What is the system and Basis of accounting?
System of Accounting
The Systems of Accounting and the basis of accounting are recording transactions within the book of accounts are generally classified into two types.
Double-entry system and Single entry system. The double-entry system is predicated on the principle of “Dual Aspect” which states that each transaction has two effects, viz. receiving of a benefit and giving of a benefit. Each transaction, therefore, involves two or more accounts and is recorded at different places in the ledger. The basic principle followed is that each debit must have a corresponding credit. Thus, one account is debited and therefore the other is credited.
The systems of recording transactions in the book of accounts are generally classified into two types:-
- Double Entry System
The double-entry bookkeeping system is predicated on the principle of “Dual Aspect” which states that each transaction has two effects, i.e. receiving a benefit and giving of a benefit. Each transaction, therefore, involves two or more accounts and is recorded at different places in the ledger. The basic principle followed is that each debit must have a corresponding credit.
Thus, one account is debited and therefore the other is credited. The double-entry bookkeeping system is complete as both the aspects of a transaction are recorded within the book of accounts. The system is accurate and more reliable because the possibilities of frauds and misappropriation are minimised. The arithmetic inaccuracies in records can mostly be checked by preparing the trial balance. The system of double-entry is often implemented by big also as small organisations.
- Single Entry System
A single entry system is not a complete system of maintaining records of financial transactions. It doesn’t record the two-fold effect of each transaction. instead of maintaining all the accounts, only personal accounts and cash book are maintained under this technique.
In fact, this is often not a system but a scarcity of system as no uniformity is maintained within the recording of transactions. For some transactions, just one aspect is recorded, for others, both the aspects are recorded. The accounts maintained under this technique are incomplete and unsystematic and thus, not reliable. The system is, however, followed by small business firms because it is extremely simple and versatile (you will study them intimately later during this book).
Basis of accounting
From the factor of view the timing of awareness of income and costs, there can be two basis strategies to accounting. There are two types of the basis of accounting:-
- Cash Basis
Under accounting, entries within the book of accounts are made when cash is received or paid and not when the receipt or payment becomes due. for example, if office rent for December 2019, is paid in January 2020, it might be recorded within the book of account only in January 2020. Similarly, the sale of products on credit in January 2020 wouldn’t be recorded in January but say in April, when the payment for an equivalent is received.
Thus this technique is incompatible with the matching principle, which states that the revenue of a period is matched with the value of an equivalent period. Though simple, this method is inappropriate for many organisations as profit is calculated as a difference between the receipts and disbursement of cash for the given period instead of on the happening of the transactions.
- Accrual Basis
Revenues and costs are recognised in the period in which they occur rather than when they are paid. A distinction is made between the receipt of cash and the right to receive cash and payment of cash and the legal obligation to pay cash.
Thus, under this technique, the monitory effect of a transaction is taken under consideration within the period during which they’re earned instead of within the period during which cash is really received or paid by the enterprise. This is a more appropriate basis for the calculation of profits as expenses are matched against revenue earned in relation thereto. For example, staple consumed is matched against the value of products sold.
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