Posts tagged Basics

Accounting Basics – What Is Accrual Accounting?

Mar14
2012 12 Comments Written by admin

The accrual accounting method is a method of managing the accounting of a business in which transactions are recorded at the time they take place even if an exchange of assets has not taken place between the entities involved in the transaction, i.e. payment for the goods sold or services provided was not yet received by the seller and wan not yet made by the buyer. This method is based on the basic accounting principle called the matching principle, i.e. when it is necessary to match revenue with expenses incurred to earn such revenue.

How is the Accrual Accounting Method Used?

The basis of the accrual method of accounting dictates that as soon as a document, such as a billing statement or sales receipt, which supports the assumption that a debit or credit transaction has taken place, the accountant makes an entry into the appropriate accounts to represent the transaction.

The accountant would not, for example, wait until the cash is collected to record a sale as a credit in the accounts, but would record it as soon as the contract was made to support the title to get cash in the future. Of course, if cash or other property is exchanged between the entities involved in the transaction at the time the transaction initially takes place, such as a purchase made in a retail store, then the transaction would be recorded at that time regardless of the accounting method being applied.

What are the Benefits of Using the Accrual Accounting Method?

With the accrual accounting method, since liabilities are accounted for as soon as they is a legal basis for them to occur, it is less likely that a business will fail to allocate assets to cover the liabilities due to an accounting error. Also, since using accrual accounting means that assets, liabilities and revenues are recorded in chronological order, accrual accounting allows transactions to be evaluated easily and efficiently. In addition the accrual method of accounting provides more accurate financial position of the business. However, the accrual method does require that more entries are made into the accounts and since transactions are recorded despite whether cash for goods sold or services provided is received or not, in case customers fail to pay their debts, such debts will have to be recorded as losses. This is a good practice, as financial statements will indicate quality of accounts receivable and losses incurred on sales to non-paying customers.

We can conclude that this method of accounting is more widely used and recommended accounting method.

Example of the Accrual Accounting Method

The company ABC on May 2, 2009 signs an agreement with the company XYZ to sell 1000 chairs. The chairs are delivered to the warehouse of the company XYZ on May 3, 2009 and the ownership title to the chairs is transferred to this company at the delivery time. Payment for the chairs will be made within 30 days from the delivery date. Applying accrual accounting method company ABC in its books will record the transaction on May 3, 2009, when the chairs were delivered to the customer, i.e. recording sales revenue and accounts receivable from the company XYZ, reduce value of inventory by the cost on inventory sold and reflect cost of sales as the expenses related to the sales income of chairs, despite the payment for the goods will be made later.

Applying the same method of accounting, company XYZ will record purchase of chairs in its books, i.e. increasing inventory value and recording liability (accounts payable) to the company ABC.

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Accounting Basics: The Matching Principle as It Relates to Accounts Receivable and Uncollectible Accounts

Nov12
2010 Leave a Comment Written by admin

The matching principle and its implementation with regard to accounts receivable, including accounts that are not collectible, help to ensure the accurate reporting of net income. Understanding these concepts not only increases comprehension of balance sheets and income statements, but also illuminates key aspects of the recent financial crisis.

The matching principle

Accrual accounting is based on the concept that revenue and expenses are captured as they happen, whether or not payment is received or dispersed at that time. The matching principle mandates that all of the expenses required to obtain income, or revenue, be subtracted from that revenue at the same time that the revenue is reported.

The basic formula is revenue minus expenses equals net income. This information is shown on an income statement. For example, a car dealer sells a car for ,000. The ,000 is recorded as revenue. If the car dealer paid ,000 for the car and had additional expenses of ,000, a total of ,000 is subtracted from the ,000 during the same period that the revenue is recorded. The result is a net income of ,000. This is recorded as follows:

Credit revenue for ,000, and debit expenses for ,000.

Recording accounts receivable

The total amount of the sale, minus any cash received as a down payment, is entered under accounts receivable. This information is recorded as assets on the balance sheet. Thus, if a down payment of ,000 is made on the ,000 car purchase described above, the following is recorded:

Debit cash in the amount of ,000, and debit accounts receivable for ,000.

As the car’s owner makes 0 payments each month, cash will increase by 0 and accounts receivable will decrease by 0. These transactions will not alter net income, which has already been determined at the point of sale.

Allowing for bad debt

Problems arise when customers do not fully pay their debts. The matching concept dictates that bad debt expense, also referred to as uncollectible accounts expense, be recorded in the same period as revenue, even though the actual default is in a different period, months or years later. To do this, companies estimate the amount of bad debt likely to occur in a given period and record this as an allowance for bad debt, decreasing accounts receivable and increasing expenses. If the car dealer estimates bad debt will be ,000, it is recorded as follows:

Debit bad debt expense ,000, and credit allowance for bad debt ,000.

