Monday, 16 October 2017

Will AI Soon Replace Accountants?

AI or artificial intelligence has been a growing study in the past few years. Although we won’t be having any terminators walking around soon, the advancements scientists have recently been making are enough to make a lot of employees worry. Unsurprisingly, accountants are no exception to this paranoia.

Artificial intelligence, as its name presupposes, is a field of study that delves into the idea that machines can soon have their intelligent behavior much like living beings. In the field of computer science, artificial intelligence pertains to the study of “intelligent agents”. Intelligent agents are any device that can analyze its environment and formulate an action that will help it attain its goal.

It is undeniable that new technologies can replace jobs that were once filled with people. For example, unknown to most members of younger generations, calling someone through the telephone back then meant having to connect to a room full of switchboard operators.

Switchboard operators were the people that manually and literally connected your line to the person you wanted to talk to back then. However, when telephones started getting automated, more and more switchboard operators lost their jobs. Today, that job is practically inexistent.

Why Is Accounting Threatened By Automation?

As an accountant myself, I admit that our job is full of processes that can easily be replaced by automated machines. Bookkeeping, for example, can now be done by a lot of people, trained or not, with the help of computer software such as Quickbooks or Xero.

Many businesses also claim that hiring an accountant is no longer that important. This is because they believe that anyone with a little bit of background in business can do our job with the help of these new machines. The fact that many of our responsibilities in businesses can easily be replaced by a few lines of codes is enough to make our knees shiver.

However, should we really worry? Should we really treat these machines that are popping around us as competition? For me, the answer is no. I believe that automation will not destroy the Accounting Industry, but rather strengthen it.

Why I Believe Technology Will Improve Accounting Jobs

New Technology Means More Jobs

Many people think that new advancement in technology means them losing their source of income due to machines replacing them. I agree; this is an undeniable truth. However, we often overlook the fact that when new technologies arise, new industries appear. These new industries, in turn, result in new jobs that people need to fill.

For example, during the industrial revolution, laborers were then afraid that the rise of steam-powered machines would eventually replace them. But, alas, a few decades later the employment rate worldwide is better than ever.

Machines Are Tools Not Replacements

Being afraid of technological innovations is like being afraid that stoves will result to chefs being phased out. Tools like those that I mentioned a while ago (Quickbooks and Xero) are actually being used by accountants themselves today.

Instead of being replaced, these types of software instead made the lives of accountants far easier. Not only that, they can now use the time they save from reducing repetitive work like recording for strategizing. Hence, accountants are more in need than ever.

Nothing Can Replace Human Intuition

Although machines may soon be able to learn every task that we do by hand, it is still unlikely for them to fully understand how the human mind works. For example, scientists were recently able to create an algorithm that can mimic the artistic skill of famous artists.

However, no matter how hard they try, these machines will never be able to create a piece of art that can touch a person’s emotions similar to those of Leonardo’s Mona Lisa or Munch’s Scream painting.

Accounting Is More Art Than Science

Finally, accounting is more art than science. Although most proponents of accounting agree that accounting is both an art and science, I believe that it belongs more in the former group. Accounting is an ever-changing study.

Almost every year the Financial Accounting Standards Board release new and updated guidelines for accountants to follow. This is because there are infinite ways we can report and analyze financial data. Hence, we can always find new ways to make businesses understand how they are doing.

Machines, although fast, do not have the same amount of creativity that us humans have. Thus, it is unlikely for them ever to be able to take away our beloved job.

Lastly, humans are naturally self-serving beings. Hence, whether or not I am right that machines will soon replace us, it is inevitable for us humans to prevent them from taking us over. So instead of being afraid of the future, we should look forward to whatever surprise it holds for us.

The post Will AI Soon Replace Accountants? appeared first on Aldaris CPA Group.

