There are two systems of Accounting:
Cash System of Accounting: Only cash receipts and payments are recorded in this system. This system assumes that no credit transactions have occurred. Expenses are only considered when they are paid, and earnings are only considered when they are really received, in this accounting method. Organizations that are founded for a non-profit purpose employ this method. However, because it does not represent the real revenues made or the current condition of affairs of the company, this method is regarded to be faulty.
Mercantile or Accrual System of Accounting: Expenses and revenues are taken into account in this method throughout the time period in question. This accounting method is seen to be perfect, but it may result in unrealized gains that show up in the books of accounts, forcing the company to pay taxes. The Mercantile or Accrual System of Accounting is required by law for all firm types.