Accounting is a necessary part of business. Having well managed accounts keeps finances in order, allowing the business to keep track of expenses and organise its income. An important part of this is how exactly the business records its finances, which is defined by the accounting method that the business uses.
Choosing An Accounting Method
There are two accounting methods that can be used to keep track of a businesses income and expenses. These are accrual basis accounting and cash.
Accrual basis accounting counts and records income when a sale has been made. Expenses are recorded when goods or services are received. Accrual basis accounting is more widely used among bigger businesses. Including those with inventory and those who extend credit to their customers.
Cash accounting is usually used by small businesses that do not have to keep track of inventory. Under the cash method, income does not need to be recorded until cash or check is actually received from your customer or affiliate and expenses are not recorded until you actually pay for them.
- The main difference between these two accounting methods is when the transactions are debited or credited to the account.