Tuesday, 3 October 2017

IFRS 9: The Price Of The 2008 Housing Bubble

After the enormous housing bubble in 2008, the financial sector has never been more paranoid in every decision and guidelines they make. Hence, when the accounting industry created the latest and one of the most significant restructurings in the past few decades, many were still skeptical if it was the right decision or not.

This essay aims to determine if the shift to IFRS 9 was necessary and beneficial to the financial sector. It seeks to answer the following questions: What are the reasons that led to the transition to IFRS 9? What benefits that arose from moving to IFRS 9? And finally, was and would the change be worth it in the long run?

The synthesis will cite various sources to elaborate different opinions from various proponents. According to Redgienald Radam, a column writer for SGV, Co., banks was one of the biggest players during the housing bubble. They were also the most affected by the shift to IFRS 9. With this in mind, we shall focus some parts of the synthesis to the effect of the shift to the banking industry.

The first question is what the reasons for the shift to IFRS 9 are?  IFRS 9 started as a joined project together with the Financial Accounting Standards Board (FASB), which promulgates accounting principles in America.

The boards released a joint argument report in March 2008 suggesting a future objective of reporting all financial instruments at fair value, with all modifications to the fair value reported in net income (FASB) or profit and loss (IASB).

The International Accounting Standards Board (the Board) completed the final element of its comprehensive response to the financial crisis with the publication of IFRS 9 Financial Instruments in July 2014. After the financial crisis in 2008, many have argued that the current financial standards may have contributed to the disaster that rippled throughout the world.

Many bankers, political figures, and commentators contending that fair value accounting was a major contributing factor to the procyclical decline in the value of bank assets, and hence bank stock prices, when the housing market bubble burst.

If the system, for instance, upheld discretion as an essential accounting principle it could have pointed out the fatal repercussions of forking over dividends and bonuses out of unrealized book profits.

Secondly, what are the benefits of shifting to IFRS 9? Accountants have generally accepted the standard as a step up from the prior, discredited model, referred to as IAS 39, that made it possible for financial institutions to overstate their income and create insufficient provisions for loans which could go south and thus led to the financial meltdown.

IFRS 9 features an alternative to value equity investments (for instance, shares in other businesses) as well as specified debt instruments at fair value through other comprehensive income. Thus, there is no necessity to put all your revaluation gains and losses to profit or loss. Therefore, it may substantially reduce the unpredictability of your profits.

If you like a more stable presentation of income to your shareholders, IFRS 9 would be good for you. However, under the new model, which will take effect in 2018, banks will have to provision for debts that go bad much earlier.

This is most likely to expand loan loss provisions on banks’ balance sheets by about 50%, possibly pressuring banks to put aside far more capital to protect against potential future losses. Another major concern in the implementation of IFRS 9 is the cost that would be incurred by different institutions in order to integrate the new standards.

On a survey conducted by SGV, Co. in September 2016 on 36 top tier banks, The participants have organized an extremely broad range of budgets (from below €2m million to over €125 million, with a few undisclosed) about their IFRS 9 programs.

The costs and benefits of the implementation IFRS 9 are toe to toe both of great concern. With the effects of the financial crisis back in 2008 still being felt today, a lot of financial giants are still finding ways to prevent the next financial bubble.

Whether IAS 39 truly was or not a great contributor to the financial bubble, any uncertainty is better met with change than just hoping that it was not at fault. IFRS 9 shows great potential in presenting financial statement with more reliability and giving companies better options in handling the presentation of their income.

The post IFRS 9: The Price Of The 2008 Housing Bubble appeared first on Aldaris CPA Group.

Sunday, 24 September 2017

What Are The Benefits Of Getting A CPA Degree?

It’s a well-known fact that getting those three letters appended on your surname is an uphill battle. However, we still see thousands and thousands of hopefuls lining up to spend almost half a decade of their lives only to be allowed to take the Uniform CPA Examinations of the United States.

With more than half a million certified accountants across the country, there must be some reason why this number keeps on growing right? We’ve listed below some of the most common reasons we think getting certified as a public accountant is a sound investment for your future.

