SolveYourProblem
Article Series: Accounting
Home & Small Business Accounting
Business
Bookkeeping Systems and Methods
The type of business you are in will affect
the type of records you keep in a number of ways. Whatever
system of bookkeeping you use, the details will have to be
adapted to your special needs. It is important to have all
the information you need for your own use in managing the business
and for tax purposes. At the same time, your records should
not be cluttered with details that aren't really necessary.
There
are many variations when it comes to keeping records. For example, If a housewife buys a dozen oranges for $0.79,
a grocer using the simplest method of recordkeeping merely
records the fact that a $0.79 sale has been made. He doesn't
care whether the sale involves a dozen oranges or a pound of
meat.
Another grocer might want to know that $0.79 worth of fresh
produce had been sold, as opposed to meats or dry groceries.
Under normal circumstances, however, he wouldn't need to know
whether the $0.79 entry on his financial records represented
a dozen oranges or some other item of fresh produce. But if
an appliance dealer, for instance, sells a television set for
$419.95, he will want to record a number of facts in addition
to the amount of the sale: the brand; the model number; trade-in
information, if applicable; sales tax, if any; service contract
charge if service is included; and so on.
Thus, a grocer would not use the same bookkeeping system as
an appliance dealer. In fact, in department or general-merchandise
stores where both groceries and television sets are sold, different
systems are generally used for recording sales in the two departments.
Cash & Accrual Accounting: Bookkeeping
systems differ in the basic method of recording as well as
in the amount of
detail shown. For income-tax purposes, the Internal Revenue
Service recognizes two basic methods - the cash basis and the
accrual basis.
When books are kept on the cash basis, no income or expense
is entered in the journal or ledger until cash is actually
received or paid out. When the accrual basis is used, income
from a sale or other income-producing transaction is entered
as soon as the transaction takes place, even though the cash
may not be collected until some future date. Likewise, in accrual
accounting, expenses are recorded when they are incurred, even
though payment may not be made until later.
Suppose, for example, that you sell $100 worth of goods on
credit. If your books are kept on the accrual basis, the sale
will be entered in the journal immediately. Later, when the
account is paid, you will make another entry to record the
payment. If your books are kept on the cash basis, you will
keep a memorandum record of each credit customer's account.
A credit sale will be noted on this account but not entered
in the journal until the bill is paid.
Now suppose you pay your employees every Friday, and December
31 falls on a Monday. If you use the accrual method, you will
enter the amount of the wages earned between the end of the
last pay period and the close of business on December 31 as
a December expense, even though you pay it in January. If you
keep your books on the cash basis, you will make no entry until
you pay the employees on January 4.
Which
Method Is Best for You? The Internal Revenue Service
allows you to use either basis of accounting - cash or accrual
- provided that it clearly reflects income, and that you use
it consistently. Internal Revenue regulations state, however,
that where inventories play an important part in accounting
for income, the accrual method must be used in recording sales
and purchases. # # # # # SolveYourProblem.com : 2007
> Home > Business
Accounting Articles:
Main Page
|
