Accounting

Accounting

Accounting

 

The Chart of Account take into account of following heads:

- Fixed Assets

- Depreciation

- Accumulated Depreciation

- Profit or loss on sale of assets

 

Choosing a accounting method

To work out which method best suits you take into account:

  • The size of your business
  • How complicated your business transactions and processes are.
  • Whether you have the resources to manage accrual accounting.

 

Cash Accounting

Cash accounting tracks the actual money coming in and out of your business.In cash accounting, if you get an invoice for something, you don't record the cost in your books until you've paid the invoice.

For example, if you send an invoice on Tuesday, and don't receive the payment in your account until Friday, you record the income against Friday's date in your books.

  • In this system of accounting transactions are recorded when there is actual flow of cash.
  • Revenue is recognised only when it is actually received.
  • Expenditure is recognised only on the outflow of cash.
  • No consideration is given to the “due” fact of the transaction.
  • This system of accounting is simple to understand and as such needs less skill on the part of the accountant. Its whole focus is on cash management. The recognition trigger is simply the flow of cash.
  • Budgetary and legislative compliance is easier under this system.

Advantages are as under:

  • It helps in the assessment of financial performance by correctly reflecting surplus/deficit as all expenses whether paid or not and all incomes whether received or not are duly accounted for.
  • It gives information on whether income streams are adequate to meet short and long term liabilities so that their early payment keeping in view their payment period (short term and long term) and nature (cheap or costly loan) can be better managed.
  • It gives comprehensive information on the Financial Position i.e. assets and liabilities. In this system of accounting the financial decisions are not seen merely from the point of view of cash outgo or inflow but also from their impact on the asset and liability.
  • It bridges the gap leftover by cash accounting by inclusion of accrued expenses and revenues (receivables and payables), physical assets, capital work-in-progress and depreciation, pension liabilities and provisions etc. in the accounting system.
  • It discloses the Accounting Policies used in the preparation of Financial Statements for better understanding and appreciation of the Financial Statements.

 

Accrual accounting

If you use accrual accounting, you record expenses and sales when they take place, instead of when cash changes hands.

For example, if you're a builder and have sent an invoice for a project you've completed, you record the sale in your books even though you haven't received payment yet. This way of accounting shows the amounts you owe to people and the amount owed to you.

  • It is a system of accounting in which transaction are entered in the books of accounts, when they become due.
  • The transactions are recognised as soon as a right to receive revenue and/or an obligation to pay a liability is created.
  • The expenses are recognised when the resources are consumed and incomes are booked when they are earned.
  • Therefore, the focus is on the recording of flow of resources i.e. labour, goods, services and capital., the related cash flow may take place after some time (of event) or it may or may not take place in the same accounting period.

Advantages of the Accrual System of Accounting

  • The system of Accrual Accounting while retaining the advantages of the Cash Accounting System by including it and overcomes its limitations.
  • It helps in the assessment of financial performance by correctly reflecting surplus/deficit as all expenses whether paid or not and all incomes whether received or not are duly accounted for.
  • It provides comprehensive information on expenses which helps in knowing the cost consequences of policies and enables comparison with alternative policies. Also, information about calculation of subsidy can be extracted from the accounts, which helps in its rationalisation. This ensures the adoption of best policy, which in turn assures optimal use of scarce resources. It also helps in ascertaining the future sustainability of programmes.
  • Liquidity position can be better assessed
  • It gives comprehensive information on the Financial Position i.e. assets and liabilities of government. In this system of accounting the financial decisions are not seen merely from the point of view of cash outgo or inflow but also from their impact on the asset- liability position of future funding requirements of assets enabling planning of their timely maintenance and replacement.
  • It gives disclosures on account of contingent assets and contingent liabilities so that risk associated with the guarantees issued and letters of comfort given can be better assessed by the user of the financial statements.
  • It bridges the gap leftover by cash accounting by inclusion of accrued expenses and revenues (receivables and payables), physical assets, capital work-in-progress and depreciation, pension liabilities and provisions etc. in the accounting system.

 

Pros and cons

Cash accounting is:

  • A simple system that keeps track of your business cash flow
  • Generally suited to smaller businesses that mostly handle transactions in cash, for example a hairdresser's or a grocery store
  • Gives you a picture of how much money you have in your till and in your bank accounts.
  • It doesn't capture money that is owed to you or money you owe to others.

Accrual accounting is:

  • More complicated than cash accounting
  • Better suited to businesses that don't get paid straight away (for example, architects often provide services that they invoice at a later date)
  • A system that tracks your true financial position as it captures money that is owed to you and money you owe others
  • Helpful if you're dealing with lots of contracts or large amounts of money.
  • Accrual accounting is more complicated than cash accounting so you'll need an in-depth understanding of bookkeeping methods or a professional to help you out.

 

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