Accounting method refers to the specific rules and procedure which are used by a business to record its financial transactions and prepare its financial statements. There are two primary accounting methods namely cash accounting and accrual accounting.
In case of cash accounting, the transactions are only recorded when cash changes hands while in case of accrual accounting, transactions are recorded when they are incurred regardless of when the cash is exchanged.
Accounting method can simply be considered as a method through which a business keeps track of its money coming in and going out. If cash accounting is used, then the business only writes things down when the cash is actually received or cash is spent. In case of accrual accounting, the transactions are recorded when they happen and not well the money is exchanged. In case of accrual accounting, the transaction is noted down when the bill is received and not when it is paid.
Accounting methods are fundamental in business economics as financial reporting taxation and internal management are dependent on it. The financial health of a business entity can be analysed using accounting methods. Different industries and different types of business might be choosing different methods on the basis of their specific needs and regulatory requirements.
For example a small business might be using cash accounting for recording its income when it receives cash from customers and expenses when it pays bills. On the other hand a large Corporation might be using a cruel accounting for recognising revenues when the earn them through sales and expenses when they in incurred by them.
Source: A to Z of Economics by Dr. NC Raghavi Chakravarthy