Discuss the Methods of Accounting
There are two main methods of accounting that businesses can use: cash basis accounting and accrual basis accounting. Here’s an overview of each method:
1) Cash Basis Accounting: This method of accounting recognizes income and expenses when they are received or paid, respectively. In other words, transactions are recorded only when cash changes hands. Cash basis accounting is simple, making it ideal for small businesses with few transactions. However, it does not provide an accurate picture of a company’s financial performance as it does not account for transactions that have not yet been paid.
2) Accrual Basis Accounting: This method of accounting recognizes income and expenses when they are earned or incurred, regardless of whether cash has changed hands. This means that revenue is recorded when it is earned, even if payment has not been received, and expenses are recorded when they are incurred, even if they have not been paid. Accrual basis accounting provides a more accurate picture of a company’s financial performance as it takes into account all transactions, whether they have been paid or not.
In addition to these two methods, there are also specialized methods of accounting used in certain industries. For example, businesses in the construction industry may use the percentage of completion method, which recognizes revenue and expenses based on the percentage of a project that has been completed. Similarly, businesses that hold inventory may use the inventory valuation method, which determines the value of inventory based on its cost or market value.
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