2 Basic Methods Of Accounting
When you're working in accounting, there are two basic methods. You have your cash basis and accrual basis. Whichever methods you choose will depends on your type of business.
Cash basis is the simpler method. It is mainly use by service businesses that do not maintain inventory or startup businesses that do not offer credit. The accrual method is used by businesses that provide for credit sales or maintain an inventory.
In cash basis accounting, your record sales when cash is received and expenses when they are actually paid. Using the cash basis method is like maintaining a checkbook. Under this method, account receivable are not recorded as sales until they are collected. Account payable are not recorded as expenses until the account is paid.
Bad dept, accruals and deferrals are not appropriately recorded under cash basis because they are examples of outstanding credit or business notes. The cash basis method is not appropriate for businesses that extend credit.
In accrual basis accounting, you report income and expenses as they are earned or incurred rather than when they are collected or paid. Record credit sales as accounts receivable that have not yet been collected. The accrual basis also provides a method for recording expenditures paid in a single installment but covering more than one period. For example, interest may be paid semi-annually or annually, but it is recorded on a monthly basis.
The accrual method satisfies the matching concept, i.e., matching income with related expenditures. Consequently, it can provide a clear and accurate view of business operations for a given period.