Accounting Methods Explained: Types of Accounting Methods You Should Know
July 8, 2025, 3:43 p.m.
Understand How Businesses Record Money – The Simple Way!
Accounting isn’t just about numbers—it’s also about how and when you record those numbers. That’s where accounting methods come in.
In this article, we’ll explain the most common types of accounting methods used in business. Whether you're a student just starting out or a parent helping your child, this guide makes it all easy to understand with examples and tables.
What Are Accounting Methods?
Accounting methods are the rules a business follows to record income and expenses. They help determine when and how a transaction is recorded in the books.
There are two main types:
Cash Basis Accounting
Accrual Basis Accounting
Let’s break them down.
Cash Basis Accounting
What It Means: Income and expenses are recorded only when money is actually received or paid.
Example:
If you receive Rs. 5,000 on April 5, you record it on April 5.
If you pay a bill on May 2, you record it on May 2.
Best For:
Small businesses and freelancers
People who want a simple system
Pros and Cons
Pros
Cons
Simple to understand and use
Doesn’t show pending payments or future income
Easy to track actual cash flow
Not suitable for large or growing businesses
Accrual Basis Accounting
What It Means: Income and expenses are recorded when they are earned or incurred, not when money is exchanged.
Example:
You send an invoice on March 30 for Rs. 10,000, but receive the payment on April 5. You record it on March 30.
You get a bill on June 1 but pay it on June 10. You record it on June 1.
Best For:
Medium to large businesses
Companies needing detailed financial reports
Pros and Cons
Pros
Cons
Gives a clearer financial picture
More complex than cash basis
Matches income and expenses better
Requires careful record-keeping
To Know more about what is accounting, checkout the blog given below,
Businesses must choose one method and stick to it for consistency
Which Method Should You Learn First?
If you’re a student or beginner, start with cash basis accounting—it’s easier to understand. Once you’re comfortable, learn accrual accounting for a more complete financial understanding.
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Understanding accounting methods is a basic but important part of financial literacy. Whether you're just starting or helping your child, knowing the types of accounting method used in business helps make sense of how companies track money.
Cash basis records money when it’s paid or received; accrual basis records when it's earned or owed.
Cash basis is simpler and a good starting point for beginners.
Yes, especially if they plan to take commerce or become a CA or accountant.
Yes, but it requires more effort and tracking compared to cash basis.
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