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CASH SYSTEM OF ACCOUNTING
CA B.RADHA KRISHNA
Cash system of accounting
Government of India is planning to introduce Acrual System of Accounting in all its departments.
As you all are well aware that India is one of the top destinations for International Investor, there is a need to provide world class facilities to welcome investment from domestic as well as international investor. Not only this even Indian grown from a primitive society to international society as many of our citizens have secured employment and business interest in many countries and have developed a sense of world class facilities.
Even the common man with the advent of electronic media such as TV, internet, mobile etc., has sensed the facilities available across the globe. All these things have made the Government of India to rearrange its existing operating systems to make them competitive and world class. This requires adjustments to our present system of working in many facets. Once such facet is Government Accounting. The present scenario may be compared to a pocket money system where it is like a young boy receiving pocket money from the parent. He has nothing except to ask for more and more and spend within the means.
Accounting in such a background doesn’t require much complications. But whereas the same young boy becomes an adult and sets up his own enterprise, he needs to change his working methods and change his accounting system also to suit to the new enterpreneural status. The Government of India expects the same from all its departments. To make them from Grant giving status to Independent enterprise status.
HISTORY OF ACOUNTING
Accounting is thousands of years old.
The earliest accounting record, which state back more than 7000 years, were found in
. A region which comprises of ancient learn Iran, Iraq, Syria and Turkey.
the existence and need of proper accounting and auditing.
Luca pacioli an Italian Mathematician is widely considered as father of accounting.
He in his book
mentioned about the method of book keeping which is presently known as
“Double Entry System” .
WHAT IS ACCOUNTING
In 1941, American Institute of Certified Public Accountant(AICPA) defined accounting as follows:
“Accounting is the art of recording, classifying and summarizing in significant manner and in terms of money transactions and events which are, in part at least, of a financial character, and interpreting the results thereof
In 1966, the American Accounting Association (AAA) defined accounting as follows:
Accounting is the process of identifying, measuring and communicating economic information to permit informed judgment and decision by the users of the information.
In 1970, the Accounting Principle Board (APB) of American Institute of certified Public Accountant (AICPA) enumerated the functions of accounting as follows:
The function of accounting is to provide quantitative information, primarily of financial nature, about economic entities, that is needed to be useful in making economic decisions.”
Thus, accounting may be defined as:
“The process of recording, classifying, summarizing, and interpreting the financial transactions and communicating the result thereof to the persons interested in such information.”
One part of accounting focus on presenting information in form of general purpose financial statements prepared in accordance with generally accepted accounting principles.Another part of accounting involves compliance with government regulations such as income tax reporting.
Functions of accounting
An analysis of definition of accounting brings out the following functions of accounting
ANALYSIS & INTERPRETING
1.Recording: This is the basic function of accounting. It is essentially concerned with not only ensuring that all business transactions of financial character are recorded but they are recorded in an orderly manner.
Classification is concerned with the systematic analysis of the recorded data, with a view to group transactions or entries of one nature at one place.
This involves presenting the classified data in a manner which is understandable and useful to the internal as well as external end users of accounting statements.This process leads to the preparation of following statements
1.Trial Balance 2. Income & Expenditure Statement
3. Balance Sheet
4.Analysis & Interpreting
: The recorded financial data is analysed and interpreted in a manner that the end users can make a meaningful judgement about the financial condition and profitability of the business operations.The data is also needed for preparing the future plan and framing the policies for executing such plans
5.Communicating: The accounting information after being meaningfully analysed and interpreted has to be communicated in a proper form and manner to the proper person. This is done through preparations of accounting reports, which includes besides the usual income statement and balance sheet,additional information in the form of accounting ratios, graphs , diagram , fund flow statement etc. The initiative, imagination and innovative ability of the accountant are put to test in this process.
Objectives of Accounting
Objective of accounting may differ from business to business depending upon thier specific requirements. However, the following are the general objectives of accounting
To keep systematic business records.
To protect business properties from unjustified and unauthorised use
To assertain the results of the operation, To find out the position of assets and liabilities on a particular date
To show the liquidity position.
To communicate financial results of an enterprise to various stake holders.
To facilitate the rational decision making
To satisfy the requirement of law.
1. To keep systematic record
: Accounting is done to keep a systematic record of financial transactions.
