Concepts Vs Methods in Accounting: What’s The Difference? (Part 2)

Although Concepts and Methods are closely linked to the process of bookkeeping and accounting, there is a difference between the two. As a business owner, you need to be familiar with this difference in order to have the correct accounting framework in place. 

Let us talk about the difference between Concepts and Methods in accounting.

What are accounting methods?

There are a variety of accounting methods businesses can use to track their financial performance. The most common methods are cash basis and accrual basis accounting.

Cash basis accounting records income when it is received and expenses when they are paid. This is the simplest method and is often used by small businesses.

Accrual basis accounting records income when it is earned and expenses when they are incurred, even if the cash has not yet changed hands. This method is more accurate and is often used by larger businesses.

There are also other methods such as modified accrual basis accounting and percentage of completion accounting. Each method has its own advantages and disadvantages, so it is important to choose the one that best suits the needs of your business.

Here’s a definition of the most common methods and a look at their pros and cons.

Cash accounting is the simplest form of accounting and is based on the actual cash inflows and cash outflows of a business. This method is most effective for small businesses that have a limited number of transactions.

Accrual accounting is more complex than cash accounting, but it offers a more accurate picture of a company’s financial health because it takes into account outstanding invoices and bills that have yet to be paid. The accrual method is preferred by most businesses and organizations.

Double-entry bookkeeping is the most complex type of accounting and is used to track every asset, liability, revenue, and expense of a company. This method is used by businesses that need to adhere to Generally Accepted Accounting Principles (GAAP).

The benefits of cash accounting include its simplicity and its ability to quickly identify a company’s financial position. The main drawback of cash accounting is that it doesn’t take into account unpaid invoices and bills, which can distort a company’s true financial position.

The benefits of accrual accounting include its accuracy and its ability to help businesses track their financial progress over time. The main drawback of accrual accounting is its complexity, which can make it difficult for some businesses to understand and use.

The benefits of double-entry bookkeeping include its accuracy and its ability to adhere to GAAP. The main drawback of double-entry bookkeeping is its complexity, which can make it difficult for some businesses to understand and use.

Modified accrual basis accounting

Modified accrual basis accounting is a way of accounting for financial transactions in which revenues and expenses are recognized when they are incurred, rather than when they are paid or received. This method results in a more accurate portrayal of a company’s financial health, as it takes into account all income and expenses, both current and future. 

Percentage of completion accounting

Percentage of completion accounting (PCA) is a method of accounting for income and expenses on long-term contracts. Under PCA, a company estimates the percentage of a contract that has been completed and reports that percentage of revenue and expenses in its financial statements.

PCA is used to estimate the amount of revenue and expenses that will be recognized on a long-term contract. The company uses historical data and its current estimated percentage of completion to project future revenue and expenses.

Key takeaways

Accounting methods are the processes and procedures used to record, categorize and analyze your business’s financial transactions and to prepare financial statements used for reporting purposes. 

Accounting concepts are the rules that guide the process of accounting in order to provide information that is predictable and understandable. It is important to understand the differences between the two concepts and methods because the approach to accounting for your company’s financial information is dependent on your company’s business practices.