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What is accounting method?
Accounting method is a process of recording financial transactions and maintaining records of financial position. Accounting methods are used in business to make informed decisions about how to allocate resources, manage risk, and make profits. There are three main types of accounting− cash accounting, accrual accounting, and hybrid accounting.
Accounting Method- The Main Approaches
There are four main approaches to accounting, which are− the cash basis, accrual basis, the modified cash basis, and the comprehensive basis. Each has its own set of benefits and drawback.
Cash Method
The cash method of accounting is a means of recording business transactions that uses actual cash payments and receipts. This method prevents double−counting of transactions and allows for more accurate financial reporting. The disadvantage of the cash method is that it can be difficult to track changes in cash levels over time. The another drawback is that it can be difficult to track changes in assets and liabilities over time. The cash basis is the simplest approach, and all transactions are recorded as they occur. This is the most common method in small businesses.
Accrual Method
The accrual method is a popular accounting method that records revenue when it’s earned and expenses when they are incurred. This method helps businesses keep better track of their financial position and performance. The method is based on when they are incurred, not when they are paid. This is more accurate than the cash basis, but it can be more complicated to keep track of changes in assets and liabilities over time.
Modified cash Method
The modified cash basis combines elements of the accrual and cash bases. Transactions are recorded based on when they are paid, but interest and dividends are also included in the calculation of net income. This is a popular method for bigger businesses that want to keep better track of their finances.
Comprehensive method
The comprehensive basis is the most complex approach and includes both accrual and cash accounting methods. It's ideal for businesses that need to track a lot of different information at once. However, it can be difficult to understand and use at first.
Summary
Accrual basis accounting records all transactions as they occur, rather than waiting for a payment to be made. This is useful when you want to track how much money is being spent and how much money is available. The downside is that it can be more complicated to keep track of finances this way. Cash basis accounting, on the other hand, only records transactions when money actually changes hands. This can make it easier to see how much money is available and how much money was spent, but it can be less accurate when it comes to tracking spending over time.
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