Recognition From People Around You

The board exam for public accounting is known to be one of the hardest certification exams among all professions. According to the American Institute of Certified Accountants, the average passing rate of CPA Exam takers rarely exceeds 50 percent, making it one of the hardest licenses to get.

Hence, people around you, who are knowledgeable about this, will most likely to give you respect for the amount of effort you have given. Furthermore, it will also be a testament to your mental prowess and intelligence. Not only that, everyone will recognize how you were able to achieve what most people will never achieve in their lives.

Steady And Good Source Of Income

Although we would want to stay as philosophical as possible by saying that “money can’t buy happiness,” it is also undeniable that money can give you more freedom to pursue your happiness.

The Bureau of Labor Statistics estimates that the annual salary of a certified accountant can range anywhere between $65,000-$70,000 a year. Furthermore, they found out that the demand for the job is expected to increase in the coming years, and we all know the saying “the higher the demand, the higher the price.”

Ability To Shift To Any Industry You May Want In The Future

The best thing about the training of accountants is that they are made to learn how various industries work. The reason behind this is that any company that wishes to grow will at some point need an accountant who can effectively manage their finances.

Hence, if you are already tired of the hard (albeit high-paying) job of a certified public accountant, you can always shift to any other financial industries out there. Moreover, you will only spend a lesser amount of time due to different principles between various fields.

Increase Your Chances Of Getting The Job You Want

People who have graduated any accounting course are already allowed to pursue their careers as accountants whether or not they pass the CPA licensure exam. However, most auditing accounting firms often prefer accountants who have this license.

Other than that, business owners are often more willing to entrust their business’s money to someone who can show a proof of their skills and competency. Thankfully, that is exactly what a CPA license is for.

Have Access To An In-Demand Industry

As was stated a while ago, the Bureau of Labor Statistics believes that the accounting industry will have a significant boost in the coming years. One probable reason for this is that the sense of entrepreneurship among the masses has been growing these past few years.

More and more millennials are now in love with the idea of having their own business. Thus, more businesses mean higher demand for financial controllers and handlers. Want to avoid experiencing unemployment? Well, being a CPA can make it easier to do just that.

Monitor and Control Your Own Finances

Many people need to hire tax accountants to make sure that they are legally compliant to the requirements of the Internal Revenue. But for accountants, doing so is something as easy as a walk in the park. Their years of experiencing tax reports or cases have prepared them to apply these same principles to their personal lives.

Furthermore, their in-depth training on the principles and budgeting and financial management will make it easier to handle their expenses. It will also help them assess how they use their income, and how they can utilize it better.

Easier To Start Your Own Business

Having first-hand experience of handling businesses, most accountants are already equipped to start building their own companies. Not only that, they are well-informed on how to manage their income and expenses to increase the likelihood of their business succeeding.

Lastly, if you are anxious about leaving the profession that you grew up in, you can always start an accounting or auditing firm of your own.

Honestly, this article would become too long if I were to add in all the possible benefits of becoming a certified public accountant. Hence, the best way for you to know what the others are is for you to start pacing towards your dream of becoming a CPA!

The post What Are The Benefits Of Getting A CPA Degree? appeared first on Aldaris CPA Group.

Friday, 15 September 2017

How Can I Apply Accounting In My Personal Life

Accounting is one of the fundamental activities of any business. Without it, a company would be similar to a blind person driving a high-speed car. They may know how to do business, but they would be blind to important signals that Accounting can give them.

However, it is not only businesses that need Accounting for them to survive. Unbeknownst to many, even regular people like us are using it every single day. We use accounting to check our finances, manage our bills, and even for something as simple as buying groceries.

Surprised? Well, this simple explanation by Investopedia of what Accounting is may help you grasp the idea:

“Accounting is the systematic and comprehensive recording of financial transactions pertaining to a business, and it also refers to the process of summarizing, analyzing and reporting these transactions to oversight agencies and tax collection entities.”

