In most circumstances, it is legal for a business to keep two sets of accounting records. There are a number of legitimate reasons why a business would want to do this. For example, the Internal Revenue Service mandates that certain kinds of businesses use the accrual method for accounting, while the business owner himself may prefer to use the cash method. The IRS also imposes certain legal formulas and methodologies for depreciation, depletion and other accounting concepts that may not neatly apply to the specific circumstances. The business can keep two sets of records, one using generally accepted accounting principles and one that satisfies IRS requirements.
Accounting is simply the discipline of recording business income and expenses and allocating it to the appropriate time period. In most business contexts, accounting is governed by GAAP, or generally accepted accounting principles. There is a certain amount of judgment that comes into play. What is usually important is not the specific rules adopted but that the accounting rules chosen are consistently applied.
Cash Versus Accrual Method
There are two main accounting methods: cash and accrual basis. In cash method accounting, the business must recognize any business expenses in the year in which they are incurred, and income in the year in which the income is actually received. In the accrual method, you must recognize income in the year you actually make the sale, even if the customer hasn't paid the invoice yet. The cash method is much simpler to administer and understand. But the accrual system is widely considered to be more accurate, in some instances. The IRS requires businesses engaged in the sale of merchandise to use the accrual method.
In some cases, companies are required to keep two sets of accounting records. For example, publicly traded companies are required to use GAAP by the U.S. Securities and Exchange Commission. But GAAP and IRS depreciation rules don't always match up. Companies routinely account for earnings and expenses differently on their annual reports, compared with their tax returns.
While it is legal for companies to maintain more than one set of financial records, it is still against the law to defraud or attempt to defraud creditors, investors or the government. Businesses may not use multiple sets of financial records to conceal information from their shareholders, prospective shareholders, creditors or the IRS.