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INTRODUCTION Accounting systems have been used for thousands of years As businesses grew people to keep track of costs profits and losses invented accounting systems Modern accounting measures and communicates financial information about an economic entity This information is used to plan control evaluate and make decisions about a business The process begins with bookkeeping which records transactions such as checks and invoices and summarizes these transactions in financial statements Financial managers use the financial statements to raise and spend cash and make intelligent financial decisions This section defines accounting and contrasts it with bookkeeping and finance functions Points to Remember Accounting is an information system that measures processes and communicates financial information about an identifiable economic entity Bookkeeping primarily a mechanical and repetitive record keeping function is a subset of accounting Finance is concerned with raising and using cash Accounting supplies information about the company to financial managers so they can make intelligent financial decisions Accounting enables managers to intelligently plan and control the business and make decisions based on objective information Definition Cash Method Accrual Method There are two basic accounting methods available to most small businesses cash or accrual Cash method If you use the cash method of accounting you record income only when you receive cash from your customers You record an expense only when you write the check to the vendor Most individuals use the cash method for their personal finances because its simpler and less time-consuming However this method can distort your income and expenses especially if you extend credit to your customers if you buy on credit from your suppliers or you keep an inventory of the products you sell Accrual method With the accrual method you record income when the sale occurs whether it is the delivery of a product or the rendering of a service on your part regardless of when
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