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Accounting Principles for Diverse Needs and Situations

Provided by SME Solutions Center - Kenya


Choose an Accounting Method

Your chosen accounting approach will guide how and when you key in income and expenditure items in your financial records. You can choose from between two main methods, namely:   

  • Cash method
  • Accrual method

A third method is the hybrid approach.

The Hybrid Accounting Method

With this approach, you employ elements of both the cash and accrual method.  The hybrid method is thus neither cash- nor accrual-based in the strict sense. You use the accrual approach to meet tax obligations. You then handle all other cash transactions using the cash method. This method is mostly used by small businesses.

The Accrual Accounting Method    

If you choose the accrual approach, you document expenses once they are incurred and income as soon as you earn it. Should you fail to receive the so recorded income, you deduct its worth and designate it as a bad debt.

Advantages

  • The accrual method offers you a more precise image of the business’ general financial status
  • It specifies planned expenditures, thus preventing you from misallocating funds   
  • It shows your anticipated income
  • The accrual method cannot determine the quantity of money owned by your business
  • Its determination of your business’ overall fiscal status is pegged on debtors’ non-defaulting habits
  • You can only rely on the accrual method’s reported expected income if debtors do not default

Disadvantages

The Cash Accounting Method

Choosing the cash method means that you record expense items after paying for them and income items after receiving the associated cash

Advantages

  • The cash method is a familiar approach to many people and is thus easier to employ  
  • At any instance, it gives you a precise image of your tangible cash at hand  
  • You recognize income once you receive the associated funds
  • You recognise expenses after paying for them 
  • It wisely defers the recognition of expense and income items whose cash has not been received or dispensed

The cash method is more accurate as it avoids recognising income and expenditure items that could eventually be eliminated  

Disadvantages

  • The cash method does not give an accurate picture of your business’ fiscal status

Each of the three methods is suited to specific circumstances. Based on your situation and business needs, you can choose any.    

As a business owner, you can choose between either of two key accounting approaches. These are the cash and the accrual methods. If you go by the cash accounting method, you document expenses when you actually pay for them. Similarly, you key in income figures the moment you practically receive cash amounts for them. The cash accounting method has the advantage of enabling you to have a clear grasp of the business’ cash reserves at any point. Alternatively, you could employ the accrual accounting approach. This method requires you to document expense and income items when you realise the expenses or income. The method is advantageous in that it provides you with a generalised view of your business’ cash circumstances. A third accounting method that you could utilise is the hybrid approach. This method combines elements of both the accrual and cash accounting methods.  It is usually used by small business persons. Essentially, no method is superior to the other. You are required to select the accounting method that best suits your needs and circumstances.

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