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.
Period End Accruals, Receipt Accruals, Paid Time-Off Accruals, AP Accruals, Revenue Based Cost Accruals, Perpetual Accruals, Inventory Accruals, Accruals Write Off, PO Receipt Accrual, Cost Accrual, etc. are some of the most complex and generally misconstrued terms in the context of general ledger accounting. In this article, we will explore what is the concept of accrual and how it impacts general ledger accounting.
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.
An allocation is a process of shifting overhead costs to cost objects, using a rational basis of allotment. Understand what is the meaning of allocation in the accounting context and how defining mass allocations simplifies the process of allocating overheads to various accounting segments. Explore types of allocations and see some practical examples of mass allocations in real business situations.
There are two commonly used methods of accounting - Cash Basis and the Accruals Basis. Understand the difference between accruals and reversals. Recap the earlier discussion we had on accruals and reversals and see the comparison between these two different but related accounting concepts. Understand how the action of accruing results in reversals subsequently in the accounting cycle.
Multitude of these legal and operational structures clubbed with accounting and reporting needs give rise to many reporting dimensions at which the organization may want to track or report its operational metrics and financial results. This is where business dimensions play a vital role.
There are five types of core accounts to capture any accounting transaction. Apart from these fundamental accounts, some other special-purpose accounts are used to ensure the integrity of financial transactions. Some examples of such accounts are clearing accounts, suspense accounts, contra accounts, and intercompany accounts. Understand the importance and usage of these accounts.
Network Organizational Structures
The newest, and most divergent, team structure is commonly known as a Network Structure (also called "lean" structure) has central, core functions that operate the strategic business. It outsources or subcontracts non-core functions. When an organization needs to control other organizations or agencies whose participation is essential to the success, a network structure is organized.
In this article, we will explain the general Ledger journal processing flow from entering journals to running the final financial reports. Understand the generic general ledger process flow as it happens in automated ERP systems. The accounting cycle explains the flow of converting raw accounting data to financial information whereas general ledger process flow explains how journals flow in the system.
Record to report (R2R) is a finance and accounting management process that involves collecting, processing, analyzing, validating, organizing, and finally reporting accurate financial data. R2R process provides strategic, financial, and operational feedback on the performance of the organization to inform management and external stakeholders. R2R process also covers the steps involved in preparing and reporting on the overall accounts.
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.
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