Cash Method

The cash method. The cash method is the more commonly used method of accounting in small business. Under the cash method, income is not counted until cash (or a check) is actually received, and expenses are not counted until they are actually paid.

The accrual method. Under the accrual method, transactions are counted when the order is made, the item is delivered, or the services occur, regardless of when the money for them (receivables) is actually received or paid. In other words, income is counted when the sale occurs, and expenses are counted when you receive the goods or services. You don't have to wait until you see the money, or actually pay money out of your checking account, to record a transaction.

With the accrual method, sometimes it's not easy to know when the sale or purchase has occurred. The key date is the job completion date.

When to record income. Not until you finish a service, or deliver all the goods acontract calls for, do you record the income in your books.

When to record an expense. Likewise, you don't record an item as an expense until the service is completed or all goods have been received and installed, if necessary. (If a job is mostly completed but will take another 30 days to add the finishing touches, technically it doesn't go on your books until the 30 days pass.)

Debit & Credit example:

You can learn to understand to identify the two basic components of each transaction:

1. what did you get?

2. where did it come from?

The debit is what you got

and 

The credit is the source of the item you received.

• Notes Payable - Promissory notes to creditors.

• Accounts Payable - What you owe others on account.

• Unearned Revenue - You've been paid, but haven't delivered.

• Salaries Payable - Salaries you owe employees.

• Interest Payable - Interest you owe.

• Taxes Payable - Taxes you owe.