gnucash volunteer items for benoit
Jon Lapham
lapham at extracta.com.br
Wed Sep 10 04:54:31 CDT 2003
Linas Vepstas wrote:
> -- "accrual v. cash" reporting. explain what this is ...
Below is what I have for the business intro chapter. This is derived
from a thread a month (?) ago with Derek, and has yet to be committed to
CVS. I'll do that soon, but will require some chapter reorganization.
Original thread:
http://lists.gnucash.org/pipermail/gnucash-devel/2003-August/009809.html
<title>Accrual vs Cash Accounting</title>
<para>There are two main methods of accounting, cash accounting and
accrual accounting.</para>
<para>In the <emphasis>cash accounting</emphasis> 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.</para>
<para>In the <emphasis>accrual accounting</emphasis> 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.</para>
<para>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.</para>
<para>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. </para>
<para>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.</para>
<para>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.</para>
<para>Unfortunately GnuCash does not (yet) automatically convert from
its accrual-based business accounting to cash-based (see bug #95700).
Creating cash-based reports are planned for a future release, but for
now users must make the computation by hand.</para>
--
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Jon Lapham <lapham at extracta.com.br> Rio de Janeiro, Brasil
Work: Extracta Moléculas Naturais SA http://www.extracta.com.br/
Web: http://www.jandr.org/
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