TN 9 (02-98)
RS 01803.101 When NESE are Derived
NESE include gains, profits and compensation credited to or set apart for the owner's or partner's use during the taxable year. The two most commonly used methods of accounting are the “cash method” and the “accrual method.” The individual must use the method which most accurately reflects his income and expenses.
2. Cash Method
The cash method involves offsetting actual or “constructive” cash receipts against actual cash disbursements for deductible expenses in the same taxable year. Constructive receipt means the income becomes unqualifiedly subject to the demand of the taxpayer.
If a person's business is one in which inventories are necessary, cash basis accounting is not permitted with respect to purchases, sales, and inventories.
3. Accrual Method
Under the accrual method, net income is measured by the excess of income earned over expenses incurred. Cash, property, or services earned during the taxable year have accrued to the taxpayer and is classified as income, even though not then received.
NOTE: Do not question the method used if the taxpayer has reported consistently using the same method.