Cash And Accrual Accounting

Today we are talking about Cash And Accrual Accounting in detail, let's first we talk about some basics of Accrual Accounting.

Accrual Accounting Basics:

This is the method by which revenues are recorded when earned, and
expenses are recorded when they are incurred, as opposed to a cash-basis
method of accounting that measures revenue when cash is received and
expenses when they are paid. The accrual method must be used for financial
statements to be considered prepared according to Generally Accepted
Accounting Principles (GAAP).

Accrual vs. Cash Basis Accounting

When working with basic small business financial statements, the
accrual concept is easy to understand. However, in more complex
business environments accrual accounting can become as exacting and
tedious in its application as nuclear physics.Fortunately, we are going
to be discussing the former, not the latter.

You have read the definition of accrual vs. cash (above) so let’s use
one of the most common examples of accrual accounting found in small
businesses, i.e., Accounts Receivable and Accounts Payable. First, you
must be familiar with how debits and credits work.

Which one is better?.... It is not a question of better, it is a question
of accuracy. If you include all accrual transactions on your books, the reader
will have a more complete understanding of what is going on in your business
than if only Cash transactions are recorded. Think about it with our examples.
The Accrual transactions would show more Assets, more Liabilities and more
Revenue than the strictly Cash transactions. This reflects all the activity
going on instead of just a portion. This is why the Financial Accounting
Standards Board (FASB) requires that financial statements that are prepared
using Generally Accepted Accounting Principles (GAAP) use the Accrual
method of accounting.

Chartered Accountant Syllabus

Today i am talking about the Chartered Accountant Syllabus in India.If you are looking for information about Chartered Accountant Syllabus on the web then this article will help you a lot.

Group I – Paper 1: Advanced Accounting
(One paper – Three hours – 100 Marks)

Contents:-


1. Conceptual Framework for Preparation and Presentation of Financial
Statements

2. Accounting Standards

3. Company Accounts

4. Financial Statements of Banking, Insurance
and Electricity Companies

5. Average Due Date, Account Current, Self-
Balancing Ledgers

6. Financial Statements of Not-for-Profit
Organisations

7. Accounts from Incomplete Records

8. Accounting for Special Transactions

Paper 2: Auditing and Assurance
(One Paper – Three hours – 100 Marks)

1. Auditing Concepts

2. Auditing and Assurance Standards

3. Auditing engagement

4. Documentation

5. Audit evidence

6. Internal Control

8. Audit Sampling

9. Analytical review procedures

10. Audit of payments

11. Audit of receipts

12. Audit of Purchases

13. Audit of Sales

14. Audit of suppliers’ ledger and the debtors’
ledger

15. Audit of impersonal ledger

16. Audit of assets and liabilities

17. Company Audit

18. Audit Report


Paper 3: Law, Ethics and Communication
(One paper – Three hours – 100 Marks)

1.Business Laws

2.Company Law

3.Business Ethics

4.Ethics in Accounting and Finance

5.Business Communications

Paper 4: Cost Accounting and
Financial Management
(One paper – Three hours – 100 Marks)

Part I: Cost Accounting

Part II: Financial Management

Paper 5: Taxation
(One paper – Three hours – 100 Marks)

Part I: Income-tax

Part II: Service tax and VAT


Paper 6: Information Technology and
Strategic Management
(One paper – Three hours – 100 Marks)

The Liabilities

A Liability is a legal obligation of a business to pay a debt. Debt can be paid with money, goods, or services, but is usually paid in cash. The most common liabilities are notes payable and accounts payable. Accounts payable is an unwritten promise to pay suppliers or lenders specified sums of money at a definite future date.

Current Liabilities

Current Liabilities are liabilities that are due within a relatively short period of time. The term Current Liability is used to designate obligations whose payment is expected to require the use of existing current assets. Among current liabilities are Accounts Payable, Notes Payable, and Accrued Expenses. These are exactly like their receivable counterparts except the debtor-creditor relationship is reversed.

Accounts Payable is generally a liability resulting from buying goods and services on credit

Suppose a business borrows $5,000 from the bank for a 90-day period. When the money is borrowed, the business has incurred a liability – a Note Payable. The bank may require a written promise to pay before lending any amount although there are many credit plans, such as revolving credit where the promise to pay back is not in note form.

On the other hand, suppose the business purchases supplies from the ABC Company for $1,000 and agrees to pay within 30 days. Upon acquiring title to the goods, the business has a liability – an Account Payable – to the ABC Company.

In both cases, the business has become a debtor and owes money to a creditor. Other current liabilities commonly found on the balance sheet include salaries payable and taxes payable.

Another type of current liability is Accrued Expenses. These are expenses that have been incurred but the bills have not been received

for it. Interest, taxes, and wages are some examples of expenses that will have to be paid in the near future.

Long-Term Liabilities:

Long-Term Liabilities are obligations that will not become due for a comparatively long period of time. The usual rule of thumb is that long-term liabilities are not due within one year. These include such things as bonds payable, mortgage note payable, and any other debts that do not have to be paid within one year.

You should note that as the long-term obligations come within the one-year range they become Current Liabilities. For example, mortgage is a long-term debt and payment is spread over a number of years. However, the installment due within one year of the date of the balance sheet is classified as a current liability.

The Account Types

In order to track money within an organization, different types of accounting categories exist. These categories are used to denote if the money is owned or owed by the organization. Let us discuss the three main categories: Assets, Liabilities, and Capital.

