Many business owners wonder what the difference is between the most well-known accounting procedures. In this blog post, we will break down some of the differences and how they can be applied to your business.
Firstly, there are two major types of accounting: cash basis and accrual basis. The big difference in these two methods is that under cash basis accounting, income is recognized when it’s received while with the accrual method, income is recognized when it’s earned.
For example, if you sell a product or service on credit (even though payment hasn’t been made yet) then you would need to account for this sale under the accrual method but not necessarily under the Cash Method.
Another common accounting procedure is accounting for credit sales. With accounting for credit sales, you must record the sale of goods or services on account before payment has been received (or when it’s due). If you sell on credit, then accounting for the sale is required before payment has been received.
On the other hand, accounting for cash sales means that income must be recognized when it’s received in cash or by check – not just when a customer makes an agreement to pay later (which would require accounting under an accrual basis). The most common example of this is invoices sent out immediately after goods have been delivered/services have been provided.
Another difference between these two methods is transaction costs. Transaction cost includes any additional charges associated with purchasing assets and services such as brokerage fees, commissions, service charges, installation fees etc., which will vary depending on your business model. To put it simply: If you choose Cash Method accounting, you can deduct these costs. If you use the accrual accounting method and incur transaction costs in the process of earning income, then they cannot be deducted until that same year (when it is recognized as an expense).
In conclusion: Under Cash basis accounting all transactions are recorded when cash or checks have been received while under Accrual accounting, transactions must be recorded when they’re earned not just once a customer agrees to pay later. In addition – any additional charges such as brokerage fees etc., should only be deducted if using the Cash Method because otherwise, this may result in tax evasion according to GAAP standards. Lastly, accounting for credit sales means recording a sale before payment has been made whereas accounting for cash sales would mean recording.