2. To protect business properties
: Accounting provides protection to business properties from unjustified and unwarranted use.This is possible on account of accounting supplying the following information to the manager or proprietor:
i.The amount of fund invested in business.
ii.How much organizational has to pay to others?
iii. How much the organization has to recover from other?
iv. How much business has in th form of
a) Fixed Assets
b) Cash in hand
c) Cash at bank
d) Stock of raw material, finished goods etc.
Information about above matters helps the proprietor in assuring the funds of business are not unnecessarily kept idle or under-utilized.
3.To ascertain the operational profit or loss:
Accounting helps in ascertaining the net profit earned or loss suffered on account of carrying the business or running the organization/Government Department. This is done by keeping a proper record of revenue and expenses of particular period. The Income & Expenditure Account is prepared at the end of the period.
4.To ascertain the financial position of enterprise: Accouting helps in ascertaining the financial position of the enterprise. This objective is surved by balance sheet prepared. The Balance Sheet is a statement of Assets & Liability on a particular date.
5. To facilitate the rational decision making:
Accounting these days has taken upon itself the task of collection, analysis and reporting of information at a particular point of time time to facilitate rational decision making. The American Accounting Association has also stressed this point while defining the term “ Accounting”.
When it says that accounting is, “ the process of identifying , measuring and communicating economic information to permit informed judgement and decision by the users of the information.
Hybrid basis accounting
Systems of Accounting
This refers to set of concepts and rules that determine when a transaction is recognised by accounting system and recorded in books
There are three systems of accounting commonly used.
i. Cash system of Accounting
ii. Accural system of Accounting
iii.Hybrid system of Accounting
CASH BASIS In cash-basis accounting,
companies record expenses in financial accounts when the cash is actually laid out, and they book revenue when they actually hold the cash in their hot little hands or, more likely, in a bank account..
Smaller companies that haven't formally incorporated and most sole proprietors use cash-basis accounting because the system is easier for them to use on their own, meaning they don't have to hire a large accounting staff.
ACCRUAL BASISIf a company uses accrual accounting,
it records revenue when the actual transaction is completed (such as the completion of work specified in a contract agreement between the company and its customer), not when it receives the cash. That is, the company records revenue when it earns it, even if the customer hasn't paid yet.
Expenses are handled in the same way. The company records any expenses when they're incurred, even if it hasn't paid for the supplies yet. he gets the bill.
HYBRID SYSTEM ACCOUNTING: Hybrid basis of
is the system in which we use both cash basis and accrual basis of accounting. Businessman will record revenues and
on the cash basis accounting and he will record expenses and liabilities on accrual basis of accounting.
Cash System of Accounting.
In this system of accounting , transactions are recorded only when there is actual flow of cash.
Revenue is recognised only when it is actually recieved;
Expenditure is recognised only on actual outflow of cash;
This system of accounting is simple to understand and need less skill on part of accountant.
Its whole focus is on cash management.
The recognition trigger is simply the flow of cash.
Advantages of Cash system of accounting
It is convenient and reliable way of tracking expenses and profit without necessitating a great deal of bookkeeping.
It ensures that taxes ar e not paid on monies that have not yet been recieved ; this improves cash flow and ensures that funds are available for tax expenditures.
This can be important for individuals and small businesses and for companies that do great deal of cash and do not maintain large inventories.
Limitations of cash accounting system
It does not differentiate between
with respect to Income as well as Expenditure .
It does not give effect to
timing of events.
It does not provide complete picture of financial position
No information about capital work-in-progress is available
It does not give full information on receivables & payables
No disclosure is made about contingent assets and liabilites
Comprehnsive information is not available about government liabilites.
Unit cost and total cost of services provided by department is not ascertainable.No Weightage is given to the concept of Matching.
No disclosures are made about Accounting Policies on the basis of which Financial Statements are prepared.
WHY TO CHANGE FROM PRESENT CASH SYSTEM OF ACCOUNTING?
Till now, the current accounting system followed by department was serving its purpose. However in changing scenario, when the department plans to enter into aggrement with outside parties for business and loans etc,
Cash- based system does not give a true and fair view of
(a) Financial Position (Income and Expenditure account), and
(b) Financial Health ( Balance Sheet).
Cash–based System leaves lot of accounting data out of the accounting system.Cash–based system does not offer sufficient decision-making support.
Cash-based system does not show financial vulnerability in its complete form; it only shows cash vulnerability.