Accountancy and Various Accounting Methods
Accountancy is the process of communicating financial information about a business entity to users such as shareholders and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management; the art lies in selecting the information that is relevant to the user and is reliable.
Accountancy is a branch of mathematical science that is useful in discovering the causes of success and failure in business.The principles of accountancy are applied to business entities in three divisions of practical art, named accounting, bookkeeping, and auditing.
Accounting is defined by the American Institute of Certified Public Accountants (AICPA) as “the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof.
Generally, there are two types of accounting methods, which dictate how the company’s transactions are recorded in the company’s financial books: cash-basis accounting and accrual accounting.
The key difference between the two types is how the company records cash coming into and going out of the business. Within that simple difference lies a lot of room for error — or manipulation. In fact, many of the major corporations involved in financial scandals have gotten in trouble because they played games with the nuts and bolts of their accounting method.
Cash-basis accounting
In cash-basis accounting, companies record expenses in financial accounts when the cash is actually laid out, and they book revenue when they actually hold the cash in their hot little hands or, more likely, in a bank account. For example, if a painter completed a project on December 30, 2003, but doesn’t get paid for it until the owner inspects it on January 10, 2004, the painter reports those cash earnings on her 2004 tax report. In cash-basis accounting, cash earnings include checks, credit-card receipts, or any other form of revenue from customers.
Smaller companies that haven’t formally incorporated and most sole proprietors use cash-basis accounting because the system is easier for them to use on their own, meaning they don’t have to hire a large accounting staff.
Accrual accounting
If a company uses accrual accounting, it records revenue when the actual transaction is completed (such as the completion of work specified in a contract agreement between the company and its customer), not when it receives the cash. That is, the company records revenue when it earns it, even if the customer hasn’t paid yet. For example, a carpentry contractor who uses accrual accounting records the revenue earned when he completes the job, even if the customer hasn’t paid the final bill yet.
Expenses are handled in the same way. The company records any expenses when they’re incurred, even if it hasn’t paid for the supplies yet. For example, when a carpenter buys lumber for a job, he may very likely do so on account and not actually lay out the cash for the lumber until a month or so later when he gets the bill.
All incorporated companies must use accrual accounting according to the generally accepted accounting principles (GAAP). If you’re reading a corporation’s financial reports, what you see is based on accrual accounting.
source: http://www.dummies.com/how-to/content/understanding-accounting-methods.html#ixzz1332GCZxR
