Xacc/280 Week 3 Discussion Questions Essay Example
DQ 1
What would be the effect of removing either the Matching Principle or the Revenue Recognition Principle from the process? Use a concrete example of how doing so might affect accounting in a given period.
From experience of handling financial records for various companies’, from start-ups to million dollar small business, I’ve found that removing these processes can lead to disaster. By eliminating them you are saving more work to do later, it doesn’t matter if it’s the end of the year or if and when the IRS audit the company. If removed there will be no up to date financial records kept to fall back on in the event there are discrepancies in any given transaction at any given time. The main reason this financial process takes place is to insure the books are balanced daily, and monthly as well as year-end. In one company I’ve worked for I was tasked with recording transactions made on the company accounts which included payables from each department, and expenses from the executives. This was a tedious job to maintain but if the transactions were not recorded, the board would not be aware of the amount of revenue that was being paid out. If this wasn’t done until the end of the year it could have caused the company to lose over 100k.
DQ2
What is the difference between the cash basis of accounting and the accrual basis of accounting?
Which one would you select for a company that has inventory and why? Does the size of the company make a difference? Explain how. What would be the advantages and disadvantages of using one basis of accounting over the other?
Accrual basis is matching revenue earned with expenses in a period of time. Cash Basis is real time cash flow; income and expenses are record when cash is received. For a company that has inventory I would use accrual, when accrual basis is used income is recorded when it is earned for those items; regardless if the actual funds have been received and the expenses are assumed as well.
What would be the effect of removing either the Matching Principle or the Revenue Recognition Principle from the process? Use a concrete example of how doing so might affect accounting in a given period.
From experience of handling financial records for various companies’, from start-ups to million dollar small business, I’ve found that removing these processes can lead to disaster. By eliminating them you are saving more work to do later, it doesn’t matter if it’s the end of the year or if and when the IRS audit the company. If removed there will be no up to date financial records kept to fall back on in the event there are discrepancies in any given transaction at any given time. The main reason this financial process takes place is to insure the books are balanced daily, and monthly as well as year-end. In one company I’ve worked for I was tasked with recording transactions made on the company accounts which included payables from each department, and expenses from the executives. This was a tedious job to maintain but if the transactions were not recorded, the board would not be aware of the amount of revenue that was being paid out. If this wasn’t done until the end of the year it could have caused the company to lose over 100k.
DQ2
What is the difference between the cash basis of accounting and the accrual basis of accounting?
Which one would you select for a company that has inventory and why? Does the size of the company make a difference? Explain how. What would be the advantages and disadvantages of using one basis of accounting over the other?
Accrual basis is matching revenue earned with expenses in a period of time. Cash Basis is real time cash flow; income and expenses are record when cash is received. For a company that has inventory I would use accrual, when accrual basis is used income is recorded when it is earned for those items; regardless if the actual funds have been received and the expenses are assumed as well.