Corporate Accounting Methods: The best & easy explanation
Basically, there are two types of corporate accounting methods that let us know how a company records its transactions in the financial book of the business. One is the accrual accounting and the other is the cash-basis accounting. The main difference that the both have is just the method in which the company records the cash that is going out and coming in the company. But as simple as this difference is, there is a lot of errors as well and even manipulation.
As a matter of fact, a lot of the large companies are involved in the scandals due to the financial frauds, got in trouble and are getting in trouble. This is since they have played a lot with the bolts and nuts of their business’ accounting system. This is since they are very clear about the basics and they know all about the corporate accounting salary.
If you understand what the corporate accounting is then you would easily be able to differentiate between the corporate accounting vs public accounting. The things explained further would help you out in it.
Corporate Accounting Basics: Cash-Basis Accounting
In this type of accounting, the businesses record the investments in the financial accounts. This is when the amount has been deposited and they add it in the revenue records. This is even when they still have the cash in their hands at that time too, or to be clear, in a bank account.
Let us take an instance of a painter who has finished a project on the 30th December of 2003, but does not get the money for it. After the owner has checked all the things, they pay him the cash on 10th January 2004. This painter would still add this earning in the tax report for 2004. And for this method as said in the corporate accounting book, the earnings mean the credit-card receipts, checks and other forms of revenue that they have got from the customer.
Most of the sole proprietors and the businesses that are smaller that have not yet officially consolidated can use this method. It is the best way they can use it on their own where they do not have to hire a professional.
Corporate Accounting vs Public Accounting: Accrual Accounting
In case a business utilizes the accrual corporate accounting, the revenue is recorded when the transaction has been completed. For instance, a particular work has been assigned to a company. When it has been completed by the company and the customer has reviewed it. That is when it has been done. And it not done when the company gets the cash, but when the contract has been completed and closed as the project has been completed.
In short, the company would record the revenue as soon as they gain it, even though the client has not paid them yet. Again, for instance, a company completes with providing the service it that the client asked for and hasn’t got paid for it yet. It would be added in the revenue records of the company still.
If you read your corporate accounting book well, you would know that the expenses are also handled this way. That is, a business records the expenses only when they are contracted, even though the payment has not been done for the supplies yet. Let us take an example again where the company purchases a tool for the job, it can be done on an account or it might not be paid until a month or even later. This is till he gets the bill, but the record has been added to the system of the company.
Note: All partnered businesses require to utilize the accrual accounting. This is as per the accepted corporate accounting or the GAAP. So, if you are going through a corporation’s financial reports, all that they use there is related to the accrual accounting.
Corporate Accounting Basics: What does the Method Matter?
It matters a lot and the reason why the accounting method in the business matters is since it has a huge impact on the gross revenue of the reports of that business. Moreover, it also has impacts on the expenses that are removed from the revenue to reach the end. And this is how:
- Accrual Corporate Accounting:
The revenue and the expenses are matched, offering the business a much perfect idea of what amount is being spent by it to operate every month. And also how much profit the company is actually making.
All the expenses are made a record of during the month it has been contracted in. And this is also even though the payment has not been made yet. The revenues are also made a record of when the project has been done or the product has been shipped to the place needed. This is also when they company has not got the payment for it yet.
- Cash-basis corporate accounting:
The revenue and the expenses are not matched on the monthly basis. Moreover, the revenues are not recognized until they payment has been made to the company and so is with the expenses. They are not recognized until the money has been given out.
This is also even though the payment takes place in the next month that is when the record would be added to the company’s financial system. This helps the company in tracking the actual cash available.
This is how the recording of payment of the taxes differ in the companies and these are the corporate accounting basics that are the main ones used. If this confuses you, then hire an accountant to help you with this task as you concentrate on other parts of the business. GLG Accounting provides with the best lawyers and accountants that would serve you with the best services. Visit https://www.glgaccounting.com/ to know more!
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