Cash Accounting vs. Accrual Accounting.

Good accounting is basic to every successful business.  It is the job of the business owner to ensure that the best method of accounting is being applied.  Here is the definition of accounting from Wikipedia: “Accounting or accountancy is the measurement, processing, and communication of financial information about economic entities such as businesses and corporations.”  This provides the basic idea.  Without accounting, a business is sloppy, and it is impossible to run it successful.  Accounting is a structural aspect of every business that should not and cannot be overlooked, there are two basic methods of accounting that are given in the paragraphs below.

Cash accounting method.  In using the cash method of accounting, sales are recorded when cash is received, and the expenses are recorded when cash is sent out.  This may seem like a very basic method, and it is.  However, there are issues.  When using the cash method, the economic reality is distorted.  Some expenses have to be paid months or years in advance, this throws off the financial statements and presents a lot of confusion.

Accrual accounting method.  In the accrual method of accounting, the revenue is recorded when the service or good is delivered no matter when the cash is paid or received.  This is the reverse of the cash method.  It is simple, and it is more productive.  “Accounts payable” is the term we use to record these unpaid expenses.  The accrual accounting method, unlike the cash method, clears up economic confusion and allows for more accuracy in financial records.

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