Modern Accounting System

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Accounting systems have been used for thousands of years. As businesses grew, people to keep track of costs, profits, and losses invented accounting systems. Modern accounting measures and communicates financial information about an economic entity. This information is used to plan, control, evaluate, and make decisions about a business. The process begins with bookkeeping, which records transactions, such as checks and invoices, and summarizes these transactions in financial statements. Financial managers use the financial statements to raise and spend cash and make intelligent financial decisions. This section defines accounting and contrasts it with bookkeeping and finance functions.
* Accounting is an information system that measures, processes, and communicates financial information about an identifiable economic entity.
* Bookkeeping, primarily a mechanical and repetitive record keeping function, is a subset of accounting.
* Finance is concerned with raising and using cash.
* Accounting supplies information about the company to financial managers so they can make intelligent financial decisions.
* Accounting enables managers to intelligently plan and control the business and make decisions based on objective information.
There are two basic accounting methods available to most small businesses: cash or accrual.
Cash method. If you use the cash method of accounting, you record income only when you receive cash from your customers. You record an expense only when you write the check to the vendor. Most individuals use the cash method for their personal finances because it's simpler and less time-consuming. However, this method can distort your income and expenses, especially if you extend credit to your customers, if you buy on credit from your suppliers, or you keep an inventory of the products you sell.
Accrual method. With the accrual method, you record income when the sale occurs, whether it is the delivery of a product or the rendering of a service on your part, regardless of when you get paid. You record an expense when you receive goods or services, even though you may not pay for them until later. The accrual method gives you a more accurate picture of your financial situation than the cash method. This is because you record income on the books when it is truly earned, and you record expenses when they are incurred. Income earned in one period is accurately matched against the expenses that correspond to that period, so you get a better picture of your net profits for each period.
All businesses need to choose one of these methods of accounting: cash or accrual.
It's important for you to understand the basics of the two principal methods of keeping track of a business's income and expenses: cash method and accrual method (sometimes called cash basis and accrual basis). In a nutshell, these methods differ only in the timing of when transactions both sales and purchases are credited or debited to your accounts. If you use the cash method, income is counted when cash (or a check) is actually received and expenses are counted when actually paid. But under the more common accrual
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