Methods of Accounting…1,2,3

There are three methods an organization can use to account for their daily transactions: pure cash basis method, accrual method and modified accrual method. The major difference between these methods is how an organization records its inflow (receipts) and outflow(disbursements) of cash. Let’s define the pure cash basis method.

The pure cash basis method of accounting only recognizes income or expense when cash is received or paid. Basically, this means that an organization will not record an expense when a service is performed, or invoice is received, but rather when payment for that service or invoice occurs. Similarly they will not record revenue when a service is preformed or a sale is made, but rather when payment is received. This is the most basic method of accounting and may be appropriate for very small organizations.

However, because the cash basis method of accounting does not match income to expense, it does not provide the most accurate information about the financial position of an organization. For this reason many companies choose, and some are required, to use the accrual method of accounting. What is the accrual basis of accounting?

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