Accounting methods refer to the different ways in which businesses record their financial transactions in order to present them on their financial statements. The two most commonly used accounting methods are the accrual method and the cash basis method.
The accrual method records expenses as soon as they are incurred, regardless of whether money has changed hands yet or not. Revenue is also recorded when it’s earned, not necessarily when payment has been received. This method provides an accurate picture of a company’s income and expenses over a period of time.
The cash basis method records only transactions that involve actual cash exchanges. This means that expenses are only entered in the books once they have been paid, and revenue is entered only after payment has been received. This method may be easier to track initially, but it can under-report income and expenses since it does not take into account any payments that have been made or received but will show up in later periods.