Accounting Methods, Financial Records and Book-Tax Reconciliation
This topic covers cash, accrual, and hybrid accounting methods, Form 3115, income statements, balance sheets, beginning and ending balances, depreciation recovery, pass-through activity, M-1, M-2, M-3, related parties, loans to and from owners, and year-to-year comparisons.
How to study for EA Part 2
Build every answer around entity classification, filing obligation, owner basis, income and deduction character, payroll duties, accounting records, and specialized taxpayer rules.
Core concepts
Concept 1
Accounting Methods, Financial Records and Book-Tax Reconciliation questions test whether an enrolled agent candidate can apply business tax rules to entity, return, owner, and recordkeeping facts.
Exam cue: Identify the entity, tax year, owner role, form, accounting method, record source, and whether the issue is income, deduction, credit, basis, payroll, or advice.
Concept 2
The best answer usually identifies the business form, tax year, filing obligation, income or deduction character, owner-level consequence, and penalty exposure before calculating.
Exam cue: Check basis, distributions, depreciation, employment tax deposits, QBI limits, method changes, due dates, penalties, and information reporting.
Concept 3
Eliminate answers that ignore entity classification, basis, payroll deposits, accounting method, book-tax reconciliation, or specialized taxpayer filing requirements.
Exam cue: Tie the result to the correct business return, schedule, K-1, payroll form, book-tax reconciliation, owner basis, or specialized taxpayer return.
Risk pitfalls and guardrails
Solving as if every business were a sole proprietorship instead of respecting entity classification and owner-level rules.
Guardrail: Use a 15-second safety pause before finalizing your action.
Calculating a deduction or credit without checking basis, at-risk limits, passive limits, depreciation elections, or payroll compliance.
Guardrail: Use a 15-second safety pause before finalizing your action.
Missing specialized taxpayers such as trusts, estates, exempt organizations, retirement plans, farmers, and rental real estate.
Guardrail: Use a 15-second safety pause before finalizing your action.
Memory anchors
Cash Method
The cash method generally recognizes income when received and deductions when paid.
Accrual Method
The accrual method generally recognizes income when earned and expenses when incurred under applicable rules.
Form 3115
Form 3115 is used to request or report many changes in accounting method.
Income Statement
An income statement reports revenues and expenses for a period.
Balance Sheet
A balance sheet reports assets, liabilities, and equity at a point in time.
Book-Tax Difference
A book-tax difference reconciles financial accounting treatment with tax treatment.
Schedule M-1
Schedule M-1 reconciles book income to taxable income for certain entities.
Schedule M-2
Schedule M-2 tracks certain accumulated account changes.
Related Party
Related-party activity can trigger special loss, interest, and timing rules.
Owner Loan
Loans to or from owners require documentation, business purpose, and proper classification.
Checkpoint rule
Do the check-up only after you can summarize each concept in one sentence and identify one dangerous pitfall from memory.
Knowledge Check (after reading)
Short check-up to confirm understanding of this module.
Check-up Questions
What is the central tax requirement for a business's accounting method?
Under the cash method, when are ordinary business expenses generally deducted?
Answer all questions to submit.
Next step personalized recommendations
Continue learning
Move forward only after this module is stable.
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