Accounting Methods

So why do you need to know about Accounting Methods?

As a small business owner, you will have to decide which accounting method you are going to use to record all of the transactions for your business. The method that you select will not only affect the amount of work that 'doing the books' will involve, but also the amount and quality of information about your business that you will have access to in your financial records.

Cash Accounting

Single entry bookkeeping or cash acounting is relatively simple to manage as you really only need to record cash payments and cash receipts.

Recording these transactions can be managed quite effectively using paper based records, or a simple spreadsheet.

This alone makes this method attractive to small business owners, particularly those with limited knowledge or experience with bookkeeping or accounting.

But there are drawbacks to using this method.

For example, this method does not recognize non-cash transactions, such as depreciation on fixed assets, and does not collect or report any information related to credit transactions. Because of these limitations, it is not generally considered satisfactory for businesses that choose to conduct a significant proportion of their business on credit.

Accrual Accounting

Accrual accounting or double entry bookkeeping recognizes transaction when it occurs, whether cash changes hands or not. This means that both cash and credit transactions are recognized at the time agreement is reached between the transacting parties, and the net profit for accounting period is determined by taking into account all of the transactions that occurred during the period.

Where a transaction is recorded once in a single entry bookkeeping system, a credit transaction will be recorded twice in a double entry bookkeeping system. Once when agreement is reached, to record the sale or purchase, and again when payment is made or received, to record the movement of the cash.

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