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Indeed, this is one of good area, where most of techies have lot of confusion and illusion
about when accounting comes. Many of consultant came from Technical background and
gradually moved into doing some techno -functional role or pure functional role, thus it is
essestintial to understand the basic accounting and Guided principal .
Normally, there are two basic accounting methods available in the business world:
Cash
Accrual
And most of the ERP accounting products weather its SUN system, Oracle financial or
SAP have functionality to capture on the basis of set up.
Then want is the difference:
Cash Basis Accounting
This is what Based on Realization
We Most of us use the cash method to keep track of our personal financial activities.
The cash method recognizes revenue when payment is received, and recognizes expenses
when cash is paid out.
For example, our local grocery stores record is based on the cash method. Expenses are
recorded when cash is paid out and revenue is recorded when cash or check deposits are
received
If we summarize, under the cash basis accounting, revenues and expenses are recognized
as follows:
Take a note the word cash is not meant literally - it also covers payments by check,
credit card, barter, etc.
If we summarize, under the accrual basis accounting, revenues and expenses are
recognized as follows:
Using the cash method accounting, you would record a $1,500 payment for the
month of July, the month when the money is actually paid.
Under the accrual method, you would record the $1,500 payment in May, when
you take the Laptop and become obligated to pay for it.
As discussed in last post Balance Sheet is a position statement whereas Profit &
Loss Account is a flow statement.
The need of P & L report is enforced because of companies Act, which enforce to
produce Balance sheet and P&L account.
A Balance Sheet as on the last day of the financial year
A Profit & Loss Account for the financial year.
cycle, this account is turned to zero. Entire balance is transferred to the retained earnings
account.
Expense Account : This is the operations expenditure account. Whenever an expenditure
account balance is changed, it leads to a change in the Assets / Liabilities account. This
account behaves just like the Owners equity account as an increase in this account
essentially means a decrease in owners equity. Expense account is not a control account,
its treated as an operative account. At the beginning of a new accounting cycle, this
account is turned to zero. Entire balance is transferred to the retained earnings account.
Spliting the above , the balance sheet can be drived on the basis of these. You can see the
details in one of last post.
BALANCE SHEET
Do you know one of Key Financial Report aka Balance Sheet is a basically position
statement, which describes the financial position of assets & liabilities of
your company/firm
as on a particular date
If you take any accounting book, this can be best defined as a statement of the financial
position of an enterprise as at a given date, which exhibits assets, liabilities, capital, etc.
Why Balance Sheet Required?
Obvious question why this is required? the Only reason is because the the legal rules
(Companies Act) enforce companies to publish such report.
In accounting world , balance sheet should reflect true and fair view in term of
shareholder equity .
Assets and Liabilities are continuously changing with Business activity. To understand
the financial position of the Business, it is necessary to FREEZE the values of financial
components at a certain point in time. These values, or Balances, are used to construct a
balance sheet which shows how the owners equity is represented by the various
categories of assets and liabilities.
Horizontal
Vertical
The only difference between these two are required to give the corresponding amounts
for the preceding financial year (Comparatives) for all the items shown in the balance
sheet.
A typical Balance sheet can be best represented as:
This is based out of accounting equation, which I have discussed in one of old post :
Assets = Owners Equity + Outside Liabilities
A = OE + OL
in the world of double entry system, the rule of thumb is In the double-entry accounting
system, every transaction is recorded by equal amounts of debits and credits
A (DEBIT)= OE + OL(CREDIT)
If you analyze the above sheet in term of accounting equation , this can be best
understood as:
As most most assets and liabilities are based out of historical cost.
Judgments and estimates are used in determining many of the items.
The balance sheet does not report items that can not be objectively determined.
It does not report information regarding off-balance sheet financing.
Balance sheet reports in Oracle are one of the FSG report which need to fine tune base
out of the customer requirement, and this can be executed from the report section within
GL responsibility.