There are two types of accounting used in business: cash accounting and accrual accounting. Cash accounting (also known as cash-basis accounting) requires that a company records sales when it receives actual invoice payments from customers and that the company records its expenses when it makes payments to suppliers. Small businesses often use cash accounting because it is simple and provides a clear picture of how much money is actually available.
For example, imagine that your business receives a $100 payment in October from a customer who, according to your invoice terms, has 30 days to pay. In cash accounting, you would have recorded the sale in accounts receivable in September, when it occurred. You’d debit the money in October, because it was actually received.
In accrual accounting, revenue and expenses are recorded when they are incurred. Corporations are required to use accrual accounting under generally accepted accounting principles.