Cash method of accounting
When you get your allowance from your parents, you put the money in a jar. When you want to buy something, you take money out of the jar to pay for it. That is called the cash method of accounting.
This method is also used by businesses to manage their money. Instead of putting money in a jar, they put it in a bank account. This account keeps track of all the money that comes in and goes out of the business.
When a business gets paid for a product or service, that money is recorded as income in the account. When the business pays for something, like rent or supplies, that money is recorded as an expense.
The cash method of accounting is simple and easy to understand, which is why many small businesses use it. However, it can be difficult for larger businesses that have a lot of transactions. That's when they may use a different method called accrual accounting.
This method is also used by businesses to manage their money. Instead of putting money in a jar, they put it in a bank account. This account keeps track of all the money that comes in and goes out of the business.
When a business gets paid for a product or service, that money is recorded as income in the account. When the business pays for something, like rent or supplies, that money is recorded as an expense.
The cash method of accounting is simple and easy to understand, which is why many small businesses use it. However, it can be difficult for larger businesses that have a lot of transactions. That's when they may use a different method called accrual accounting.