The accounting method refers to the rules a company follows in reporting revenues and expenses. Understand the two common systems of bookkeeping, single, and double-entry accounting systems. Learners will also understand the two most common accounting methods; cash and accrual methods of accounting and the advantages and disadvantages of using them.
Two types of accounting methods are commonly used to record business transactions know as cash accounting and accrual accounting. Under the cash accounting method, revenue is recognized and recorded when the cash is received and expenses are recognized and recorded when the cash payments are made. Under the accrual method of accounting, revenue and expenses are recognized and recorded, when the product or service is actually sold to customers or received from suppliers, generally before they're paid for.
While many small businesses and generally the professionals and professional organizations, use the cash method of accounting, but most businesses tend to use the accrual method. Typically, the single-entry bookkeeping system is used along with the cash method, while the double-entry system can be used with both the cash and accrual methods. The most common combination is double-entry bookkeeping and the accrual method.
There are two common systems of bookkeeping single entry and double-entry accounting systems. The first – single entry – is simplistic, recording each transaction only once, either as revenue or as an expense. Single entry bookkeeping is suitable for organizations that have very few transactions, very few or negligible assets, and liabilities. But when you need a more sophisticated bookkeeping system double-entry bookkeeping system provides you with the tools necessary to represent your accounting data in a meaningful way for use by the stakeholders. Double-entry bookkeeping has become the standard, and is the preferred way of accounting, as it allows businesses to track both the sources and application of money.
A single-entry bookkeeping system or single-entry accounting system is a method of bookkeeping relying on a one-sided accounting entry to maintain financial information, based on the income statement (profit or loss statement). The system records the flow of income and expenses through the use of, daily summary of cash receipts and disbursements. The single-entry bookkeeping method records entries once and does not "balance" the transaction out by recording an opposing credit or debit.
A single-entry system may consist only of transactions posted in a notebook, daybook, or journal. However, it may include a complete set of journals and a ledger providing accounts for all important items. A single-entry system for a small business might include a business checkbook, check disbursements journal or register, daily/monthly summaries of cash receipts, a depreciation schedule, employee wages records, and ledgers showing debtor and creditor balances."
Under the method, the intent is to record the bare-essential transactions. In some cases, only records of cash, accounts receivable, accounts payable, and taxes paid may be maintained. Records of assets, inventory, expenses, revenues, and other elements usually considered essential in an accounting system may not be kept, except in memorandum form. Single-entry systems are usually inadequate except where operations are especially simple and the volume of activity is low. Single-entry systems are used in the interest of simplicity. They are usually less expensive to maintain than double-entry systems.
Double-entry accounting is a system of organization that records financial transactions in an efficient manner and has been used by accountants for over 500 years. Since the fifteenth century, when Luca Pacioli first wrote about the practice, the term "accounting" has referred to double-entry accounting. Double-entry accounting uses a system of accounts to categorize transactions. Each transaction that is entered consists of one or more debits and credits and the total debits must equal the total credits.
The double-entry bookkeeping system assumes that when a transaction takes place, it impacts two different accounts, one as a debit and the other as a credit. Therefore each transaction is recorded twice. A transaction may also affect more than two accounts, but its total credit amount will always match its total debit amount.
Before a transaction can be recorded, it must be analyzed and classified to determine the accounts it affects and how it affects them. At least two accounts are affected – one with debit and one with credit. Some accounts are increased by debit and others are increased by credit.
Double-entry accounting provides a system of checks and balances, where the accuracy of the system can be verified by reconciling asset, liability, and equity accounts to external sources. You can uncover simple errors, such as transposing numbers or misplacing a decimal point, when you reconcile accounts. For example, the bank account is reconciled to the bank statement, accounts payable can be reconciled to statements received from suppliers, and accounts receivable can be verified by confirming balances with customers. The inventory account is reconciled by taking a physical count of inventory and comparing the physical account to the accounting records. Because each entry in a double-entry system affects two or more accounts, and debits and credits are equal overall, in a given period of time, balancing the trial balance and reconciling the balance sheet accounts provides a high degree of probability that the profit and loss accounts are correct.
In some of the ERP tools, there are more than 12 accounting periods in a financial year. This article discusses the concept of accounting calendar and accounting periods. Learn why different companies have different accounting periods. Understand some of the commonly used periods across different organizations and the definition & use of an adjustment period.
A legal entity is an artificial person having separate legal standing in the eyes of law. A Legal entity represents a legal company for which you prepare fiscal or tax reports. A legal entity is any company or organization that has legal rights and responsibilities, including tax filings.
In this article, we explain some commonly used subsidiary ledgers like accounts receivable subsidiary ledger, accounts payable subsidiary ledger or creditors' subsidiary ledger, inventory subsidiary ledger, fixed assets subsidiary ledger, projects subsidiary ledger, work in progress subsidiary ledger, and cash receipts or payments subsidiary ledger.
Five Core General Ledger Accounts
Typically, the accounts of the general ledger are sorted into five categories within a chart of accounts. Double-entry accounting uses five and only five account types to record all the transactions that can possibly be recorded in any accounting system. These five accounts are the basis for any accounting system, whether it is a manual or an automated accounting system. These five categories are assets, liabilities, owner's equity, revenue, and expenses.
In this article, we will describe how to determine if an account needs adjustment entries due to the application of the matching concept. Learners will get a thorough understanding of the adjustment process and the nature of the adjustment entries. We will discuss the four types of adjustments resulting from unearned revenue, prepaid expenses, accrued expenses, and accrued revenue.
Horizontal or Flat Organizational Structures
Flat organizational structure is an organizational model with relatively few or no levels of middle management between the executives and the frontline employees. Its goal is to have as little hierarchy as possible between management and staff level employees. In a flat organizational structure, employees have increased involvement in the decision-making process.
When the quantum of business is expected to be moderate and the entrepreneur desires that the risk involved in the operation be shared, he or she may prefer a partnership. A partnership comes into existence when two or more persons agree to share the profits of a business, which they run together.
Different Types of Organizational Structures
Modern business organizations run multiple product and service lines, operate globally, leverage large number of registered legal entities, and operate through complex matrix relationships. To stay competitive in the current global business environment, they must often develop highly diverse and complex organizational structures that cross international borders.
GL - Different Type of Journals
Two basic types of journals exist: general and special. In this article, the learner will understand the meaning of journalizing and the steps required to create a journal entry. This article will also discuss the types of journals and will help you understand general journals & special journals. In the end, we will explain the impact of automated ERPs on the Journalizing Process.
Shared Services is the centralization of service offering at one part of an organization or group sharing funding and resourcing. The providing department effectively becomes an internal service provider. The key is the idea of 'sharing' within an organization or group.
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