-Investopedia

Although it is specifically about businesses, by reading it, you should a hint on how it applies to our lives. Let us try to use this definition of Accounting on something we often do in our personal lives, namely groceries.

How We Use Accounting Everyday

When cooking something at home, the first thing we often do is check if we have any supplies left. If not, the next thing we’d do is list down all the items that we will purchase in the store.
After you get all the things you need, you proceed to the cashier to pay them the total price of your groceries.

Finally, you rigorously count your change to make sure that there is no overage or shortage. If you find any, you are most likely going to approach the sales person to correct the error.

We’re you able to identify which parts were actions you did were related to accounting? If yes, then good job! But if not, then here’s a simple explanation on how groceries is related to accounting. Summarizing; by looking at your refrigerator, you were already summarizing which items you will buy and which ones you will not.

Analyzing; the act of counting your change to know whether they gave you too much or too little is like an accountant investigating if their business is receiving the correct amount of cash or revenue (auditing).

Reporting; lastly, reporting is when you try to communicate your data to other parties. Hence, when you explained to the cashier that she gave you too much or too little change, you are reporting to her based on how you analyzed what you previously summarized.

With every choice we make, whether for major or minor decision, we are unconsciously using the principles of accounting. Hence, it is an inescapable part of everybody’s lives. Nevertheless, there are also other ways that you could apply accounting to make your life better or earn/save some more of that sweet, sweet money.

Other Ways You Can Apply Accounting In Life

Budgeting Your Money

Most companies hire accountants at the beginning of every business cycle to help them determine the best way for them to spend their existing assets. The reason for budgeting is that it would assist them to avoid wasting their money or resources due to poor planning.

Private people can use the budgeting principles in accounting to help them allocate their salaries. Furthermore, it could help them avoid unexpected shortages due to overspending. Budgeting our expenses are not just limited to long term things like education, or retirement, but also to things that you engage daily like your fare or meals.

Tracking Your Expense And Income

After we budget our expenses, it is important that we know how to follow through it by tracking how we spend our money. Tracking is more of a continuous action that we need to do every time money leaves or enters our pockets.

By tracking our expenses, we can adjust our budget accordingly to accommodate new plans or information that was not available when we first budgeted our money.

Saving For The Future

The best case scenario after budgeting and tracking your expenses is having some leftover money that you can save. Savings are the result of well-planned budgets and careful tracking of expenditures. It allows you have some leeway for next month for emergencies and unexpected expenses.

Furthermore, by being able to save some money, you can be more assured that there is a smaller possibility of you having financial crises.

Investing To Make More Money

Lastly, if you were able to save enough money due to following the first parts of this section, the best move for you is to invest it let your money grow on itself.

You can invest your money in passive investing platforms like stocks, forex, bonds and more. You also have the choice to start up a business that you think would help you make more money than you already have.

There are many options for an individual to invest, all of which will need for you to apply more accounting. Lastly, it is also at this point that you’ll need to start considering asking for the help of professional accountants.

Regardless of how you use accounting in your life, the Aldaris CPA Group is here to help you grow your potential. Contact us for our individual and family consulting services and let us show you how we can help you with your personal finances.

The post How Can I Apply Accounting In My Personal Life appeared first on Aldaris CPA Group.

Friday, 8 September 2017

What are the Most Common Accounting Software Used?

Most accountants train to work with the simplest tools that generations of accountants before them used. However, There may come the point in your career that you will work for a company that too large or too complicated to stick by this traditional means of accounting.

Luckily, modernization has innovated most of the jobs around the world, and the accounting profession is no exception to that. Hence, to keep up with other professional, it is important that one learns about the latest and most common accounting software’s used in the market.

Why Are Accounting Software Important?

Most accountants engage in hundreds, if not thousands, of transactions every single day. Furthermore, they would have to summarize and present these transactions with the highest level of accuracy possible. This rigorousness of their job is because, at the end of the period, these reports would be a major of basis of future decisions.

