Accounting Period & Change In Accounting Method
                     ACCOUNTING PERIOD & 
CHANGE IN ACCOUNTING 
METHOD
The business operations of any organization 
depend a lot on the accounting method and 
accounting period they choose. In this blog, we will 
take a detailed look at these two important points.
WHAT ARE THE 
DIFFERENT TYPES OF 
ACCOUNTING 
PERIODS?
CALENDAR 
YEAR:
As the name suggests, it’s a year that 
starts from January 1st and ends on 31st 
December. Generally, sole proprietorships, 
partnerships, personal service 
corporations, and S Corporations opt for 
this year. In some cases, with special 
permission from the IRS, they can use a 
different period, especially useful for those 
managing Accounting Services.
FISCAL YEAR:
A fiscal year is commonly used by seasonally operated 
businesses. It’s made up of 12 consecutive months, 
except December.
SHORT TAX 
SYhEoArt Rta:x year is the the period of less than 12 months. 
It’s used during the year when a particular business is 
formed, dissolved or the accounting period is changed.
52-53 WEEK TAX 
AYnE eAnRtit:y can choose this tax year that ends on the same 
day of the week each year. This may or may not 
correspond to the last day of a calendar month. 
Businesses typically opt for the closest date to the end of 
the month.
HOW TO CHOOSE 
YOUR ACCOUNTING 
PERIOD?
A business has to file its tax return in the 
period it wants to set its accounting period. 
But if a business wants to change its 
accounting period, it can fill the Form 1128. 
This is an application form to Adopt, 
Change, or Retain a Tax Year. Once the IRS 
approves this application form, the 
business can change its accounting period. 
The change in the accounting period could 
be the result of restructuring, 
incorporation, or alignment with industry 
standards.
ACCOUNTING 
MCAESHT HODS
TMhEis TisH thOe Dm:ost simple accounting method, 
especially suited for 
Small Business Accounting. In this method, 
revenues and expenses are noted at the 
time cash is received or paid. It is highly 
intuitive as it involves actual cash flows. 
The best part? It does not require tracking 
receivables or payables. It offers simplicity 
and a clear view of how much cash the 
business actually has on hand at any given 
time. Small businesses and individual 
proprietors often prefer this method 
because it is easier to maintain and there is 
no need to track money that is owed or 
owing.
However, the Cash Method can provide a misleading picture of longer-term 
financial health. Since it records transactions only when cash changes hands, it 
can show a business to be highly profitable in one period (when receiving 
prepayments) and less profitable later when the cash inflows are lower. So 
despite its simplicity, this method may not deliver accurate financial condition 
of the business. The main reason is, that it does not consider debts and 
receivables into account.
Example: Using the same landscaping business scenario, under the accrual 
method, the $5,000 received on June 30th is recorded as unearned revenue, 
and only $1,000 (one-fifth of the total for one month of service) is recognized as 
income in June. The remaining $4,000 will be recognized as income over the 
next four months. Similarly, if the lawnmower was delivered and used starting 
in June but paid for in July, the expense would still be recorded in June’s 
financial records because that’s when the asset began to be used in the service 
provision.
ACCRUAL 
METHOD:
Conversely, the Accrual Method provides a 
more comprehensive portrayal of a 
company’s financial status. This method 
records income items when they are 
earned and expenses when they are 
incurred, regardless of when cash 
transactions occur. This approach aligns 
expenses with related revenues in the 
same accounting period, which adheres to 
the matching principle of accounting — a 
cornerstone of accrual accounting.
This method is more complex as it requires maintaining detailed records of all 
credit transactions and the status of all receivables and payables. It is more 
labor-intensive than the cash method but provides a more accurate financial 
picture, especially for larger companies or those with a lot of credit 
transactions. It allows businesses to forecast financial trends more effectively 
and prepare more comprehensive financial statements, which are crucial for 
attracting investors or obtaining loans.
Example: Using the same landscaping business scenario, under the accrual 
method, the $5,000 received on June 30th is recorded as unearned revenue, 
and only $1,000 (one-fifth of the total for one month of service) is recognized as 
income in June. The remaining $4,000 will be recognized as income over the 
next four months. Similarly, if the lawnmower was delivered and used starting 
in June but paid for in July, the expense would still be recorded in June’s 
financial records because that’s when the asset began to be used in the service 
provision.
HYBRID METHOD:
The Hybrid Method combines elements of 
both cash and accrual accounting and is 
used by businesses that prefer the 
flexibility to tailor the accounting methods 
to different types of transactions. Typically, 
this method uses the accrual approach for 
inventory and other significant assets while 
employing the cash method for income and 
expenses, providing a middle ground 
between the operational simplicity of the 
cash method and the comprehensive detail 
of the accrual method.
This method can be particularly beneficial for businesses that manage a large 
inventory but do not want to employ full accrual accounting for all operations. 
By using accrual accounting for inventory, businesses can accurately track the 
cost of goods sold and inventory levels, which is important for producing 
accurate financial statements. Meanwhile, using the cash method for other 
transactions reduces the complexity and maintenance of the accounting 
system.
Example: Imagine a business that sells both services and products. It uses the 
accrual method to account for product sales and inventory but uses the cash 
method for its service revenue and associated expenses. If it receives an 
advance of $3,000 in June for a consulting project to be conducted over the 
next three months, this amount is recorded as revenue in June itself (cash 
method). Conversely, if it sells $2,000 worth of products in June but won’t 
receive payment until July, the $2,000 is still recorded as June revenue (accrual 
method). Expenses are handled in a similar mixed approach depending on their 
nature.
CHOOSING AND 
CHANGING THE 
ACCOUNTING 
METHOD
Businesses select their accounting method 
when they file their first tax return. To 
change the accounting method afterward, 
they must file Form 3115 (Application for 
Change in Accounting Method) and obtain 
consent from the IRS. This might be 
necessary to more accurately reflect 
earnings or to comply with tax laws as the 
business grows and evolves.
CASE STUDIES AND 
PRACTICAL 
ISMCEPNLAIRCIOA TANIOALNYSSIS:
• A corporation might switch from a cash 
to an accrual basis as it expands to 
better match income with the expenses 
incurred in earning it. This provides a 
more accurate financial picture.
• A sole proprietor might start with a 
calendar year. But then switch to a 
fiscal year to align better with business 
cycles, especially if the business is 
highly seasonal.
BUSINESS 
C•ONSIDERATIONS:Regulatory Requirements: Certain 
businesses are required by law or 
industry standards to use specific 
accounting methods. For instance, 
corporations with revenues above a 
certain threshold must use the accrual 
method.
• Tax Implications: Choosing the wrong 
accounting method or period can lead 
to significant tax implications, including 
deferred tax liabilities or accelerated 
tax obligations.
• Financial Reporting: Accurate financial 
reporting helps in attracting investors, 
manage finances, and make informed 
business decisions. The choice of 
accounting method can significantly 
impact reported earnings, asset 
valuation, and investors' perception.
WRAPPING UP
The decision on which accounting period or 
method is important for financial reporting 
and tax obligations of a business. 
Businesses should carefully consider the 
business type, industry standards, and 
regulatory requirements before picking an 
accounting method. It requires careful 
consideration of the business type, industry 
standards, regulatory requirements, and 
financial reporting needs. And if you have 
any doubts or confusion, our experts at 
CROWGNLOBE are here to help. You can 
always reach out to them for assistance. 
Every year, we assist a lot of businesses 
with choosing the right accounting year 
and the right accounting method.
CONTACT
848-248-4300
[email protected]
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PETERSBURG FL 33702