The allowance for bad debt is considered a contra asset. This means that it is subtracted from assets on the balance sheet. While it is normal for assets to be recorded as debits, in this instance, the bad debt allowance is posted as a credit.

As actual defaults occur, the real amount of bad debt will be written off. When this happens, the precise amount of bad debt is subtracted from accounts receivable, and the same amount added to the allowance for bad debts. This is recorded on the balance sheet. It does not affect the income statement, since it has already been captured under the bad debt expense. Should one of the car dealer’s customers default on ,000, the transaction is recorded as follows:

Debit allowance for bad debt ,000, and credit accounts receivable ,000.

The impact of poor estimates

Whether calculated by taking a percentage of total accounts or by taking percentages that vary based on the amount of time accounts have been past due, the bad debt allowance is ultimately an educated estimate. When the bad debt allowance is too high or too low, the reported net income is inaccurate. Thus a company can appear to be healthier than it is or be undervalued.

The importance of this concept has been illustrated over the past few years. Allowing for bad debt is an integral part of the banking industry, in which the loans themselves are a significant source of revenue, in the form of interest. The principles behind the allowance for bad debts can be transferred to loan loss reserves in the banking industry. A loan loss reserve is the amount set aside to cover anticipated losses due to default. Loan loss reserves that are too small not only misrepresent income, but more seriously, can jeopardize the viability of a bank, contributing to bank failures and bail outs of banks “too big to fail.” Conversely, the slow recovery may be in part related to banks keeping too much in their loan loss reserve—or of banks raising the standards on loans so that the risk of default is lower as is the amount required to offset it — thereby restricting the availability of loans.

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Accounting Basics – What Is Accrual Accounting?

Sep28
2010 Leave a Comment Written by admin

The accrual accounting method is a method of managing the accounting of a business in which transactions are recorded at the time they take place even if an exchange of assets has not taken place between the entities involved in the transaction, i.e. payment for the goods sold or services provided was not yet received by the seller and wan not yet made by the buyer. This method is based on the basic accounting principle called the matching principle, i.e. when it is necessary to match revenue with expenses incurred to earn such revenue.

How is the Accrual Accounting Method Used?

The basis of the accrual method of accounting dictates that as soon as a document, such as a billing statement or sales receipt, which supports the assumption that a debit or credit transaction has taken place, the accountant makes an entry into the appropriate accounts to represent the transaction. The accountant would not, for example, wait until the cash is collected to record a sale as a credit in the accounts, but would record it as soon as the contract was made to support the title to get cash in the future. Of course, if cash or other property is exchanged between the entities involved in the transaction at the time the transaction initially takes place, such as a purchase made in a retail store, then the transaction would be recorded at that time regardless of the accounting method being applied.

What are the Benefits of Using the Accrual Accounting Method?

With the accrual accounting method, since liabilities are accounted for as soon as they is a legal basis for them to occur, it is less likely that a business will fail to allocate assets to cover the liabilities due to an accounting error. Also, since using accrual accounting means that assets, liabilities and revenues are recorded in chronological order, accrual accounting allows transactions to be evaluated easily and efficiently. In addition the accrual method of accounting provides more accurate financial position of the business. However, the accrual method does require that more entries are made into the accounts and since transactions are recorded despite whether cash for goods sold or services provided is received or not, in case customers fail to pay their debts, such debts will have to be recorded as losses. This is a good practice, as financial statements will indicate quality of accounts receivable and losses incurred on sales to non-paying customers.

We can conclude that this method of accounting is more widely used and recommended accounting method.

Example of the Accrual Accounting Method

The company ABC on May 2, 2009 signs an agreement with the company XYZ to sell 1000 chairs. The chairs are delivered to the warehouse of the company XYZ on May 3, 2009 and the ownership title to the chairs is transferred to this company at the delivery time. Payment for the chairs will be made within 30 days from the delivery date. Applying accrual accounting method company ABC in its books will record the transaction on May 3, 2009, when the chairs were delivered to the customer, i.e. recording sales revenue and accounts receivable from the company XYZ, reduce value of inventory by the cost on inventory sold and reflect cost of sales as the expenses related to the sales income of chairs, despite the payment for the goods will be made later.

Applying the same method of accounting, company XYZ will record purchase of chairs in its books, i.e. increasing inventory value and recording liability (accounts payable) to the company ABC.

