ACCOUNTING PRACTICES

Accounting Practices and Entries

Accrual, cash flow, and fund accounting

Accrual-basis accounting

Accrual-basis accounting is one of the most common methods of accounting. Under this system, revenue (income) and expenditures (expenses) recognized in the event. This method is an alternative to cash basis (cash basis) of accounting, where income is recognized when it is received, and expenses at the time of payment. (Khan, 2009) Using accrual accounting for revenues and expenditures at the time of the transaction, the company has more leeway as to when the record income and expenses. Enterprises applying it to evaluate items of income, which may be reflected in financial statements, given the possibility that some of them will not be paid.

Entries

In accrual-basis accounting, expenses and revenues are recognized as under:

Expenses

In this method, matching principle is used and expense is recognized in which the underlying revenue is recognized.

Revenue

The revenue is recognized when it is earned or realized (realizable).

Example

Merchandise is sold at $7,100 on April 2, 2011 and cash is received on April 10, 2011.

(Entry on April 2, 2011)

Debit

Credit

Accounts receivable

7,100

Sales

7,100

(Entry on April 10, 2011)

Debit

Credit

Cash

7,100

Accounts receivable

7,100

Depreciation

Accrual-basis accounting uses an accumulated depreciation method which is also known as accrued depreciation. The accumulated depreciation account records the total amount of depreciation taken to date on capital assets owned by the company. (Khan, 2009)As a capital asset is depreciated, the accumulated depreciation keeps a running total of the depreciation on that asset. If the asset is sold, all record of it is removed from the balance sheet.

Organizations that use the accrual-basis accounting

All the incorporated companies use accrual accounting system. These companies are required to publicize their financial information as per the regulations by the security exchange commission. The companies that maintain an inventory also requires using accrual accounting as they buy and selling products on the credit terms. Organizations that want to communicate and understand its revenue producing activities also uses the accrual basis accounting system.

Strength

The Accrual accounting system provides with the detailed figures on net income as it matches the expenses with the income. It also provides with a realistic measure for business performance.

Weakness

It does not provide with the replacement of capital assets as they wear out.

Cash flow accounting

Cash flow is the most prominent and vital element in any business. Under cash flow accounting, revenues are included in accounting in the period when received; Expenditures are included in the period when they are paid. In accrual accounting, ...