Cash Basis Accounting Vs. Accrual Basis Accounting
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).
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.