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Accounting Basics

Sep06
2010 Leave a Comment Written by admin

Every company has an accounting system in order to know the financial status. They keep record of everything like how much money they have, where they are spending that money and from where that money coming from. The need of doing all this is to make sure that whether a company is making profit or not. In order to understand all this and to do the accounting homework we have to first understand the basics of accounting concepts.

Accounting concept are those rules and assumptions which a person, like an accountant, always keeps in mind when he/she is making business transactions records and accounts. These concepts include Business entity, Money measurement, Going concern, Accounting period,  Accounting cost,  Duality aspect, Realisation, and Accrual Matching concept.

According to Business entity concept, business and personal transaction of its owner are two separate entities. All business transaction are expressed in terms of the currency of a country like for India it’s in rupees, this concept comes under money measurement. In a Going concern concept, it assures that business is for lifelong. Business life is divided in parts and that part is known as accounting period and that period may be a calendar year or a financial year. The concept of accounting cost tells that all the assets are recorded at their purchase price and not at its market price.

Assets = Liabilities + Capital

The duality concept is expressed by the above fundamental equation of accounting.

In Realisation concept, when revenue is realized then only it comes under account records. When a company receives an order then it does not means it is realized but when its sells good then it comes under realisation. The Accrual concept helps in knowing the actual expenses and income during an accounting period and it also calculate the profit of an organization. The last one is the matching concept; it helps in determining the profit or loss of a company by matching the expenses with the revenue for a particular accounting period.

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Bookkeeping and Accounting Basics and Services offered

Aug29
2010 Leave a Comment Written by admin

Bookkeeping and accounting share two basic goals:

to keep track of your income and expenses, thereby improving your chances of making a profit to collect the necessary financial information about your business to file your various tax returns and local tax registration papers

Sounds pretty simple, doesn’t it? And it can be, especially if you remind yourself of these two goals whenever you feel overwhelmed by the details of keeping your financial records. Hopefully you will also be reassured to know that there is no requirement that your records be kept in any particular way. (There is a requirement, however, that some businesses use a certain method of crediting their accounts. See ” Peak Virtual Accounting”) In other words, there’s no official “right” way to organize your books. As long as your records accurately reflect your business’s income and expenses, the IRS will find them acceptable.

The actual process of keeping your books is easy to understand when broken down into three steps.

Keep receipts or other acceptable records of every payment to and every expenditure from your business. Summarize your income and expenditure records on some periodic basis (generally daily, weekly, or monthly). Use your summaries to create financial reports that will tell you specific information about your business, such as how much monthly profit you’re making or how much your business is worth at a specific point in time.

Whether you do your accounting by hand on ledger sheets or use accounting software, these principles are exactly the same.

Step 1: Keeping Your Receipts

Comprehensive summaries of your business’s income and expenses are the heart of the accounting process. But they can’t legally be created in a vacuum. Each of your business’s sales and purchases must be backed by some type of record containing the amount, the date, and other relevant information about that sale. This is true whether your accounting is done by computer or on hand-posted ledgers.

From a legal point of view, your method of keeping receipts can range from slips kept in a cigar box to a sophisticated cash register hooked into a computer system. Practically, you’ll want to choose a system that fits your business needs. For example, a small service business that handles only relatively few jobs may get by with a bare-bones approach. But the more sales and expenditures your business makes, the better your receipt filing system needs to be. The bottom line is to choose or adapt one to suit your needs.

Step 2: Setting Up and Posting Ledgers


A completed ledger is really nothing more than a summary of revenues, expenditures, and whatever else you’re keeping track of (entered from your receipts according to category and date). Later, you’ll use these summaries to answer specific financial questions about your business such as whether you’re making a profit, and if so, how much.

You’ll start with a blank ledger page (a sheet with lines) or, more often these days, a computer file of empty rows and columns. On some regular basis like every day, once a week, or at least once a month, you should transfer the amounts from your receipts for sales and purchases into your ledger. Called “posting,” how often you do this depends on how many sales and expenditures your business makes and how detailed you want your books to be.

Generally speaking, the more sales you do, the more often you should post to your ledger. A retail store, for instance, that does hundreds of sales amounting to thousands or tens of thousands of dollars every day should probably post daily. With that volume of sales, it’s important to see what’s happening every day and not to fall behind with the paperwork. To do this, the busy retailer should use a cash register that totals and posts the day’s sales to a computerized bookkeeping system at the push of a button. A slower business, however, or one with just a few large transactions per month, such as a small Web site design shop, dog-sitting service, or swimming pool repair company, would probably be fine if it posted weekly or even monthly.

