Two Types of Financial Accounting Methods
Every business should have an accounting method to track its finances. Accounting methods are used when reporting both revenues and expenses, and it is a set of rules that are followed when completing the bookkeeping process.
The two types of financial accounting methods are the cash method which is used by most small businesses and individuals and the accrual method which is used by most large businesses.
What is the Cash Method?
The cash method is used to report financial transactions as they are received and paid. It is a relatively simple process that a large number of businesses use. The cash method is also used by individuals who track their own personal expenses and income.
An example of the cash method:
A customer is billed $500 on January 15th for a service, but the payment isn’t received until February 20th. For the cash method, the $500 transaction won’t be recorded until the payment is received from the customer, so we would record this transaction on February 20th.
What is the Accrual Method?
The accrual method is used to report financial transactions as they are earned or incurred. This is a less common method used by small businesses, but it is still relatively simple and gives a more accurate representation of a business's financial standing.
An example of the accrual method:
A customer is billed $500 on January 15th for a service, but the payment isn’t received until February 20th. For the accrual method, the $500 transaction will be recorded on January 15th instead of waiting until the payment is received to put the $500 in the books.