Double Entry & Accrual Basis Of Accounting

Double Entry

Double Entry is a concept which is widely used in accounting at present. In double entry accounting, all financial transactions have equal and opposite effects in at least, two different accounts. It is used to fulfill the equation Assets= Liabilties+Equity, in which each entry is recorded in order to maintain a relationship. Here, transactions are recorded in the form of debits and credits. Double entry book keeping makes it easier to make financial statements directly with precision from books with account and detect errors.

Accrual Basis Of Accounting

Accrual basis of accounting is a method of accounting which is used to measure the performance as well as position of an organization by identifying economic events notwithstanding when cash transactions take place. These economic events are recognized through matching revenues with expenses when transaction takes place instead of payments being received or made. It gives a clear picture of an organization’s financial condition by combining cash inflows and outflows with future expected cash inflows and outflows.

This method of accounting is used by most companies these days. But compared to other systems, it is more complex and costly to implement. Accrual accounting is the opposite of cash accounting which identifies transactions only in case there is cash exchange. Selling on credit and projects which offer revenue streams over a long span of time, often affect the financial condition of a company’s financial condition during transactions. Accrual accounting helps to reflect these economic events in its financial statements during the reporting period when these transactions take place.

Applications

Accrual accounting is mostly used by companies which usually sell on it. The sale is entered into books, once the inbox has been generated, rather than the time when cash is acquired. Similarly, an expense is incurred when the company orders for raw materials. This method is required by organizations whose annual sales are more than $ 5 million and their business venture is structured in the form of a corporation. Businesses with inventory also use this method.

Uses

The major plus point of this method is that it helps in matching income as well as expenses of an organization perfectly during a specific time period. This method is very useful for monitoring the financial performance of an organization. The company receives details about how much money it is generating and what might be expected from future expense reports. This type of recording helps business analysts to analyze financial trends and calculate current cash flow statements on a daily basis.

Conclusion

These days, accrual accounting is used by organizations from different fields as it helps them plan their future finances. They can come up with strategies to boost sales and improve revenues as they don’t have to wait for cash to be received to calculate their profits.