To get started on a hand-entry system, get ledger pads from any office supply store. Alternatively, you can purchase an accounting software program that will generate its own ledgers as you enter your information. All but the tiniest new businesses are well advised to use an accounting software package to help keep their books (and micro-businesses can get by with personal finance software such as Quicken). That’s because once you’ve entered your daily, weekly, or monthly numbers, accounting software makes preparing monthly and yearly financial reports incredibly easy.

Step 3: Creating Basic Financial Reports

Financial reports are important because they bring together several key pieces of financial information about your business. Think of it this way — while your income ledger may tell you that your business brought in a lot of money during the year, you may have no way of knowing whether you turned a profit without measuring your income against your total expenses. And even comparing your monthly totals of income and expenses won’t tell you whether your credit customers are paying fast enough to keep adequate cash flowing through your business to pay your bills on time. That’s why you need financial reports: to combine data from your ledgers and sculpt it into a shape that shows you the big picture of your business.

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Accounting Basics Everyone Should Learn

Aug23
2010 Leave a Comment Written by admin

After taking a semester of accounting as a freshman at West Chester University, I now realize the importance of taking accounting because it applies to so many aspects of our lives. As a result I think that all college students should be required to take an accounting class to gain a better understanding of their finances and better prepare themselves for the real world where Mom and Dad won’t be there to pay for everything forever. Some of the basic concepts that I will discuss are debits and credits, accounts receivable, and accounts payable because I think that they are necessary concepts that all responsible members of society should have at least a basic understanding.

I will first explain the concept of debits and credits. Whenever you receive cash you debit it and whenever you spend cash you credit it. For instance, if you buy a pair of jeans for you would make a journal entry debiting merchandise inventory because you just added a pair of jeans to your closet, and you would credit cash for because you just spent that you no longer have to spend on other items. However, the clothing company that you bought the pair of jeans from would debit cash for to account for the sale and credit merchandise inventory and cost of goods sold in order to effectively journalize the transaction. Since the company received the payment it is debited and merchandise inventory and cost of goods sold is credited because they company no longer has possession of that pair of jeans. The company has to credit merchandise inventory and cost of goods sold because those two numbers equal the cash received for the jeans. Cost of goods sold refers to the amount of money that the company paid to obtain the jeans, which is not the same amount of money that you paid to buy the jeans. However, merchandise inventory refers to the difference between the cost of goods sold and the amount of money that the store sold the jeans to you the consumer for.

In addition to debits and credits it is necessary to understand the different between accounts receivable and accounts payable. Accounts receivable refer to a service that has already been preformed, however the payment has not yet been collected. For example, if an electrician wires your house he has provided a service for which he deserves to be paid for. Therefore in his journal entry he would debit accounts receivable and credit services revenue because he already performed the service for which he needs to collect payment for.  If the electrician had received a cash payment as soon as he provided his services there wouldn’t be an account receivable to record, he would simply debit cash and credit services revenue. However, in the real world people don’t always pay their electricians or other people on time, which is why they have to create accounts receivable accounts in order to keep track of payments that need to be made for services that have already been provided for them.

Contrary to accounts receivable, accounts payable refers to accounts which need to be paid for. For instance, when you go to the store and purchase a 00 stereo using a credit card, if you were to journalize the transaction you would debit the stereo for 00 and credit accounts payable for 00 because you purchased the stereo on credit, therefore you are eventually going to have to pay cash for it, just not at the same time you purchased it at the store. When you eventually pay cash for the stereo to pay off your credit card bill, the journal entry would be to debit accounts payable for 00 in order to get rid of the account and credit cash for 00 because you will no longer have that money to spend on other items.

These are just basic accounting concepts that all college students should be required to learn so that they can more effectively manage their money and become responsible members of society, rather than trying to bum off of their parents for as long as they can. By understanding these basic concepts students will be able to understand where there money is going and grasp the concept that when you pay with a credit card, eventually the money will come out of your pocket because plastic doesn’t actually buy you things. Ultimately taking an accounting class while in college may help people become more responsible with their money, rather than throw it away on useless items.

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Accounting Basics: Learning Debit and Credit

Aug22
2010 Leave a Comment Written by admin

Applying for a card whether it is a credit or a debit became very famous all over the United States of America. You don’t have to carry cash all the time since this card is accepted in almost all stores and businesses. There are different choices being offered to the cardholders such as a zero interest card, charity card, a reward card, credit and debit card and so on. As a cardholder, you must think thoroughly before making your final choice so that you will be able to use the most suitable one for your need.

