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