The two primary methods (or types) of recording transactions in financial Accounting Services Buffalo are Cash Accounting and Accrual Accounting.
The difference between them lies in the timing of when revenues and expenses are officially recognized and recorded in the company’s books.
1. Cash Accounting (or Cash Basis)
Definition: Transactions are recorded only when cash is actually received or paid out.
Revenue Recognition: Revenue is recorded when the customer’s cash payment is received.
Expense Recognition: Expenses are recorded when the company pays the cash, regardless of when the service or good was used.
Simplicity: This method is generally simpler and often used by very small businesses or for tax purposes, particularly by non-corporate businesses that don’t have large inventory or many credit transactions.
Drawback: It may not give a true picture of a company’s performance during a specific period because it ignores revenue earned but not yet collected, and expenses incurred but not yet paid.
Example: If a plumber completes a $500 job in December but doesn’t receive the customer’s check until January, the $500 revenue is recorded in January.
2. Accrual Accounting (or Accrual Basis)
Definition: Transactions are recorded when they occur, regardless of when the cash is exchanged. This method is based on the revenue recognition principle and the matching principle.
Revenue Recognition: Revenue is recorded when it is earned, meaning the goods or services have been delivered, even if the cash payment hasn’t been received yet (recorded as Accounts Receivable).
Expense Recognition: Expenses are recorded when they are incurred to generate the revenue, even if the cash hasn’t been paid yet (recorded as Accounts Payable). This matches expenses to the revenue they helped create in the same period.
Accuracy: This method provides a more accurate view of a company’s profitability and financial health over a period of time, as it matches revenues and Accounting Services in Buffalo.
Mandate: Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) require most large companies and all publicly traded companies to use the accrual method.