Before accounting software existed, they’d have to record each one these transactions of their books manually. Hence, not only was their job several times harder before, the accuracies of their reports were highly unreliable. Thanks to accounting software, all these changed.

Most Common Accounting Software

To help you find the best software for you and your business. We’ve listed below 5 of the most used Accounting software by companies today:

QuickBooks Accounting

QuickBooks is one of the most famous accounting software in the market. California-based financial software company Intuit released the first version of the software in 1998 to cater for the need of simplified accounting platforms. Today, QuickBooks, according to the company, holds an estimated 85% of the retail market.

QuickBooks Online lets you see how your business is doing instantly.

QuickBooks Website

The software is available in three variants. The first one is the original desktop version of the software. The desktop-version offered the user various services such as remote payroll assistance and outsourcing, remote access capabilities, online banking and reconciliation, electronic payment functions, and more.

QuickBooks also has a cloud-based service called QuickBooks online. The product is available to users who are willing to pay a monthly subscription which provides them exclusive access to QuickBooks online platform.

Lastly, QuickBooks Point of Sale is one of the newest offerings of Intuit. It aims to replace traditional cash registers by offering other functions such as inventory tracking, customer information, sales, and more.

Xero Accounting

Unlike QuickBooks, the New Zealander Rod Drury and his personal accountant created the software more recently in 2006  to compete with what he believed were outdated accounting software in the market.

Xero is offered as a “software as a service” product where users can access the platform by paying monthly subscriptions. Since its initial release, the product is now available in over 180 countries worldwide.

Some of the major offerings of the software are automatic bank and credit card account feeds, invoicing, accounts payable, expense claims, fixed asset depreciation, purchase orders, and standard business and management reporting. Some of which are not available to others.

FreshBooks Cloud Accounting

FreshBooks caters specifically to smaller service based businesses. The original version of the software was created in 2003 by Canadian entrepreneurs Mike McDerment and Joe Sawada. Three years later they rebranded it to FreshBooks to suit the changing taste of internet users.

The all-new FreshBooks is accounting software that makes running your small business easy, fast and secure. Spend less time on accounting and more time doing the work you love.

FreshBooks Website

One of its biggest advantage over its competitors is its responsive mobile app. Users can access the software while on the go making the product easy to use for freelancers and small businesses. Furthermore, it also offers some necessary functions such as cloud invoicing, reporting, and payment processing.

Wave Accounting

Launched just in 2009, Wave Accounting is one of the newest players in the accounting software market. According to their website, they manage at least $175 billion in revenue and expenses of their customers worldwide annually. The company initially offered the software as a double entry accounting tool.

Wave Accounting Inc. then made available other financial services such as Payments by Wave (credit card processing), Receipts by Wave, Invoice by Wave, Payroll by Wave, and Lending by Wave. All of which is available to anyone for up to a certain number of employees.

Sage 50 Accounting

Lastly, Sage 50 Accounting, formerly known as Peachtree, is offered by the third largest supplier of enterprise resource planning software worldwide namely The Sage Group Plc. It is a subscription-based business management software available to businesses of all sizes.

[Sage] delivers built-in accounting best practices to keep your business finances on track and help you stay compliant with taxes and reporting requirements.

Sage Website

Users can integrate the software with the functions of Microsoft 365 making reports easier to process. Furthermore, it offers an integrated data checker to weed out common mistakes committed by accountants, security functions that allow the users to track who is entering their database, stock management and more.

The post What are the Most Common Accounting Software Used? appeared first on Aldaris CPA Group.

Friday, 1 September 2017

Accrual Vs. Cash Method Of Accounting

As a business grows and prospers, the need for a reliable recording and understanding of their daily transaction becomes more evident. Moreover, the necessity of hiring a professional accountant to apply the fundamental principles of accounting can no longer be ignored.

