Types of Accounting

Several kinds of accounting exist. It is important to be aware of the different ways that income and expenses are recorded in accounting. The basic differences center on when income and expenses are declared.

Cash Basis
If accounting at a company is done on a cash basis, income is recorded in the accounting period in which the cash is received. Expenses are recorded in the accounting period when bills are paid. Cash-basis accounting is generally used by small businesses and individuals. For example, a tenant is late with rent for the month of May and doesn’t pay it until June 1. The landlord records this income (including the late fee) when it was received, not in May when it was due. For small businesses, this accounting method is easier to use on a day-to-day basis when there are fewer transactions to track.

Accrual Basis
In accrual basis accounting, income is declared in the accounting period in which it is earned, rather than when the cash is received. Expenses are declared in the accounting period in which the expense is incurred, rather than when the cash is paid out. For example, if a company uses accrual basis accounting, rents would be posted when they are earned, even if the actual cash is received later. Likewise, expenses are declared when they are incurred, even if they are paid out later. Accrual basis accounting gives a more accurate and complete picture of an organization’s financial condition.

Modified Accrual
In modified accrual accounting (also called modified cash accounting), some income categories and expense categories are declared on a cash basis and some are declared on an accrual basis. For example, taxes and insurance may be separated out and treated as accrual expenses rather than as cash expenses. Small companies, especially those with smaller budgets, may choose to keep their books on a modified accrual basis. They may record small transactions (e.g., under $100) on a cash basis, but larger transactions and withheld payroll taxes are recorded on an accrual basis. Or, they may record income on a cash basis and expenses on an accrual basis.

Here is a recap:

Type of Accounting	Income	Expenses
Cash Examples: Yearly income; small business; self-employed person	Declared when cash is received Example: Tenant's rent payment recorded when it is received	Declared when cash is paid out Example: Utilities
Accrual Examples: Real-estate firm with rentals; midsized and larger corporations	Declared when income is earned Example: Rent payment declared when it is due	Declared when expenses are incurred Example: Ordering supplies
Modified Accrual	Mixed	Mixed