When most people think of accounting they think of the basic process of keeping up with either business or personal accounts. Accounting allows both businesses and individuals to keep track of their income and their spending. While there is a generic definition of accounting, the process can be divided into different types. The first is Cash Based Accounting and the next is Accrual Accounting. The article below gives definitions of each and examples of how they work.

Cash Based Accounting

According to “Accounting Basics”, an article from Accounting for Windows, cash based accounting often is used when keeping track of an individual’s personal finances. This accounting type keeps track of payments received and expenses that are paid. The article explains that this is the way your checkbook functions. You record moments when you receive cash and the moments when you pay cash out, such as when you write out checks, make withdrawals, etc.

Accrual Accounting

Accrual accounting is bound more by the rules of time. An accountant using accrual methods will note transactions as they occur, regardless of actual monetary exchanges. For instance, a credit card transaction is recorded, but really no revenue has been exchanged, yet. Expenses must also be handled in this manner. Often, bookkeeping time frames, called “accounting periods” are counted in months or even years. The accrual method works by comparing the expenses of the time period to the income of the time period. These should at least equate. If your expenses are greater than your income, this could be a big problem. If you have more income than expenses, hurray! You have a profit!

Which Is Better?

There is really no better method of accounting, but there are aspects of each that lend themselves to different purposes, be it personal or business. According to most sources, businesses use both types of accounting, cash and accrual. Accrual accounting uses Accounts Receivable, which is a process in which your account reflects an amount that you are owed, but not necessarily the amount that you currently have in the bank. Cash accounting factors in when the actual cash physically arrives.