Accrual Based Accounting

Introduction

Many nonprofit organizations have limited funds to achieve their objectives and implement their programs. The management of these funds is the responsibility of members, directors and officers of the organization. The success of a business, whatever it is, is the quality of the management of its finances.

The purpose of accounting is to provide information at a given time and the results obtained over a period of time, which is useful to users in making their decisions, both for the control of the previous management, as for the estimates from any future results, providing such decisions of rationality and efficiency.

In this paper we will talk about the History of accrual based accounting and how the current accrual based accounting system was developed.

Discussion

History of Accrual Based Accounting

The history of accrual accounting begins in the same country known for its pasta i.e. Italy where accrual accounting has its root in that state. Initially the father of accounting Pacioli used the general ledger system and journals that contain financial information of the company. Moreover, the method which was initially introduced uses the end year journal entries and trail balances in order to reconcile the financial information indicative of accrual accounting.

Moreover, the feature of initially accrual base accounting was only recording the transaction as they take place rather than the cash changing hands. This offers business owners an accurate historical financial transaction record. This results in numerous paper ledgers and journal i.e. huge amount of paper work. Pacioli was a Franciscan friar who was born in 1445. He was professor of mathematics. For the first time he describes a complete system of double accounting record. Each transaction is entered in two beads. At the end of the day he used to add up both columns. His treatise included all of the business cycle we still use:

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Active control

Passive Control

Capital and Inventories

Income and Expenditure

Balance sheets

Operating Accounts

Although Pacioli did not invent the system was but the concept came from was invented by him. It also laid the foundations of accounting ethics and cost control system. In addition, he used to advise his students regarding squaring your balance (Wynne, 2004, pp.14.)

New Accrual Based Accounting

Improvement was made in his concept and two main accounting methods came into existence which can account for the financial position of an organization, namely the method of the cash method and accrual accounting. The method of cash accounting recognizes transactions when they result in cash or cash outflows. Many small organizations that perform relatively few transactions each month are using the latter method.

A system of accounting in which revenues are recorded when earned and outlays are recorded when goods are received or services performed, even though the actual receipt of revenues and payment for goods or services may occur, in whole or in part, at a different time. Under this method, an invoice must be paid by the organization listed in the financial statements as liabilities and the amounts owed are listed under assets. The method of accrual accounting gives a truer picture of ...