Accounting Method
Candlefocus EditorThe two most common accounting methods are cash accounting and accrual accounting. Cash accounting records revenues and expenses when money is received or paid out. This method is best suited to businesses with lower sales volume, where money is exchanged immediately when a sale is made. Thus, only actual cash transactions are recorded and reported.
On the other hand, accrual accounting records revenues and expenses when they anre incurred, rather than when money changes hands. This method is the generally accepted accounting principles (GAAP) and is used for businesses with higher sales volume or those that operate primarily on credit sales. With the accrual method, revenues are recorded when a sale is made, not when the money is received, and expenses are recorded when the related liability has been incurred, not when payment is made.
The Internal Revenue Services (IRS) requires accrual accounting for businesses that have average gross sales of $25 million or more for the preceding three-year period. In addition, the IRS requires approval if a company wants to change its method of accounting. Once the method is chosen, a company must stick to it.
Accounting Method is the main corner stone of any business. It allows the company to measure and report on the performance of their business activity and helps ensure compliance with government regulations. For this reason, it is important to properly select and maintain the accounting method in order to ensure accuracy and legal compliance.