Topic to be tested:Cash Accounting vs. Accrual Accounting Systems
Learning
Objectives:To develop an understanding over difference between Cash and
Accrual Accounting Systems in real world scenarios.
To understand the practical implication and suitability of accounting systems/basis for business organizations.
Discussion Question:
Scenario
- 1: Mr. Ahsan is running a small shop under the business name of
Small General Store dealing in lighting equipment’s and allied items. He
bought lighting equipment for selling in his store on 21st November,
2012 at a cost of Rs. 6,300. As per the purchase terms, he doesn’t has
to pay the due amount for 40 days. He records this transaction on the
same date of purchase. His accounting period ends on December 31st each
year.
Scenario - 2: Mr. Farhan – the owner of Machines Trader
sold machinery for Rs. 100,000 on 19th February, 2013 to Mr. Zahid with
an agreement to allow him to pay after 30 days from the date of
purchase. While, preparing business accounts, Mr. Farhan recorded this
sale as an income during March 2013 on its receipt. His firm’s
accounting year ends on March 31st each year.
Questions:
1. Which accounting system is followed by Mr. Ahsan and Mr. Farhan for maintaining their business records?
2. Which accounting system would you preferred for commercial organizations in Pakistan? Why?
Note: To avoid negative marking complete your comment within 100 words.
[12:03:59 PM] Silent Eyes: Total Marks 5
Starting Date Wednesday, November 27, 2013
Closing Date Friday, November 29, 2013
idea Solution :
Difference between cash accounting and accrual accounting:
Cash accounting:
It is the accounting in which events are recorded when actual cash or cheque is received or paid.
Accrual accounting;
It is the accounting system in which events are recorded as when they occur.
The
main difference between accrual and cash accounting is the timing of
revenue and expenses recorded. The cash method is mostly used by
the small business and for personal finances the cash method accounts
for revenue only when the money is received and for the expense only
when the money is paid. On the other hand, the accrual method accounts
for revenue when it is earned and expenses goods and services when they
are incurred. The revenue is recorded even if cash has not been received
or if expenses have been incurred but no cash has been paid. Accrual
accounting is the most common method used by businesses.
For example:
Let's say you own a business that sells machinery. If you sell Rs.5,
00000 worth of machinery, under the cash method, that amount is not
recorded in the books until the customer hands you the money or you
receive the check. Under the accrual method, the $500000 is recorded as
revenue immediately when the sale is made, even if you receive the money
a few days or weeks later. The same thing occurs for expenses. If you
get an electric bill for Rs1700, under the cash method, the amount is
not added to the books until you actually pay the bill. However, under
the accrual method, the Rs1700 is recorded as an expense the day you get
the bill.
