Methods Of Accounting - CrownGlobe

Elevate your business's financial management with our comprehensive QuickBooks accounting services. Our expert team ensures accurate records and seamless financial insights. Explore our top-notch accounting solutions today. Please visit:- https://crownglobe.com/methods-of-accounting/

1. METHODS OF ACCOUNTING
For business, it’s very important to pick a perfect
accounting method. So it’s importance to make
the right choice. Reason? The method you pick can
impact your financial statemetns and tax
obligations. The main accounting methods are the
Cash Method, Accrual Method, Special Method,
and Hybrid Method. In this blog, we will take a look
at these primary methods.

2. CASH METHOD
This is the simplest accounting method. In this
method, the income is recorded when received,
and expenses are recorded when they are paid. It’s
most suitable for individuals and small businesses
as it is super simple and demands a lot less record-
keeping.
Under the Cash Method, gross income includes all
items actually or constructively received during
the tax year. Constructive receipt occurs when an
amount is credited to the taxpayer’s account or
made available without restrictions. For example,
income received by an agent on behalf of the
taxpayer is considered received by the taxpayer
when the agent receives it.

3. Expenses are deducted in the tax year when they are paid. However, prepaid expenses are
generally deductible only in the year to which they apply unless they qualify for the 12-month
rule. This rule allows expenses to be deducted in the year paid. But only if the benefit does not
go beyond the earlier of 12 months after the first date on which the taxpayer realizes the
benefit or the end of the tax year following the tax year in which the payment is made.

4. ACCRUAL METHOD
The Accrual Method records income when earned.
Similalrly, it records expenses when incurred. Both
of these steps are taken regardless of when cash is
received or paid. This method provides a the
perfectly accurate picture of a company’s financial
position.

5. Income is reported in the year it is earned. This includes amounts earned but not yet received.
The earliest of the following dates is used to determine the income reporting year:
When the income is earned.
When the payment is received.
When the income is due.
When the title passes to the taxpayer.
Expenses are deducted in the year they are incurred, meeting the all-events test and
economic performance test. The all-events test is met when all events have occurred that fix
the liability, and the amount can be determined with reasonable accuracy. The economic
performance test is met when the underlying activity occurs, such as the delivery of goods or
services.

6. SPECIAL METHOD
OF ACCOUNTING
The Special Method of accounting applies to
certain items that require specific treatment,
ensuring the correct matching of income and
expenses within the relevant period. This method
is particularly relevant for long-term contracts,
installment sales, and specific types of inventories.
Each of these areas necessitates a unique
approach to recognize income and expense
correctly.
For long-term contracts, the Percentage of
Completion Method and the Completed Contract
Method are commonly used. The Percentage of
Completion Method recognizes revenue and
expenses proportionally to the work completed
during the accounting period.

7. This method is preferred when the outcome of the contract can be reliably estimated. It ensures that the
income is matched with the expenses incurred to achieve that income, a more accurate reflection of the
company’s financial performance over the contract’s duration. The Completed Contract Method, on the
other hand, recognizes revenue and expenses only when the contract is completed. This method is
simpler but may not always provide a timely representation of the financial status of projects spanning
multiple accounting periods.
In installment sales, the installment method is used to recognize income as payments are received. This
method defers the recognition of income until cash is actually collected, spreading the tax liability over
the period the payments are received rather than recognizing the entire gain at the point of sale. This
method could prove to be extremely useful for businesses that sell high-value items on credit. For
example, real estate or expensive equipment. This allows them to match income with cash flow more
accurately.
Certain inventories may also require special accounting methods. For example, the Retail Method can be
used to estimate the ending inventory and cost of goods sold based on the relationship between the cost
and the retail price of inventory items. This method is useful for businesses with a large volume of
merchandise where tracking individual items might be impractical.

8. The Hybrid Method of accounting combines
elements of both the Cash and Accrual Methods,
allowing for a more tailored approach to financial
reporting. This method is particularly beneficial
when different transactions within the same
business require different accounting treatments.
Under the Hybrid Method, a business might use
the Cash Method for most of its transactions,
recording income when received and expenses
when paid. This approach simplifies the
accounting for many routine transactions.
However, for items like inventory, the business
would record income when earned and expenses
when incurred.
HYBRID METHOD OF
ACCOUNTING

9. This combination ensures that the financial statements reflect the true economic activity of
the business.
For example, a retail business might use the Cash Method for its sales transactions but apply
the Accrual Method for inventory purchases. By doing this, the business can manage its cash
flow effectively. Similalry, this also ensures that the cost of goods sold is matched with the
related sales revenue. This method gives a better and more accurate idea about profitability,
particularly in businesses where inventory plays a significant role.
Businesses that engage in long-term contracts can also benefit from Hybrid Method. The
revenue and expenses from these contracts can be used for the Percentage of Completion
Method, while other transactions follow the Cash Method. Such a flexibility allows businesses
to meet their specific financial need. The best part? They can do so without compromising
the accuracy and reliability of their financial statements.

10. The Hybrid Method of accounting combines
elements of both the Cash and Accrual Methods,
allowing for a more tailored approach to financial
reporting. This method is particularly beneficial
when different transactions within the same
business require different accounting treatments.
Bookkeeping systems are essential for maintaining
accurate financial records. The two primary
systems are Single-Entry and Double-Entry.
BOOKKEEPING
SYSTEMS

11. Single-Entry System: Uses cash receipts and disbursements and is built around the
income statement.
Double-Entry System: Uses journals and ledgers, based on the income statement and
balance sheet, and is self-balancing. This system records every transaction as both a debit
and a credit, ensuring accuracy and completeness.

12. WRAPPING UP
When you select an accounting method,
it’s very important to weigh in all the
factors. Reason? If you pick a wrong
method, your entire accounting and
financing goes haywire. Moreover, each
method has specific rules and applications,
and the choice depends on the nature of
the business and regulatory requirements.
Proper bookkeeping practices support the
chosen accounting method, ensuring
accurate and reliable financial information.
All this can feel overwhelming, and that’s
totally understandable. So, if you need any
assistance with accounting method
selection or accounting services, our
experts at CROWNGLOBE can help. Feel
free to reach out to us.

13. CONTACT
848-248-4300
[email protected]
WWW.CROWNGLOBE.COM
7901 4TH ST N STE 300, ST PETERSBURG FL 33702