Methods Of Accounting

Since the preceding units of this course were a piece of cake, now let’s talk about accounting methods, starting with the topics of cash and accrual. When you were a child, if your parents allowed you to go door-to-door selling items for your school’s fundraiser, you have used cash and accrual methods. It’s a simple concept that allows you to record the sale or purchase of an item even if you have not yet received payment.

Cash Method

This means that you will record the money once you receive it. The receipts for such transactions are recorded during the periods they are received. An example of this method is when you are making a cash deposit in the bank and they record it into your account as receiving cash. If you present the teller with a check, then she would not be able to document it as cash. If the teller does not record the cash as she receives it, she would not be able to properly account for the cash later.

Accrual Method

Accrual is the method of accounting in which all income and expenses are recognized on the income statement at the time when they are earned and incurred, regardless of when the cash for that transaction is received or paid. An example of this method would be, when you work, your hours are documented, and although you are earning a salary, you won’t receive the money you have accumulated until you get a pay check, and it is cashed. The accounting department still has to recognize that those funds are going to be paid in the future.

Differences between Cash and Accrual

The differences between the two are that the cash method is recorded when you receive the actual cash whereas with the accrual method, you will record it even if you have not received it or paid for it. For example, you are selling candy bars for your child’s school, when you receive the cash; you mark it down in the paid section. This is considered the cash method. If you were using the accrual method, you would want to record the transaction with anticipation of receiving the funds at a later date. This method will help you keep track of anticipated funds so that you can better manage your business. With the cash method, you receive the revenue at the time of the transaction like when you go into a store and purchase something vs. putting something on a “pay later” plan.