However, before an accountant could even begin to record the very first journal entry, they would need to decide on some important matters first. And no other choice is more significant than the choice between accrual and cash method.

The accrual basis and cash basis are two of the most common methods of recording transactions. They determine the timing and valuation of most account records. Every type of business can only be best accounted for by either one of them. Thus, the choice between the two is one of the hardest and most critical decisions a business needs to decide.

Lucky for you, we have created this simple article to guide you on which accounting method best suits your type of business.

Accrual Basis Of Accounting

Also known as the accrual method, the accrual basis is the most commonly used method between the two. According to this method, revenues may only be recognized when they are earned. This means, getting paid for a service, does not automatically permit you to record an income in your income statement. It is necessary that you have performed the service first before you can say you can do so.

The expenditures of your business, on the other hand, may only be recognized when either it has been actually used, or when its related income has been recognized. For example, a rim of paper that you have previously bought may not be recorded as an expense until they have been printed on or disposed of. (1)

Pros And Cons of The Accrual Method

The accrual method is preferred by many accountants as it helps represent the real value of the business more than the cash basis. This approach also follows the matching principle of accounting. According to the matching principle of accounting, related incomes and expenses should be recognized at the same time or period.

Hence, the accrual basis can represent a business’s performance for a particular period more accurately and reliably. However, one of the most significant issues of the accrual method is that it requires more effort to implement.

Accountants who use this approach are needed to monitor and remember certain accounts that need to be adjusted due to subsequent events. Another problem is that the recording of incomes and expense do not usually coincide with the issuance of receipts and invoices.

This requires accountants to do some guesswork to value subsequent adjustments in particular account titles. Lastly, the rules and regulations of the accrual method are far more extensive than the cash method; thus, requiring accountants to know hundreds if not thousands of principles and standards.

Who Must Use The Accrual Method Of Accounting

The accrual method is most suitable for businesses that have a few recurring or many, but similar, transactions. Using the accrual method in companies that have hundreds or thousands of unique products can be very troublesome if not impossible an accountant to perform.

Some businesses that are recommended to use the accrual method are:

  • Car dealerships
  • Groceries
  • Services Companies
  • Computer Stores

Cash Basis of Accounting

The cash basis of accounting is a simpler and straightforward counterpart of the accrual basis. The recording and recognizing of income and expenses through this method is based on the physical movement the cash account.

Hence, revenues are recognized when the business gets paid, and the costs are recorded the company pays. This method is used by many small and medium businesses. This is because it is incredibly easy to implement even by someone who has minimal training in the accounting profession.

Pros And Cons Of The Basis Method

As was stated above, the cash basis of accounting is simpler and easier to use for any business. It also consumes lesser time to implement since fewer analytical procedures are needed to value various account. Furthermore, the cash basis is cheaper for smaller companies because there is a lesser need for them to hire well-trained accounting professionals.

However, all these advantages come with a price. The cash basis is rarely able to represent a business’s real value correctly. One common reason for this is that companies often buy their supplies in advance. Hence, if these supplies were to be expensed immediately, even those not yet used by the company would pull their net income down.  (2)

Who Must Use The Cash Method Of Accounting

The cash basis of accounting is most suitable for small and start-up businesses. This is because they can invest the money they would use to hire a professional accountant into other growth related sectors of their company. It is also recommended for companies who have many unique products and expenses but have not yet implemented more advanced automated accounting systems.

Some businesses that are recommended to use the accrual method are:

  • Mom and Pops type of shops
  • Newly opened café shops

The post Accrual Vs. Cash Method Of Accounting appeared first on Aldaris CPA Group.

Thursday, 24 August 2017

US Tax Accounting

Tax Accounting is a service on the compilation, organization, and summarization of all relevant business transactions of an organization in compliance with the regulations set by the taxing authority of a country. The purpose of which is to satisfy a recurring (annually, biannual, etc.) obligation to the state.

