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. |