business intro

[Derek Atkins]

Jon Lapham <lapham at extracta.com.br> writes:

> So, wadda ya think about the text presented below (I just wrote it,
> criticism will be very welcome)?

It's a good start, I've got some additional text to suggest (see
below).

> Oh, also, where should this text go?  A new "intro to business"
> chapter? I don't think we want to have this anywhere near the personal
> finance people, so it should definitely stay in the later
> chapters... but where?

I think an "Intro to Business Accounting" chapter is reasonable, where
you introduce cash v. accrual accounting and define all the various
business features that you discuss in "later" chapters.

> =====================================
> 
> There are two main methods of accounting, cash accounting and accrual
> accounting.
> 
> In the cash accounting method, you enter income into the books when
> you actually receive payment, and you record expenses when you
> actually write a check.  Most personal finance is recorded using the
> cash method because it is simple to impliment, and fairly accurately
> represents most personal finance transactions.  However, for business
> accounting this method suffers from some serious drawbacks.  Most
> notably, it is difficult to determine your real financial standing
> when you buy or sell items on credit, a very common business activity.
> 
> In the accrual accounting method, you enter income in the books when you
> make a sale, regardless of whether you have received payment or
> not. Inline with this, you record expenses when you receive goods or
> services, even if you will only pay for them at a later date.
> 
> The advantage of accrual accounting in a business setting is that it
> gives a more accurate picture of your finances within a financial
> period, even if payments will be arriving or leaving outside of this
> period of time.  The biggest disadvantage to the accrual method of
> accounting is that it is more complex, requiring entry of a sale or
> purchase twice.  Once at the time of the sale or purchase, and again
> at the time it is paid for.
> 
> The following is an example of a common problem with using the cash
> method of accounting in business. It is possible to artifically
> inflate apparent income in a period simply because many customers paid
> their bills from previous periods, but not due to increased sales.
> This kind of accounting distorts the financial view of the company,
> which may lead to making incorrect business decisions.

Suggested additional text:

The GnuCash business features (Customer Invoices, Vendor Bills, and
Employee Expense Vouchers) implement an accrual-based system.  Income
and Expenses are accounted as they happen instead of as they are paid.
Indeed, there is no way to implement an A/R or A/P system without
implementing it as an accrual system.

However all is not lost for companies that wish to continue to report
on a cash basis.  They key is rather simple: ignore any income or
expenses that have not been paid.  In other words, to compute the
cash-basis income for the current period you have to add the income
from invoices dated in previous periods but paid in this one and then
subtract the income from invoices posted but not yet paid.  Similarly
for expenses you need to add and subtract the bills paid in the
period.

Unfortunately GnuCash does not (yet) automatically convert from its
accrual-based business accounting to cash-based.  (see
http://bugzilla.gnome.org/show_bug.cgi?id=95700 ) Creating cash-based
reports are planned for a future release, but for now users must make
the computation by hand.

-derek
-- 
       Derek Atkins, SB '93 MIT EE, SM '95 MIT Media Laboratory
       Member, MIT Student Information Processing Board  (SIPB)
       URL: http://web.mit.edu/warlord/    PP-ASEL-IA     N1NWH
       warlord at MIT.EDU                        PGP key available