What is the Accounting Method? An accounting method is a set of rules under which revenues and expenses are reported in financial statements. The choice of accounting method can result in differing amounts of profit being reported in the short-term. Over the long-term, the choice of accounting method has a reduced impact on profitability. So, what is the topic we are going to discuss; Top 3 Accounting Methods are very Useful with Docs.
The Concept of Accounting explain; 3 Accounting Methods.
The primary accounting methods are the accrual basis of accounting and the cash basis of accounting. Under the accrual basis, revenue is recognized when earned, and expenses are recognized when consumed. Accrual basis accounting is required for publicly-held entities, and for any organization that wants to have its financial statements audited. This is considered the most theoretically correct accounting method, but also requires a greater knowledge of accounting, and so is less likely to be used by smaller organizations.
The other main accounting method is the cash basis of accounting. Under the cash basis, revenue is recognized when cash is received from customers, and expenses are recognized when cash is paid to suppliers. This method is more likely to result in lumpy profitability in any given period since a large cash inflow or outflow can sharply alter profits.
The following Methods below are;
(A) Where Separate Set of Books is Kept:
This method is particularly followed where there are large transactions, that is, the venture is a large one and is continued for a comparatively long period.
(B) Where No Separate Set of Books is Kept:
This method is applicable where the joint venture transactions are limited and the ventures reside at two different places. Under this method, each venture will record his own transactions plus the transactions relating to other co-ventures capital whereas the other venture will prepare a Joint Venture Account and the capital of the others, that is, two accounts are prepared in each party’s ledger.
(C) Where Each Co-Venture Maintains A Record of His Own Transac¬tions (or Partial Record Method) (or Memorandum Joint Venture Method):
Under this method, each co-venture keeps a record of Joint Venture transactions in which he is involved i.e. each venture records in his own book only the transactions of the joint venture which relate to him. Each party keeps his account in his own books. He will not record the transactions of other co-venture.