Cash and Accrual Base Accounting

If you are new to this blog you have to read below these 3 posts before further reading.

     1.     What is Accounting

     2.     Standard definition of Accounting

     3.     Type / Nature of Accounts

There are two approaches to record business transaction one is Cash Base Accounting and other is Accrual.

Cash Base Accounting refer to the recording approach where we only record transaction when actual cash in or out from the business. To understand this approach suppose you sell some products to customer for Rs-10,000/-, at March 15, 2019. Customer will pay this amount in two installments after every 15 days. You received Rs-5,000/- the first payment at 30^th, March 2019. When you conclude the books of account at the end March, 2019, following balances will appear in your book of Accounts:

Income 5,000

Cash 5,000

In Cash Base Accounting there is no Receivable and Payable Accounts in Accounting Books.

In Accrual Base Accounting we record transaction at the time of Income earned and expenses occurred, regardless of actually money received or paid. Let’s see the above example again in Accrual Base Accounting approach. The books of Accounts will show the following balances:

Income 10,000

Cash 5,000

Account Receivable 5,000/-

In accounting we will follow the Accrual Base Accounting Approach.

Why we will follow Accrual Base Accounting?

Accrual base accounting gives us the more precise view of business profit and loss, because business selling and purchasing also involve the credit transactions. When we follow the cash base this transaction not recorded and misstated the balances of profit and loss account.

Summary:

Basis of Accounting	Point of Understanding
Cash Base Accounting	Transactions record when actual Cash In or Out from Business.
Accrual Base Accounting	Transactions record when Revenues earned and expenses occurred.

Types / Nature of Accounts

“Accounting is the language of Business”.

Let’s test our definition of Accounting; we all know that for running a business we need some resources.

(if you are new read this blog first)

Resources:

Resources of the business mean the items which is necessary to run a business. e.g Cash, Bank Account, Stock, Office Furniture, Machinery, Delivery Vehicle, Building, and Equipment.

In Accounting we give the name to all this resources is “Assets” and It is also give us a definition of Assets, anything which is qualify in this definition we called it “Assets”.

“An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.”

Go back to our explanation of Resources / Assets, we can observe that there are many assets which have short term benefits, and the others have long term benefits. So, we can divide these Assets according to their future economic benefits time in two categories, Current Assets and Fixed Assets.

Before going to the definition of Current Assets, here are some points to cover first. Accounting Period is the time period when companies close his account and create Profit / Loss statement and Balance Sheet. Generally it is 12 month period, in some countries it is started from January and End at December 31. In Pakistan it is started from July and End at June 30. Future Economic Benefits means the inflow of Cash into the Business.

“Current Assets are that resources of Business which Economic benefit is not more than One Accounting Period.” Current Assets example includes Cash, Bank Account, Stock, Raw Material Inventory, Finished Goods Inventory, Receivables, Short Term Advances, Short Term Investments, and Prepayments.

“Fixed Assets are the resources other than Current Assets.” Or “The Assets which future economic benefit is more than one Accounting Period.” Fixed Assets Example includes Office Furniture, Equipment, Machinery, Land, Building, Plants, Goodwill, Copyrights, and Trademarks.

Fixed Assets are further more divided into Tangible and Intangible Fixed Assets.

“Tangible Fixed Assets are the Fixed Assets which have physical existence”. Example is Property, Plant and Equipment.

“Intangible Fixed Assets are the Fixed Assets which have not physical existence”. Examples are Copyright, Patents, and Goodwill.

Sources:

Sources are the means of business by business get the funds for resources. Sources are two type, Internal and External. Example of Internal Sources is Fund provided by the owner in term of Investment.  Example of External sources is loan from the suppliers, other peoples, and businesses.

Internal Sources Called by Capital / Owner Equity in Accounting and External Sources are called by Liabilities.

As Same in the case of Assets, Liabilities are also current and long terms.

Current Liabilities is the liabilities which will pay in one Accounting Period. Accounts Payable, Notes Payable, Bank Overdraft are the some examples of Current Liabilities. Other than Current Liabilities all the liabilities are Long Term Liabilities.

          For more explanation of Liabilities we can say that liabilities mean all that which we get economic benefit in present and will pay it in future.

Revenues:

If we look closer in businesses we observe that every business is selling something. Some are selling goods; some are selling services, and some are selling both. This is called revenues in Accounting.

Examples of Revenues are Sales Income, Consultancy Fee Income, Service Charges Income etc.

