Which method of accounting is typically used by smaller businesses?

Cash accounting is often the preferred method for smaller businesses due to its simplicity and ease of use. In cash accounting, transactions are recorded only when cash is exchanged, which means that income is recognized when it is received and expenses are recognized when they are paid. This straightforward approach allows small business owners to easily track their cash flow and manage their finances without the need to maintain complex records associated with other methods.

For many small businesses, cash accounting aligns well with their operations since they typically have fewer transactions and want to avoid cumbersome accounting processes. Additionally, the cash basis can provide a clearer picture of how much cash is available at any given moment, which is crucial for daily financial management.

While accrual accounting provides a more comprehensive view of a company's financial health by recognizing revenues and expenses when they are incurred, it requires more detailed record-keeping and financial analysis that may not be practical for smaller entities. GAAP accounting, which refers to Generally Accepted Accounting Principles, is a framework that includes both accrual and cash accounting but is irrelevant for the question given the context of small business practices. Fund accounting is particularly relevant for non-profit organizations and governmental entities, making it less applicable to typical small businesses.