Cash Vs. Accrual Vs. Modified Cash Accounting Methods

Starting a new business involves a lot of planning.  The accounting is a very important part of managing your business.  You must consider the accounting method.  There are three options to choose from.

The Cash Basis Method
This accounting method records income and expenses as received and paid out.  Expenses are recorded only when bills are paid.  This method is advantageous for smaller businesses as it is a simple method that accounts for cash paid or received.

The Accrual Method
With this method, income is accounted for when it is earned.  You may deliver a product or service to a customer and not have been paid for it, yet consider it income. Expenses are recorded the day you receive the bill or goods from a vendor or supplier.  Accrual method does include accounts receivable and accounts payable on the balance sheet.

The Modified Cash Basis Method
This Modified Cash Basis combines elements of the above two accounting methods.  It is not accepted on official financial statements.  Income is recorded as received but expenses are put into two categories.  Long-term liabilities are treated as accounts payable as in the accrual method.  Short term expenses are recorded as paid, as in the cash method.