Types of Accounting Methods for Businesses

 chief financial officer, Dana Finegold studied business economics and accounting at the University of California in Santa Barbara. After earning her undergraduate degree, Dana Finegold began a career overseeing accounting practices and managing the operational duties of JD Fine & Company, which she co-owns with her husband.

When opening a business, accounting is one of the most important operational functions. Choosing the right bookkeeping method is essential to keeping a business afloat and thriving. Business owners can choose from the accrual accounting method and the cash basis accounting method. The accrual accounting method records expenses when a sales transaction is made and goods or services are delivered to the customer. It accounts for the payment, also called receivables, after the fact, but logs the sales transaction as revenue at the time of the purchase. The accrual accounting method is best used in companies that sell on credit or hold product inventory.

The cash basis accounting method is a popular bookkeeping choice among small business owners. Unlike the accrual accounting method, the cash method records income and accounts for expenses only after payment is received. Thus, the cash basis accounting method illustrates a more precise picture of a company’s earnings and losses. While this method is good for tracking cash flow, it does not provide a clear view of a company’s profitability in the long term.