Tuesday, May 25, 2010

What's the Recommended Type of Bookkeeping System and Accounting Method ?

Most accountants when asked will recommend that a business use the double entry bookkeeping system and the accrual basis or method of accounting which is based on the revenue realization principle and a principle called the matching concept. The revenue realization principle states that revenue should be recorded when actually earned.

Don't tell me accountants actually play matchmakers or promote a dating service! No the matching principle is recording the revenues earned during a period using the revenue realization principle and matching (offsetting) the revenues with the expenses incurred in generating this revenue. Why is this so important ? All businesses small and large need information to determine how well or badly they are performing; however, if this information is misleading it could lead to false conclusions and unnecessary actions. Show me what you mean.

The following sample business transactions for a mowing and landscaping company will be used to illustrate the accrual basis of accounting/matching concept and the cash basis of accounting.

January xxxx Billed $30,000 To Customers For Services Performed & Completed In January XXXX
January xxxx Received Payments From Customers of $15,000
January xxxx Billed $12,000 by Outside Contractors For Services Performed & Completed In January XXXX
January xxxx Paid Outside Contractors $8,000

February xxxx Received Payments From Customers of $15,000
February xxxx Paid Outside Contractors $4,000

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