It is one of the largest industries in the accounting sector partially because of its necessity. Tax preparation services account for a significant chunk of the revenue of the four largest accounting firms in the US, namely Deloitte, PricewaterhouseCoopers, Ernst & Young and KPMG.

Who Governs Taxation In The US?

The United States Federal Government collects on the average 3 to 4 trillion dollars in taxes every year. For the upcoming year 2018, they are expecting to receive another $3.654 trillion dollars across various revenue sources. (1)

Collecting and monitoring such a massive revenue requires the government to create a separate agency to govern tax collection. This is where the IRS comes in.

Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.

-IRS Mission Statement

IRS, which stands for Internal Revenue Service, was founded on July 1, 1862 as the revenue collection bureau of the Department of Treasury. They are also in charge of administering the Internal Revenue Code of the US. With its central office located in Washington, DC, the bureau currently employs a least 79,000 individuals. (2)

What Is The Internal Revenue Code?

Formally known as the Internal Revenue Code of 1986, the IRC is “bible” of taxation in the US. The code guides the Internal Revenue Service in conducting their responsibilities. It also contains the guidelines that must be followed by all taxpayers. The US House of Representatives published the code in 1926 before revised multiple times into its current form.

The IRC is broken down into several sub categories namely income taxes, estate and gift taxes, employment taxes, miscellaneous excise taxes, alcohol, tobacco and certain other excise taxes.

Other sub categories include procedure and administration, the joint committee on taxation, financing of presidential election campaigns, trust fund code, coal industry health benefits, and finally, group health plan requirements.

Tax Accounting And The IRC

Taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books.

Section 446 of the IRC

Section 446 of the Internal Revenue Code, entitled General rule for methods of accounting, sets the basic guidelines for tax accounting. It emphasizes the method of accounting that should be the basis of the taxable income of the company. It also lists the acceptable accounting methods that a company may use for their tax accounting.

Permissible Accounting Methods

The computation of taxable income can vary significantly depending on which accounting method a company uses. Each method determines the timing of the revenue recognition of a company. Furthermore, it affects every the financial statement of the company, such as balance sheet, income statement, and more.

Listed below are the acceptable accounting methods according to the Internal Revenue Code:

Cash Receipts And Disbursement Method

Cash receipts and disbursement method, cash basis for short, is a revenue recognition method wherein the recognition of income and expenses is directly related to the cash inflow and outflow of the organization. Most of the time, this is because, although the company wishes to use the accrual method, some transactions are too insignificant or immaterial to use the accrual method.

The general rule is that income is recognized when cash is received, while expenses are recognized when cash is given up, regardless whether said income or expenses are earned or used. Furthermore, one major advantage of this method is that it is easier to implement than its counterpart the accrual method.

Accrual Method

Accrual method, on the other hand, is on the opposite side of the spectrum of cash basis. According to this approach, accountants should only recognize revenue and expenses when earned or used up. The accrual method disregards the movement of cash in the organization.

This method is based on the matching principle of accounting. According to the matching principle, accountants should simultaneously recognize income its respective expense when they occur, and vice versa. Finally, the accrual method is more difficult than the cash basis. However, it produces more accurate and reliable financial data. (5)

Combination of Accrual And Cash Basis

Most companies use a mix of both the accrual method and cash basis. Some companies prefer to implement different methods for different types of transactions.

An example of this would be office supplies that are very cheap. No accounting department would want to account for the depreciation for a single stapler. Hence, they would most likely, decide to recognize the stapler as an expense right away. (4)

Key Takeaway

Tax Accounting is one of the first accounting services a company should consider even during their early years. Not only will it help them monitor their tax expenses, but it can also save them from getting in trouble with the Internal Revenue Service.

The Aldris CPA Group offers various tax accounting services such as tax planning and preparation, IRS representation, and estate and trust tax preparation. Contact us or set an appointment through our website and let us help you with your tax needs.

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