Method of Accounting
As a rule, you must calculate your net business income according to the accrual method of accounting. Consequently, you must
- report your income for the fiscal period in which it was earned, regardless of whether it was actually paid to you during that period; and
- deduct your expenses for the fiscal period in which they were incurred, regardless of whether you actually paid them during that period.
Self-employed persons
If you are a self-employed person who receives commissions, you may choose to use the cash method of accounting rather than the accrual method. In such a case you must
- report your income for the fiscal period in which you received it; and
- deduct your expenses for the fiscal period in which you paid them.
Professions
If you practise a profession, your total income (professional fees) for your first year of operation is the aggregate of
- all amounts received during the year for professional services that you rendered during the year (or will render after the end of the year); and
- all amounts receivable at the end of the year for services that you rendered during the year.
For subsequent years, you must subtract from the result obtained all amounts that were owing to you at the end of the preceding year.
Partnerships
If you are a partner in a partnership, the amount that you must report is equal to your share of the partnership's income, even if it has not been paid to you or credited to your capital account.
The partnership's gross income for income tax purposes must be identical to the figure shown on its financial statements. Net income may differ, however, particularly where a given type of income or expense is treated differently for accounting purposes than for income tax purposes, as in the case of
- expenses relating to an office in a partner's home;
- entertainment expenses;
- charitable donations;
- the cost of products intended for sale but consumed by a partner or by members of the partner's family; and
- expenses relating to the use of an automobile.