Accounting Methods are the overarching style of accounting and bookkeeping which determine the practices, procedures, systems, and controls which should be put in place.
There are two main methods of accounting that businesses and individuals can use to approach their accounting, and these are known as cash basis and accrual basis. The IRS expects businesses to choose early one which method they will use, and it can be difficult to change accounting styles later on.
In cash basis accounting, the only transactions to be recorded are those where money has changed hands and settlement has been reached. This does not mean the transactions have to use hard paper currency, but the point is that transactions must be finalized and that payment has been given or received.
Publicly traded companies with over $5 Million in annual revenue are not able to use Cash accounting, due to SEC reporting requirements and GAAP standards. Instead, they use Accrual Accounting, which is the primary accounting method taught to CPAs and MBAs.
Accrual accounting documents transactions as soon as the transaction has been initiated, whether by the transfer of goods, or the performance of services, and so on, whether or not the payment has been finalized or received. The payment for such things can be put into a Receivables or Payables account and settled at a later date.
Companies who offer financing to their customers, even if the company is very small, will need to use Accrual Accounting, since Cash Basis accounting does not use Receivables or Payables. Many other things are characteristic of accrual accounting, such as Interest, Taxes, Depreciation, and Amortization.
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