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THE UNITED STATES TAX SYSTEM: AN OVERVIEW§ 2.9 ANNUAL ACCOUNTING PERIODThe income tax imposed on entities is reported and taxed on an annual basis foran annual accounting period or tax year. 31 All of an entity’s income is thereforeallocated to the appropriate tax year.There are two methods of reporting or accounting for income on an annualbasis. The first is the calendar year method. 32 A calendar year is, as its nameimplies, a period of 12 consecutive months that corresponds to a calendar year. Itbegins on January 1 and ends on December 31. Individuals are typically calendaryear taxpayers. The second method is the fiscal year. 33 This annual period isany other 12-month period beginning on the first day of a calendar month andending on the last day of the twelfth calendar month for that period. As anexample, a 12-month period beginning on July 1 in the current year and endingon June 30 of the following year is a fiscal year.§ 2.10 ACCOUNTING METHODClosely related to the annual accounting period (the tax year in which income isreceived or allocated) is the taxpayer’s method or basis of calculating when theentity receives income. This is referred to as a taxpayer’s accounting method. 34The particular accounting method used to determine when an entity receivesincome will necessarily affect the year to which the income is allocated. Onceagain, there are two methods: the cash receipts and disbursement method 35 and theaccrual method. 36Under the cash receipts and disbursements method, income (and expense) isrecognized to the taxpayer when cash is received (income) or paid out (expense).In the accrual method, income (and expense) is recognized when a right toreceive income or an obligation for an expense arises.§2.11 TIMINGBecause income is taxed on an annual basis, timing can be important. Timing concernsthe question of determining the tax year in which an income or expenseitem is taken into account for tax purposes. The receipt of income in a particulartax year can have a significant impact on an entity’s tax burden. A taxpayer can,and may wish to, accelerate or postpone the receipt of income in any particularyear so as to minimize tax.Timing is directly related to the annual accounting period and method ofaccounting of a taxpayer. The timing implications of each are apparent when oneviews a simple transaction. An individual taxpayer is entitled to receive the sumof $5,000 immediately upon the completion of a contract. The taxpayer completes31 IRC § 441.32 IRC § 441(d).33 IRC § 441(e).34 IRC § 446.35 IRC § 446(c)(1).36 IRC § 446(c)(2). 36