Expenses:

Expenses mean the outflow of money (Economic Benefit) to getting the revenues.

Examples of Expenses include Salaries Expense, Utility Bills Expense, Courier Postage & Telegram Expense, Repair & Maintenance Expense, etc.

Summary:

Types / Nature of Accounts	Explanation
1)    Assets	Future Economic Benefit
2)    Liabilities	Out Flow of Future Economic Benefit at the result of past events.
3)    Owner Equity / Capital	Investment by the owner
4)    Revenue	Selling of Goods and Services
5)    Expense	Out flow of economic benefit to get the revenues

Standard Definition of Accounting

By previous blog we go through the simple explanation about what is accounting, so now we are moving forward to the definition given by the “American Institute of Certified Public Accountants”. This definition gives us very detail view about the accounting. It tell us about the Function of Accounting, which data should be account for, and objective of the accounting.

“Accounting is an Art of Recording, Classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least of financial character, and interpreting the result thereof.”

          (American Institute of Certified Public Accountants)

Function of Accounting:

    Recording, classifying and summarizing is the function of Accounting. For every business transaction and event we apply this function. How accountant will do this, let’s leave to the future discussion, for now we remember that the function of accounting is to record, classify and summarize the information.

Significant Manner:

    Accounting also gives us some sort of Manual about the functions, what should record, where it will be classify and how it will be summaries. This is Called “International Financial Reporting Standards (IFRS)” previously called “International Accounting Standards (IAS)”.

    Accountant follow this rule all over the world, it is very pretty because we can understand the account of every business not only what we are doing in business but every business which follow this standards all over the world!.

Nature of Transactions / Events:

    Accounting only deals in the information about the transactions and events which have money inflow / out flow at the time of recording or in some time in near future.

The example of Transactions and Events are Buying and Selling, Depreciation of Asset / Assets etc.

Objective of Accounting:

    The objective of Accounting is to interpret the result of all the transactions and event which was recorded, and the basis of this result the stockholder of this business can take decisions.

Stack Holders:

    There are many people or group of people, companies and government organization which is linked in somehow with the business, e.g Management of the company, employees of the company, customers and suppliers, tax agencies, regulatory authorities and general publics. Every stack holder have their own objective to the profitability of that particular business.

Conclusion:

    Accounting is to provide the basis of financial decisions to the stakeholder by following the standards.  

Income Tax Return (Check List For Filling of Income Tax Return)

FBR Tax Filling Date Extended

As Federal Board of Revenues Announce the New Date of Income Tax Filling For The year 2018, is 30, April 2019. Many people still have not necessary information to File Income Tax Returns, here are some basic information with check list to require for filling of income tax return.

What is Tax?

Tax is the one of the income source for any government. Like the general people and companies, government also spends money on people of the state, e.g Education, Health, Defense, to run state own enterprises, and also infrastructure, that’s why government need money. Through giving tax to the government, people help his country to achieve this objective. In the recent press release of Federal Board of Revenue (FBR) the tax return filler crossed the number 1.8 million for the tax year 2018, for the year 2017 this number till December 2017 is 1.158 million. Where the population of Pakistan is 207.7 Million (according to the population census 2017), the percentage of Tax Filler as compare to population is 0.0057%, this figure in India is 2 %.

Income Tax Return

Income Tax Return is the online statement to file the income with other details to the government. You can file this statement online through IRIS system of Federal Board of Revenue. You need your ID (CNIC in the case of Individual) and password. if you are not registered with FBR, then click how to Register.

Here you need some working before start the filing.

For Income Tax Return Statement (114(1))

1)     Income

You need to calculate your total income for the whole year e.g Jul-2017 to Jun-2018 in following categories.

a)     From the salary

b)     From Rental Property received or receivable

c)     For sole proprietor Business at least Income Statement and Balance Sheet of the business.

d)     Gain From Sales / Purchase of Capital Assets

e)     Other sources like, Dividends, royalty, profit on debt, pension, amount received from winning a bond or raffle etc.

f)      Foreign income sources

g)     Agricultural Income

h)     Agricultural Income Tax

2)     Tax Chargeable / Payments

a)     Zakat Paid (u/s 60)

b)     Pay any amount in the head of Worker Welfare Fund (u/s 60A)

c)     Pay any amount in Worker Participation Fund

d)     Profit on Debt (u/s 60C)

e)     Education Expense (u/s 60D)

f)      Charitable Donation (u/s 61, Part I, 2^nd Schedule)