Debit cards are actually being used by a lot of shoppers each day. It is a convenient option for daily shopping and purchases. All you have to do is to swipe it just like a credit card. However, this one will directly deduct the money spent to your bank account. Since it will be pulled out from your own savings, there will be no monthly interest to be paid. This method is actually very helpful if you want to control or budget your expenses within a particular period of time. It makes shoppers more aware and careful in purchasing goods and availing any kinds of services in the market. As soon as your bank savings is exhausted, there is no way for you to shop and swipe using a zero balance debit card. In other words, before using this card, you have to load it first and you will be using the exact amount deposited in it. If you wish to withdraw some cash, you just have to look for an ATM machine and withdraw funds.

When it comes to credit cards, a shopper must take control every now and then. It gives a lot of opportunities to the consumers to purchase anything and pay everything after a month or later. Once you are not wise and careful in using this type of card, you will really end up having a lot of debts which could cause a poor credit history on your part. Always make sure that you will be able to pay your balance every month to avoid higher interest rates.

Credit card is the best choice for a good financial tool that cannot be offered by a debit card. There are different types of credit cards that would best suit your needs. You can consult the bank or the financing company regarding this matter so that you’ll know more about it and will be able to decide competently. You have all the option to pay the bank partially or fully before the expected due date. This financial tool is very flexible and can be used in almost all stores but keep in mind that each card has its own spending limit which you should not exceed or else heavy penalties will be charged to you.

Both cards are useful but its use will greatly depend on what kind of buyer or user you are. If you wish to be free from monthly dues, then having a debit card is a better option. On the other hand, if you want to build a good credit history and avail various rewards, then credit card is a good option. They might look the same with credit cards but they have significant difference.

Stephen Mcmilla enjoys writing for CanadaCardProcessing.com which offers merchant services and debit machines as well as a host of additional services.

 

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Accounts Bookkeeping for Finance Accounts, Accountant Planning and Accounting Basics

Jul25
2010 Leave a Comment Written by admin

Accounts bookkeeping is a wonderful skill to have should you wish at some stage to set up in business. The large proportion of workers that are currently being made redundant, are those most expected to be the ones that use their loss of employment to face something new and some are using their pay offs to do exactly that.If you have even just a little experience in finance accounts it will help to support you any type of business that you choose to pursue though even if you have a strong background in the sector or in a finance department. It does help to make some bookkeeping and accountant planning using the expertise of someone in the accountancy sector even just to bring a little less bias to the financial side

You can easily manage your expenses and income accounts, profits and losses and create an accounts report based on your companies accounts using your experiences no matter how little and those experiences can help you to establish a good business over your future years as your business succeeds.

The internet is a source of variety of accounts bookkeeping courses where you can study online in your own time. Such part time learning courses are available to help you whether you are self employed, running a small business with an employee or two or even medium business with team of staff. The business will require accountant planning, finance accounts and income accounts. Quick taster courses can provide good bookkeeping and accounting basics should you have a severe lack of time, though going one step further than a basic taster course as your companies accounts will reap the benefits in the longer term.

The accountant planning courses are now more often than not webbased which allows you to study from home, particularly good if you are focusing much of your time on your new business or indeed if you prefer not to travel away from family. Accounts bookkeeping courses nowadays are available for entirely different individuals, those looking for work within that exact field and those of us who are running a startup business and need the knowledge. It is worth researching with different colleges and universities the different accounting basics courses or finance accounts courses open for applications, of course it is important to choose a course that offers convenience for you as a business owner.

Its only natural that we mention freelance accounts bookkeeping as it has its own benefits again and perhaps this is the business that you yourself want to pursue. There are always openings in different industry sectors and a new business that covers accounting basics for small business that cannot employ their own accountant offers up a whole new challenge. People with knowledge in accounts bookkeeping and managing finance accounts are in great demand and their experience is very valuable. They are generally equipped with the accounts bookkeeping software for small business.

Your business could offer single service system to packages depending on the need and aims of a companies accounts record. Many companies that outsource their accounts activities will be strict with security and data and you need to make them aware of your own confidentiality clauses so that they know you are highly capable.

Accounts bookkeeping is core to any business and good accurate processes need to be put into place before you plan to grow your business. Such practises are beneficial for any business as it adds to its accounting asset so whether you plan to take on a business where you will conduct accounting basics alongside your normal work. If you choose to offer finance accounts to assist other small businesses then do your research and ensure that you put your good experience to use. As a bookkeeper working for businesses independently registration is required with HMRC under the money laundering rules.

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