The decision to choose accounting method for a business depends upon the size and nature of the entity, volume of transactions it carries and complexity of the transactions involved.
Some business will be required to use the accrual method of accounting while others may be granted an exception and allowed to use the cash basis along with some special rules.
Cash Method
This is the accounting method in which income is recorded when cash is received, and expenses are recorded when cash is paid out. It is, however, simpler than the accrual basis accounting and quite suitable for very small firms which transact business mainly in cash. Many small businesses start out using the cash basis rather than the accrual basis of accounting.
Accrual Method
Under the accrual basis accounting, revenues and expenses are recognized as follows:
Revenue recognition: Revenue is recognized when both of the following conditions are met:
a. Revenue is earned.
b. Revenue is realized or realizable.
Expense recognition: Expense is recognized in the period in which related revenue is recognized
Accrual basis of account ting is required by law to be used by many professions and businesses and is the most commonly used method of accounting.
