An accounting method is a set of principles and procedures that a business uses to record and report its financial transactions. It determines when income and expenses are recorded in the books and affects how financial statements and tax returns are prepared.
The two primary types of accounting methods are the cash basis and the accrual basis. Under the cash basis, income and expenses are recorded when cash actually changes hands. Under the accrual basis, income is reported when earned and expenses when incurred, regardless of when money is received or paid.
Businesses must apply their chosen method consistently and may need approval from tax authorities to change methods.