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.
Reversing Journals are special journals that are automatically reversed after a specified date. A reversing entry is a journal entry to “undo” an adjusting entry. When you create a reversing journal entry it nullifies the accounting impact of the original entry. Reversing entries make it easier to record subsequent transactions by eliminating the need for certain compound entries. See an example of reversing journal entry!
General Ledger - Advanced Features
Modern automated general ledger systems provide detailed and powerful support for financial reporting and budgeting and can report against multiple legal entities from the single system. These systems offer many advanced functionalities right from journal capture to advanced reporting. This article will provide an overview of some advanced features available in today's General Ledgers.
Learn the typical accounting cycle that takes place in an automated accounting system. We will understand the perquisites for commencing the accounting cycle and the series of steps required to record transactions and convert them into financial reports. This accounting cycle is the standard repetitive process that is undertaken to record and report accounting.
GL - Unearned / Deferred Revenue
Unearned revenue is a liability to the entity until the revenue is earned. Learn the concept of unearned revenue, also known as deferred revenue. Gain an understanding of business scenarios in which organizations need to park their receipts as unearned. Look at some real-life examples and understand the accounting treatment for unearned revenue. Finally, look at how the concept is treated in the ERPs or automated systems.
Internally, an organization can be structured in many different ways, depending on their objectives. The internal structure of an organization will determine the modes in which it operates and performs. Organizational structure allows the expressed allocation of responsibilities for different functions and processes to different entities such as the branch, department, workgroup and individual.
Functional Organizational Structures
A functional organizational structure is a structure that consists of activities such as coordination, supervision and task allocation. The organizational structure determines how the organization performs or operates. The term organizational structure refers to how the people in an organization are grouped and to whom they report.
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.
The general ledger is the central repository of all accounting information in an automated accounting world. Summarized data from various sub-ledgers are posted to GL that eventually helps in the creation of financial reports. Read more to understand the role and benefits of an effective general ledger system in automated accounting systems and ERPs.
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.
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