ACCRUAL ACCOUNTING

Purpose and Method of the Accruals concepts of Accounting



Purpose and Method of the Accruals concepts of Accounting

Introduction

Accounting is all about recording, reporting, summarizing and analyzing the financial transactions of an organization. It is the communicating art of financial information related to entity of business to those users like managers and shareholders. The communication is carried out in the shape of financial statements which presents the financial data in terms of money and the economic resources which are under the entity's control. The performance of an entity which the organization measures, the system of financial accounting will demonstrate the limit to which resources of an organization has grown or they have decreased during the period. Like that the financial statements which are detailed present the current results of future budgets.

Formally there are two kinds of methods of accounting, which dictates that how the transactions of firm are recorded in the financial books of company: accrual accounting and cash based accounting. The major difference between these two kinds is that how the organization records the cash which is coming into the business and the cash which is going out of the organization. Between these differences a lot of space is available for error or you can call it manipulation.

Discussion

Cash-basis accounting

In this type of accounting which is the cash basis of accounting, the companies record the expenses in their financial accounts at the time when the cash is actually paid out of their accounts, and they record or realize the revenues at the time when the cash is actually received in the hands of the organization or more likely you can say that in the bank account. For instance, if a plumber has completed a task on September 30, 2004, and he does not get the money for the job he has completed until the owner himself inspects that on February 15, 2005, the plumber reports those earnings in cash on his 2005 report of tax. In the accounting of cash basis, the cash earnings includes cash, credit card receipts, checks and some other form of revenues received from the customers.

Smaller firms which haven't been incorporated formally & most of the sole proprietors use this cash basis of account because of the easiness of the system for them to utilize it on their own; it means that they don't need to hire the accounting staff.

History of Accrual Accounting

The accrual accounting's history begins in the country which is known for its famous pasta i.e. Italy where the roots of accrual accounting lies in that condition. Primarily the accounting father Pacioli used the GL System (General ledger System) and those journals which contains the financial information of the firm. Furthermore the method that was basically been introduced utilizes the journal entries of year end and the TB (Trial Balance) for the purpose of reconciling the information of financial transactions and this was the indication of accrual accounting.

Accrual accounting

When the organization is using the accrual accounting, it has a practice of recording the revenue ...