Accounting Methods

Knowing What They Mean Can Help Decide Which Accounting Method Works Best For Your Business.

Although the list is very short when it comes to what ways accounting can be done within a business operation, it is equally true that which accounting method used can make or break a business. An organization has to be very clear what their goals are and what the mission or vision is to determine how they should record financial transactions. There are two basic accounting methods that are used to record the financial transactions of a business in their journals, whether they are done electronically or manually. Method one is called the cash method. The cash method simply means that the record is entered into the books only when it actually received.

This allows for deferment on some taxation because the monies have not been collected. The advantage to this method is that as the revenue is recorded in one season, the actual taxes are not allocated to them right away. This method is good for most small businesses that don't carry lots of inventory and have mostly cash collections. The second accounting method is the accrual method is to record the financial transaction when they are actually earned and not collected. This does keep the revenue beefed up and allows the company to have a stronger financial position. When an organization has a lag time from sale to net payment, the accrual method allows them to grow receivables.

Good revenues and good receipts go undoubtedly together. The major difference between the two accounting methods is really in the timing. The time the transaction is recorded and seen as income can be a strength for some businesses and a weakness for others. GAAP or generally accepted accounting principles actually favor accrual accounting method in which is was founded on, but as the IRS changed, cash method became a lot more acceptable to use. There are some exceptions on both sides, so a business needs to investigate whether they fall within the parameters of either practiced method of accounting.