3)     Adjustable Tax

a)     If Salaried Person, Tax Deduction Certificate from Employer (u/s 149)

b)     Cash Withdrawal from bank (u/s 231A)

c)     Telephone Bill (u/s 236(1)(a))

4)     Final / Fixed / Minimum / Average / Relevant / Reduced Tax Rate

a)     Profit on Debt (u/s 7B)

For Wealth Statement (116(2))

1)     Personal Expenses

a)     Rent

b)     Rates / Taxes / Charge / Cess

c)     Vehicle Running / Maintenance

d)     Traveling

e)     Electricity

f)      Water

g)     Gas

h)     Telephone

i)       Asset Insurance / Security

j)       Medical

k)     Educational

l)       Club

m)   Functions / Gatherings

n)     Donation, Zakat, Annuity, Profit on Debt, Life Insurance Premium etc

o)     Other Personal / Household Expenses

p)     Contribution in Expenses by Family Members

2)     Personal Assets / Liabilities

a)     Agricultural Property

b)     Commercial, Industrial, Residential Property (Non-Business)

c)     Business Capital

d)     Equipment (Non-Business)

e)     Animal (Non-Business)

f)      Investment (Non-Business) (Account / Annuity / Bond / Certificate / Debenture / Deposit / Fund / Instrument / Policy /Share / Stock / Unit, etc.)

g)     Debt (Non-Business) (Advance / Debt / Deposit / Prepayment / Receivable / Security)

h)     Motor Vehicle (Non-Business)

i)       Precious Possession

j)       Household Effect

k)     Personal Item

l)       Cash (Non-Business)

m)   Any Other Asset

n)     Assets in Other’s Name

o)     Total Assets inside Pakistan

p)     Assets held outside Pakistan

q)     Credit (Non-Business) (Advance / Borrowing / Credit / Deposit / Loan / Mortgage / Overdraft / Payable)

(Click here for Complete Guide For Income Tax Filing)

Accounting Templates

 Download Sales Invoice

Download Purchase Invoice

               

             

Download Payment Voucher

Download Receipt Voucher

About Us

Sir Muhammad Irfan have MBA (Finance) and M.Com (Finance). he worked as Key Professional in Accounts and Finance Department.

he also teach Accounting at Intermediate and Graduation Level. SMI teach in University as Visiting Faculty to BBA and MBA Students.

In today’s world there is lot of gap between accountant and the real world business problems. business are facing so much competition and the only way to be the top of the competition for businesses need to be right information at right time. 

SMI build small applications which increase the efficiency of Accountant and reduce the risk of errors.

Website: Sir Muhammad Irfan
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Accounting Terms

1. Assets

Assets are the wealth that has been accumulated by the business and is owned outright without lien or loan. It may be items that depreciate over time, or goods that are sold to customers. This may include cash and investments, buildings and property, accounts receivable, warehouse inventory, equipment and supplies.

2. Balance sheet

The balance sheet is an important aspect of business. It records the basic accounting formula of assets = liabilities + stockholder equity / capital at a certain point in time, either monthly, quarterly or yearly. From the balance sheet the financial health of the business can be ascertained.

3. General ledger

The general ledger is the side of the bookkeeping ledger that contains the balance sheet and the income statement accounts. Here all business transactions are recorded, including sales, credit purchases, office expenses and income losses.

4. Gross margin

Gross margin or profit is the total number of sales that have been made, subtracted by the associated costs, such as manufacturing costs, wholesales costs, material, and supplies.

5. Loss

When a service or product sells for less than what it cost to supply or manufacture it, or when expenses have exceeded revenues of a particular asset, it's called a loss.

6. On credit/On account

On credit or on account means that products or services have been sold with the use of credit. Payment has not immediately been provided for these items, and there may be terms on account that may result in interest charges.

7. Receipts

Receipts is the total amount of cash collected in business transactions over the course of one day. It does not include other revenue collected.

8. Revenue

Income and revenue are interchangeable, compromising the total amount of all income collected at one point in time. It may include cash sales, credit purchases, subscription fees and interest income. It differs from receipts, as it can include monies that are not collected at the delivery time.

9. Trade discount

A trade discount is a percentage discounted from the purchase price, and is based on the volume of goods ordered at one point in time. Higher discounts may be applicable to larger orders, with smaller discounts for lesser orders.

10. Trial balance

The trial balance is recorded in the general ledger, and includes both debits and credits for one particular account. The sheet must balance, with debits equaling credits.