Types of Accounting Methods

There are two primary types of accounting methods, Accrual basis and Cash basis.

Accrual Basis

It is a method of accounting whereby income and expenses are recognized as they are earned or incurred. 

In other words, if you sold a product this month and will not be paid until next month you will asses the payment as occurring this month because that is the time at which you earned the revenue. 

Also, if you have an expense such as IT service that you incurred this month but may not pay for it until next month, you will assess the expense to occur this month because that is the time at which you incurred it.

Cash Basis

In Cash Basis Accounting expenses is incurred when it is paid and income is earned when the money is received.  This is unlike Accrual accounting where income and expenses are incurred when they occur, not when the money is received or the expense is paid.

Which One Should you Use

Which accounting method you use is totally up to you. However, you must be consistent with your method of accounting from year to year. The Accrual method is the one that is most commonly used by businesses.  Because the Accrual method is the most widely implemented method it provides a basis of financial comparison with other businesses in your industry.

You can find more information on accounting methods from the IRS website.