Accounting Method(s)

In general a firm follows two types of accounting method: cash accounting and accrual accounting.

Accrual accounting is something that provides companies with current financial condition. It records the revenue or expense at the time of transaction, not when the payment is received. This type of method is actually great to understand the business performances. You can analyse the expenses and sales. However, it has limitation as well. It creates chaos, but it is good from a tax perspective.

The limitation is in that the product might be sold on credit. This method doesn’t capture the cash flow movements. There might be cases where products might be sold, but the companies never get the cash. Therefore, we have a cash accounting in which the records the movement of cash transactions. It helps in tracking the movement of cash and in tracking whether the trade receivable is getting converted to actual trade or not.

However, firms are known to be cooking the books by misrepresenting the numbers. One need to be careful cross both the cash flow statements and the income statement to ensure the transaction are correct.