Businesses keep track of their finances with accounts. But just how that is done is defined by the accounting method that is used. There are two accounting methods that are used by businesses, these are accrual basis accounting and cash.
Accrual basis accounting counts and records income when a sale has been made. Expenses are recorded when goods or services are received. Accrual basis accounting is more widely used among bigger businesses. Including those with inventory and those who extend credit to their customers.
Cash accounting is usually used by small businesses that do not have to keep track of inventory. Under the cash method, income does not need to be recorded until cash or check is actually received from your customer or affiliate and expenses are not recorded until you actually pay for them.
- The main difference between these two accounting methods is when the transactions are debited or credited to the account.