Accounting has also been known as the language of business. Accounting is the organized systematic recoding, reporting and analysis of all the financial activities of the businesses. This recording and maintenance of financial activities (such as financial transaction) is done using accounting methods. Accounts methods are the fundamental rules and guidelines of keeping and preparing financial reports. With the help of accounting methods, income and the expenses are reported for taxation purposes. Accounting methods include many rules. These rules determine the record of income and expenses. All the businesses record and maintain their financial transactions and the financial expenses on the basis of these accounting methods.
Generally, there are two types of accounting methods. These methods are widely used by the businesses for recording financial activities. With help of these two accounting methods, the transactions are registered and recorded in the financial books. The two types of accounting methods are Cash – Basis Accounting and Accrual Accounting. The difference between these two lies in the way of recording the financial input and output of the company. However there are others methods too, which the companies use for accounting. These include special and hybrid methods. But these methods are not used as frequently and actively as the two primary accounting methods are used. These two accounting methods are only different from each other during the transactions. Transactions include the sales and purchase made. Accordingly these are recorded as credit and debit to the company accounts. These both can be used in various situations. These methods are frequently used by a small business, by an individual or even by the country. With help of these methods, the managers can easily assess the company’s financial position. It also helps them in making strong financial decisions.
For small businesses, it is important to decide which method they want to select. As many times, it becomes hard to change the process. Though one can change the accounting methods, but the process can be complicated. So, before setting up, it is necessary to decide which methods will suit most to the business. It can be decided on the basis of business forms, sales volumes, tax requirements, legal form of the business etc. It is a useful practice, as small businesses will have to maintain the inventory, so it may extend credit to the customers. In many cases, businesses change the accounting methods. One situation is the adjustments in the taxable income. This can be negative or positive. The company is required to take an approval from Internal Revenue Services. The company can file the application any time during the tax year. But IRS asks the application as soon as possible.
Let’s take one example. Mark & Sons Co. wants to change from cash basis to the accrual basis methods. It has accounts receivable of $15,000. It has accounts payable of $20,000. Now, a negative adjustment to the income is required for changing accounting methods. This negative adjustment is of $5,000. One thing to be mentioned here is that it can’t change the long term taxable income. It only changes the way income is recognized.
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