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Simple English definitions for legal terms
accounting method
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A quick definition of accounting method:
An accounting method is a way of keeping track of a company's money for tax purposes. There are different types of accounting methods, including the accrual method, which records income and expenses when they happen, and the cash-basis method, which only counts money that has been received or paid out. Other methods include cost accounting, fair-value accounting, and percentage-of-completion accounting. Each method has its own rules and benefits, and companies choose the one that works best for them.
A more thorough explanation:
An accounting method is a system used to determine income and expenses for tax purposes. There are different types of accounting methods, including:
- Accrual accounting method: This method records entries of debits and credits when the liability arises, rather than when the income or expense is received or disbursed. For example, if a company provides services to a client in December but doesn't receive payment until January, the income is recorded in December using the accrual accounting method.
- Cash-basis accounting method: This method considers only cash actually received as income and cash actually paid out as an expense. For example, if a company provides services to a client in December but doesn't receive payment until January, the income is recorded in January using the cash-basis accounting method.
- Percentage-of-completion method: This accounting method recognizes revenue gradually during the completion of a contract. For example, if a construction company is building a house for a client, revenue is recognized as the project progresses and milestones are met.
These accounting methods are important for businesses to accurately report their financial information for tax purposes and to make informed decisions about their operations.