Understanding and Learn What? Basic of Accounting!
The business enterprises use accounting to calculate the profit from the business activities at the end of the given period. Accounting or accountancy is the measurement, processing, and communication of financial information about financial institutions like businesses and corporations. Also, Learn What? Basic of Accounting!
There is two basis for calculating the profit, namely, the cash basis and accrual basis.
- Cash basis of accounting: In this basis of accounting, the income is calculated as the excess of actual cash receipts in respect of the sale of goods, services, properties, etc., over actual cash payments regarding the purchase of goods, expenses on rent, electricity, salaries, etc. Credit transactions are not considered at all including adjustments for outstanding expenses and accrued income items. This method is useful for professional people like doctors, engineers, advocates, chartered accountants, brokers and small traders. It is simple to adopt because there are no adjustment entries. But this basis does not disclose the true profits because it does not consider the income and expense items which relate to the accounting period but not paid in cash. Moreover, this method is not applicable where the number of transactions is very large and expenditure on fixed assets is high. The income or profit is calculated with the help of receipts and payments account.
- Accrual basis of accounting: Under this method, the items of income (revenue) are recognized when they are earned and not when the money is actually received later on. Similarly, expense items are recognized when incurred and not when actual payments are made for them. It means revenue and expenses are taken into consideration for the purpose of income determination on the basis of the accounting period to which they relate. The accrual basis makes a distinction between actual receipts of cash and the right to receive cash for revenues and the actual payments of cash and legal obligations to pay expenses. It means that income accrued in the current year becomes the income of current year whether the cash for that item of income is received in the current year or it was received in the previous year or it will be received in the next year. The same is true of expense items. Expense item is recorded if it becomes payable in the current year whether it is paid in the current year or it was paid in the previous year or it will be paid in the next year.
The advantages of this system are:
- It is based on all business transaction of the year and, therefore, discloses the current profit or loss.
- The method is used in all types of business units.
- It is more scientific and rational application, and.
- It is most suitable for the application of matching principle.
The disadvantages are:
- It is not the simple one and requires the use of estimates and personal judgment.
- It fails to disclose the actual cash flows.
The mixed or Hybrid basis of accounting: Under these method revenues (items of income) is recognized on the cash basis while the expenses are recorded on the accrual basis. The purpose is to remain cautious, safe and hundred percent certain for revenues items and make adequate provisions for expenses.
Although not everyone has the opportunity to study accounting, a CEO needs to keep track of all aspects of successful business, even if a company is recruiting outsourced bookkeeping. Here are ten accounting term definitions to communicate effectively with your online accounting service provider. Ten-Key or Ten-Tips are:
- Property: Property is the money that has been deposited by the business and is owned by no debt or debt. This can be things that are vulnerable to the time or goods sold to customers. This may include cash and investment, building and property, accounts receivable, warehouse inventory, equipment, and supplies.
- Balance Sheet: Balance Sheet is an important aspect of the business. This assets/liabilities + stockholder records the original accounting formula of monthly, quarterly or annual at a certain point in time of equity/capital. With the balance sheet, the financial health of the business can be traced.
- General Account holder: General account holder is the account holder’s account holder, with the balance sheet and income statement accounts. All business transactions are recorded here, including sales, credit purchase, office expenses and income loss.
- Gross Margin: The total number of sales made from related costs like gross margin or profit, sale cost, wholesale cost, materials, and supply.
- Loss: When a service or product sells it for less than the cost of supply or construction, or when the expenditure exceeds the revenue of a particular property, then it is called loss.
- Credit/Account: On the credit/account it means that the products or services have been sold with credit or use. Payment for these items has not been provided immediately, and there may be accounts that result in interest charges.
- Receipts: Receipts are the total amount of cash collected in business transactions for one day. Other revenue collected does not include it.
- Revenue: Income and revenue are compromising on the aggregate amount of all the income collected on each other. It may include cash sales, credit purchases, membership fees and interest income. This is different from the receipts, as it can include money that cannot be collected at the time of delivery.
- Business Discounts: Exemption from a trade discount purchase price is the percentage and is based on the number of items ordered at one point. With small discounts for short orders, higher discounts may apply to larger orders.
- Trial Balance: The test balance is filed in the general account holder and it includes both a debit and a credit for a particular account. Sheets should be balanced with the equivalent debt.