Assets

An Asset is a property of value owned by a business. Physical objects and intangible rights such as money, accounts receivable, merchandise, machinery, buildings, and inventories for sale are common examples of business assets as they have economic value for the owner. Accounts receivable is an unwritten promise by a client to pay later for goods sold or services rendered.

Assets are generally listed on a balance sheet according to the ease with which they can be converted to cash. They are generally divided into three main groups:

• Current
• Fixed
• Intangible

Current Asset

A Current Asset is an asset that is either:

• Cash – includes funds in checking and savings accounts

• Marketable securities such as stocks, bonds, and similar investments

• Accounts Receivables, which are amounts due from customers

• Notes Receivables, which are promissory notes by customers to pay a definite sum plus interest on a certain date at a certain place.

• Inventories such as raw materials or merchandise on hand

• Prepaid expenses – supplies on hand and services paid for but not yet used (e.g. prepaid insurance)

In other words, cash and other items that can be turned back into cash within a year are considered a current asset.

Fixed Assets

Fixed Assets refer to tangible assets that are used in the business. Commonly, fixed assets are long-lived resources that are used in the production of finished goods. Examples are buildings, land, equipment, furniture, and fixtures. These assets are often included under the title property, plant, and equipment that are used in running a business. There are four qualities usually required for an item to be classified as a fixed asset. The item must be:

• Tangible
• Long-lived
• Used in the business
• Not be available for sale

Certain long-lived assets such as machinery, cars, or equipment slowly wear out or become obsolete. The cost of such as assets is systematically spread over its estimated useful life. This process is called depreciation if the asset involved is a tangible object such as a building or amortization if the asset involved is an intangible asset such as a patent. Of the different kinds of fixed assets, only land does not depreciate.

The Cash versus Accrual Accounting

Accounts Receivable is an asset that is owed to you but you do not have money in the bank or property to show you own something -it is intangible, on paper. It grows or accumulates as you issue invoices; therefore, Accounts Receivable is part of an accrual accounting system.

Double-entry accounting is the most accurate and best way to keep your financial records. With a computer, you don’t have to fully understand all the accounting details. Basically, in double entry accounting each transaction affects two or more categories or accounts, so everything stays in balance. Therefore, if you change an asset balance by issuing an invoice some other category balance changes as well. In this case, when you issue an invoice, the category that balances the asset called Accounts Receivable is an income or a sales account.

When you bill your client, there is an increase in income (on paper) and hence an increase in Accounts Receivable. When you are paid, the paper asset turns into money you put in the bank – a tangible asset. Through a process of recording the payment and the deposit, Accounts Receivable decreases and the bank balance increases. This accounting program takes care of all the accounting details.

This paper income can be confusing if you don’t understand that it is the total of all invoiced work, both paid and unpaid. If you have invoiced clients for a total of $10,000 but only $2,000 has been paid, your income will be $10,000 and your Accounts Receivable balance will be $8,000, and your bank account has increased by the $2,000 you received. An accountant would call this an accrual accounting method.

A cash accounting method only counts income when money is received, and it does not keep track of Accounts Receivable.

However, in real life, small businesses tend to use both methods without realizing the difference until income tax time.

This program can handle both accrual and cash based accounting. You can use the G/L Setup option in the G/L module to select either Cash or Accrual based accounting. We recommended that you consult with your accountant to determine which system will work best for you.

Types of Accounting

The two methods of tracking your accounting records are:

• Cash Based Accounting
• Accrual Method of Accounting

Cash Based Accounting

Most of us use the cash method to keep track of our personal financial activities. The cash method recognizes revenue when payment is received, and recognizes expenses when cash is paid out. For example, your personal checkbook record is based on the cash method. Expenses are recorded when cash is paid out and revenue is recorded when cash or check deposits are received.

Accrual Accounting

The accrual method of accounting requires that revenue be recognized and assigned to the accounting period in which it is earned. Similarly, expenses must be recognized and assigned to the accounting period in which they are incurred.

A Company tracks the summary of the accounting activity in time intervals called Accounting periods. These periods are usually a month long. It is also common for a company to create an annual statement of records. This annual period is also called a Fiscal or an Accounting Year.
The accrual method relies on the principle of matching revenues and expenses. This principle says that the expenses for a period, which are the costs of doing business to earn income, should be compared to the revenues for the period, which are the income earned as the result of those expenses. In other words, the expenses for the period should accurately match up with the costs of producing revenue for the period.

In general, there are two types of adjustments that need to be made at the end of the accounting period. The first type of adjustment arises when more expense or revenue has been recorded than was actually incurred or earned during the accounting period. An example of this might be the pre-payment of a 2-year insurance premium, say, for $2000. The actual insurance expense for the year would be only $1000. Therefore, an adjusting entry at the end of the accounting period is necessary to show the correct amount of insurance expense for that period.

Similarly, there may be revenue that was received but not actually earned during the accounting period. For example, the business may have been paid for services that will not actually be provided or earned until the next year. In this case, an adjusting entry at the end of the accounting period is made to defer, that is, to postpone, the recognition of revenue to the period it is actually earned.

Although many companies use the accrual method of accounting, some small businesses prefer the cash basis. The accrual method generates tax obligations before the cash has been collected. This benefits the Government because the IRS gets its tax money sooner.