Which methods of accounting are commonly used in businesses?

The accrual and cash methods of accounting are two widely recognized approaches that businesses utilize for recording income and expenses. The cash method records revenues and expenses when cash is actually received or paid, providing a straightforward view of cash flow. This method is particularly favored by smaller businesses and individuals because it mirrors the actual cash on hand.

On the other hand, the accrual method recognizes revenues and expenses when they are incurred, regardless of when cash changes hands. This approach provides a more accurate representation of a company's financial position and performance over time as it accounts for all resources in play, not just what is currently transacted in cash. Businesses that maintain inventory or have significant accounts receivable or payable typically opt for the accrual method to comply with generally accepted accounting principles (GAAP).

By understanding both methods, businesses can choose the one that best aligns with their financial reporting needs and cash flow management. Thus, the combination of accrual and cash accounting encapsulates the two prevalent methodologies used across various sectors.