To operate a successful business, you must implement a proper accounting system to track income and expenses. You can employ various bases of accounting, depending on your needs. Accounting bases refers to methods or techniques that a firm uses to account for returns and expenses. Most firms follow Generally Accepted Accounting Principles (GAAP), using cash- or accrual-based accounting.
Cash-basis accounting recognizes exchanges of cash. If a company sells a product on credit, the sale is not recorded until payment is received. It also records an expense when the company pays the supplier instead of when the product or service is received.
Accrual-based accounting records transactions as they occur. It allows a company to do accounting based on invoices and bills, even a transaction is not yet settled. A company is also able to record the transaction when the cash is received or paid out. Transactions made on credit or installments are also accounted for.
Income Tax-Basis Accounting
Income tax-basis accounting is a method of recording financial transactions by using techniques that are used in calculating the company’s tax return. Companies opting for this system record all taxable income for the financial year. This method is basically a combination of cash-basis accounting with the laid down procedures of calculating and filing taxes.
Mixed basis accounting combines cash and accrual accounting principles. This method is suitable for companies that need to account for expenses in terms of accrual accounting and record income on a cash basis only. The organization opting for mixed basis must clearly identify the basis for each recorded financial transaction. For example, a company can decide to record expenses such as rent and bills using the accrual basis while recording income such as donations, and payments on a cash basis. It is a good method for a non-profit organization.