exception allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred for more information on economic performance see economic performance under accrual method in publication 538 if you want to dive into that exception example so you are a calendar year tax payer and use an accrual method of accounting you buy office supplies in December 2022 you receive the supplies and the bill in December but you pay the bill in January 2023 you can deduct the expense in 2022 because all events that fix the fact of liability have occurred the amount of the liability could be reasonably determined and economic performance has occurred so one more time let's just think about those three because all events fixed uh of the fact of liability have occurred meaning you know what the liability is and and it has occurred you've received you know the supplies that you purchased the amount of the liability could be reasonably determined you probably already know how much you you're going to owe because that would be in the you know in the contract of the purchase and economic performance has occurred in that in that year in other words you've got the the stuff already even if you have not yet paid for it therefore they have completed their side of the job so your office supplies may qualify as a reoccurring expense in that case you can deduct them in 2022 even if the supplies are not delivered until 2023 so possibly if you have this reoccurring kind of thing then maybe there's like an exception to the general rule and again you can look at the publication if you want to dive into that in more detail keep in inventories when the production purchase or sale of merchandise is an income producing factor in your business you must generally take inventories into account at the beginning and end of your tax year unless you are a small business taxpayer so note if you have inventory then usually you're going to have to buy the inventory meaning you might pay for the inventory at the time you purchase but still put it on the books as an asset so it's kind of similar to buying like like a large building or equipment you have to kind of capitalize it on the books as an asset you're not expensing it at the point in time of purchase generally and if you have to do that you're doing an accrual thing that's why inventory lends itself to being an accrual component because you're not going to expense the consumption of the inventory until you sell it in the form of cost of good sold so if you're a small business maybe you can still get away with like a cash-based system when you deal with inventory but if you're getting larger and you have a lot of inventory that's on hand by nature you'd be on an accrual-based type of system and I believe the second page of the of the schedule C is the is where you've got the calculation to calculate your inventory which is like beginning inventory plus purchases minus ending inventory gives you you know the cost of good sold calculation that you're going to have to generate when you're dealing with inventory so if you must account for an inventory you must generally use an accrual method of accounting for your purchase and sales for more information you could see inventories later special rule for related persons you cannot deduct business expenses and interest owed to a related person who uses the cash method of accounting until you make the payment and the corresponding amount is included and the related person's gross income so now you've got related transactions notice it gets messy when you're dealing with business of a relative someone that's related right because then you can start to manipulate the transactions and the timing of the transactions between the two entities right the two entities that are doing the transaction so in that case you would need to line up the same timing in order to properly you know record things the errors is going to be skeptical that you're going to use the two entities to manipulate the timing of the transactions so determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible so if a deduction is not allowed under this rule the rule will continue to apply even if your relationship with the person ends before the expense or interest is included in gross income of that person related persons include members of your immediate family including siblings other whole or half your spouse ancestors and lineal depend descendants obviously related transactions from the iris perspective are going to be skeptical of them