There are two methods of determining your accounting that are commonly used in business. One is the cash method and the other is accrual. Your business will choose one of them as your basis and use it exclusively for day-to-day accounting and tax purposes.
The cash method reports income when it is actually received (not when an invoice to a client is generated) and expenses when they are paid (not when you receive the bill).
The accrual method reports income when it is earned (but not necessarily received) and expenses when they are incurred (but not necessarily paid).
Most Commonly Used
The cash method is the most commonly used method of accounting.
Accrual basis accounting is required for businesses that produce and sell merchandise and keep an inventory.
The reason that businesses use the accrual method of accounting is to match the income and expenses to the year in which they were earned or incurred.
Kim Dushinski is an entrepreneur with more than 25 years of experience in sales and marketing. She has served as a mobile marketing trainer, marketing director at a travel agency, desktop publisher, business marketing consultant and partner in a book publicity firm.