Accounting Methods

Question 1

Are two basic accounting methods:

Answer 1

1. Cash Accounting

2. Accrual Accounting

Question 2

Cash Accounting Method

Answer 2

• Revenue and expenses are recognized at the time the business receives the cash or pays a bill.
• Is better at tracking actual cash flow.
• It’s fairly simple and is often used by single-person businesses and small businesses.
• Revenue and expenses are grouped into individual accounts for the purposes of auditing, review, tax preparation, management, and analysis.

Question 3

Accrual Accounting Method

Answer 3

• Revenue and expenses are recognized at the time they are earned or incurred, whether or not cash changes hands.
• Give a better picture of a business’s long-term financial status and provides information that is important for active financial management.
• Businesses above a certain size or that maintain inventory are required by IRS to use accrual accounting.
• Revenue and expenses are grouped into individual accounts for the purposes of auditing, review, tax preparation, management, and analysis.
• Uses double-entry bookkeeping, in which all transactions are listed chronologically in a journal.