Primarily, individuals and sole proprietors who do not have inventory use the cash method of accounting. If inventory is necessary to account for your income, the accrual method of accounting is used for sales and purchases. Within the cash method, you must include all items of income you receive during the year in your gross income. Should you receive property or services, you must include the fair market value of the property or service in your total income.
You need not have possession of received income in order to be required to report it. If you authorize someone else to receive income for you, you are considered to have received the income when the authorized person has received it. You may not postpone taking possession of money or property to avoid paying taxes on the income. You are required to report the income in the year that it has become available to you. If you received a check as income on the last day of the year and were unable to cash or deposit that check before the following year, you are still required to report that income in the year that the check was received.
Should your creditors cancel your debts or another person pay them for you, you may be required to report all or part of this debt-payment as income. If in a previous year you had reported income which you were forced to repay in a subsequent year, the amount of repayment can usually be deducted on your tax return in the year it was made.
As far as deducting expenses goes, you are required to deduct expenses in the tax year you actually pay them. Expenses paid in advance can only be deducted in the year to which it applies.