Accounting’s primary purpose is to measure economic activity. There are several different methods to determine the economic value generated in your business each year. In accounting this is referred to as sets of books. There are four basic sets of accounting books. Each has a different purpose and end goal.
Cash accounting is a method of accounting that only records a transaction as the cash account changes. Any sales or deposits records a transaction, any expense in the form of cash records the transaction. Cash accounting is not considered the best method of accounting but is effective for extremely small businesses because of its low cost to implement and manage.
Accrual accounting is the preferred method of accounting for all business operations. Any publicly traded company must comply with the principles of accrual accounting. Small business operations can choose between cash and accrual accounting for their records. Although cash accounting is the easiest to work with as a small business operation, accrual accounting will provide a more accurate picture of the financial status and affairs of any business operation.