How to Switch the Method of Accounting
Accounting for your business's income and expenses can be done in one of two ways, either with the cash or accrual method. The cash method is the recording of cash when you receive it. So, if you sell an item to a customer and agree to take payments on it, you don't record the cash until the whole item is paid for. The accrual method records the sale when it's made and accounts for the cash as it comes in. If you wish to change from one method to another, you must get approval from the Internal Revenue Service before filing your taxes for the year.
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Instructions
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Consult the Internal Revenue Service website or call them directly to find out if you are allowed to switch accounting methods. For example, if you have an inventory of items to sell, you may not be permitted to use the cash method.
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Change your method of accounting as soon as you are ready. If you use a computer program to record your transactions, make sure the program can make the switch to the other method. If not, obtain new software for making the switch.
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Review your income and either record all items that have been sold, but not paid -- if switching from cash to accrual -- or remove the income recorded from sales made but not yet paid for and start an accounts payable balance.
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Categorize your expenses appropriately to your new method of accounting.
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File Form 3115, the Application for Change in Accounting Method. Unless there are extenuating circumstances or the IRS contacts you, you can assume the change is made automatically once the form is filed and you should file your taxes with the new method.
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