Accounting Methods

Accounting Methods

Accounting methods are the set of rules or specific procedures through which a business keeps its financial records and transform these records into financial reports. Accounting methods are categorized in two categories the cash base accounting method and accrual based accounting method. A business decides to use a particular method by comparing number of parameters such as the legal status of the business, sales volume of the business, revenue and expenditure of business and the status of inventory and work force. Accounting methods can be changed later according to the requirements of the business but it may become complicated to do so.

Cash Base Accounting Method

In this method the expenses and income of a business are calculated on the base of real time cash flows. Income is calculated from the receipts and expenses are recorded on the bases of their payment. With the help of cash based methods taxable income can be deferred by postponing the payment of the bills.

Accrual Based Accounting Method

In this method income and expenses are recorded at the exact time at which they incurred in the business. Revenue is recorded immediately when it is earned rather than after receiving the payment. In the same way expense are recorded immediately after their occurrence.

The major difference between the accrual and cash based methods is that of the difference of recording of cash inflow and outflow from the company or the business. The cash method is simpler as compared to the accrual method and provides a more comprehensive view of the business’s accounts.

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