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Thursday, June 24, 2010

Accounting Basics - What is Accrual Accounting Principles?

The accrual accounting method is a method of managing the accounting of a business in which transactions are recorded at the time they take place even if an exchange of assets has not taken place between the entities involved in the transaction, i.e. payment for the goods sold or services provided was not yet received by the seller and wan not yet made by the buyer. This method is based on the basic accounting principle called the matching principle, i.e. when it is necessary to match revenue with expenses incurred to earn such revenue.

How is the Accrual Accounting Method Used?

The basis of the accrual method of accounting dictates that as soon as a document, such as a billing statement or sales receipt, which supports the assumption that a debit or credit transaction has taken place, the accountant makes an entry into the appropriate accounts to represent the transaction. The accountant would not, for example, wait until the cash is collected to record a sale as a credit in the accounts, but would record it as soon as the contract was made to support the title to get cash in the future. Of course, if cash or other property is exchanged between the entities involved in the transaction at the time the transaction initially takes place, such as a purchase made in a retail store, then the transaction would be recorded at that time regardless of the accounting method being applied.

What are the Benefits of Using the Accrual Accounting Method?

With the accrual accounting method, since liabilities are accounted for as soon as they is a legal basis for them to occur, it is less likely that a business will fail to allocate assets to cover the liabilities due to an accounting error. Also, since using accrual accounting means that assets, liabilities and revenues are recorded in chronological order, accrual accounting allows transactions to be evaluated easily and efficiently. In addition the accrual method of accounting provides more accurate financial position of the business. However, the accrual method does require that more entries are made into the accounts and since transactions are recorded despite whether cash for goods sold or services provided is received or not, in case customers fail to pay their debts, such debts will have to be recorded as losses. This is a good practice, as financial statements will indicate quality of accounts receivable and losses incurred on sales to non-paying customers.

We can conclude that this method of accounting is more widely used and recommended accounting method.

Example of the Accrual Accounting Method

The company ABC on May 2, 2009 signs an agreement with the company XYZ to sell 1000 chairs. The chairs are delivered to the warehouse of the company XYZ on May 3, 2009 and the ownership title to the chairs is transferred to this company at the delivery time. Payment for the chairs will be made within 30 days from the delivery date. Applying accrual accounting method company ABC in its books will record the transaction on May 3, 2009, when the chairs were delivered to the customer, i.e. recording sales revenue and accounts receivable from the company XYZ, reduce value of inventory by the cost on inventory sold and reflect cost of sales as the expenses related to the sales income of chairs, despite the payment for the goods will be made later.

Applying the same method of accounting, company XYZ will record purchase of chairs in its books, i.e. increasing inventory value and recording liability (accounts payable) to the company ABC.

Thus both companies will have to record this transaction on the date, when ownership title to the goods was transferred from the seller to the buyer, despite the date when actual payment will be made.


The Defination And The Basics Of Amortization.

Many of us have done it at a point or another during our lives however most of us do not know that the term is called amortization. Amortization in its simplest term means paying off your loan over a period of time. Amortization is pretty general and does not just relate to home loan or mortgages. It can be used to refer to your car loan, credit card bills etc.

The process of amortization is usually determining how much you need to pay for each payment over a set period of times. It is usually calculated by the loan amount, the time period in which you have to pay back, the amount per payment and the interest rate.

An example would illustrate the above point better.

Take for example you brought a house for $150,000, you pay a deposit of $20,000. So you are left with a home loan of $130,000. Suppose you found a lender who is willing to give you the loan that is for a period of 30 years with an annual interest rate of 7%

So how much would be your monthly payment?

First we divide the principle loan amount which is $130,000 with the time period in months. That would be 30 times 12 equals 360 months. You also need to factor in the interest rate of 7%. When you add up, the monthly payment would be around $870.00.

Besides calculating the monthly payments, for amortization loans, the interest payment is first deducted and then followed by your loan. However, it does not mean that the first payment is totally used to pay interest but rather parts of it.

Taking our previous example, the monthly payment of $870.00. About $760 will be used to repay interest while the rest ($110.00) is used to pay off your principle loan amount. For each subsequent monthly payment, the amount of interest paid is reduced. Eventually after as you approached the 30-year period, your interest paid would be minimum while the majority of your monthly payment goes towards repaying the principal loan.

Quite clearly as you can see, for each new loan you take out, the early monthly payments will be used to pay off the interest with only a small portion towards repaying your loan.

As you can see, amortization is quite a complicated matter. Most people would never be able to calculate the amount of interest and the amount that goes into repaying the principal loan per month. Thankfully, there are many free amortization calculators available on the internet. You can use them to calculate your monthly payment before deciding which loan to take. Your lender will also provide you with these information when you take a amortization loan.

Accounting Payroll Software

Accounting and payroll is one of the toughest and tiring jobs, if you are not fond with numbers then you are not suited for this job. Mostly this work deals with numbers, amounts and your company's finances and how to manage them.

Accounting involves maintaining the business records of a person or organization and preparing forms and taxes or other financial purposes. Accounting departments hold the records of your employees' payroll and the financial records of your company.

To have an accounting of your company's records is very important so you could keep track of your finances; you'll know where your company's money has gone, or on which department used the money and what it is used for.

Here are some tips and advice for you concerning accounting and payroll software.

You must first decide when you would like to pay your employees, would you pay them twice per month, every week, or every other week if you like. Then after you have make a decision you then have to choose if you want to hire a payroll agency or you're just going to use one of your employee to do the job.

You also need to set up a filing for your employees' records. It's recommended that you must keep important papers and records files on your employees. Ask your friends that manage their own payrolls so that you will know what documents you need to ask in your employee for filing.

If you decided to buy an accounting and payroll software then you should set a budget. You also have to consult someone who has knowledge on these things. You also need to know what kind of features that your company needs in an accounting and payroll software.

You also have to search through the net and look for the right software since you already know what vital features you need. If you want you could download trial version to see if you like their software.

You also need to consider if the software is difficult to use or not, if you buy software that is difficult to use then you need an employee or you need to hire a person who is familiar with computers and software. But if you can buy the user friendly software then you need not hire an expert and just operate the software on your own or assign one of your employees to do the payroll.

Nothing is hard if you just study and understand how it works or know its functions. Accounting and payroll software are created for companies, and to help those employees that are assigned to that area making their work a lot easier and faster. Companies can also benefit from it for the software will also help you find your employees files a lot faster, unlike before when you needed to open folders by folders. Now with just one click you'll find what you need. This kind of software, is helpful to any kind of business, you just need to find and buy the right one.

Accounting Entry Level Salary

There are plenty of entry level opportunities for new accounting graduates. In recent years there have been smaller numbers of students choosing accounting as their field of study creating a shortage of accounting graduates. There are several reasons for this; one the requirements have become tougher; two the field has gotten a bad reputation from accounting scandals; and three increasingly complex laws and regulations have made it an unpopular field to work in for many.

There are four basic fields of accounting: Public Accounting; Managerial Accounting; Governmental Accounting; and, Internal Auditing. Each of these fields has widely varying job duties, however the fundamental tasks of the profession broadly stated "are to prepare, analyze, and verify financial documents in order to provide information to clients". Most accounting jobs require at least a bachelor degree in accounting, but previous job experience is also helpful and most collages offer part time and summer internships.

An accounting salary can range due to many reasons. These include experience, certification, and overall grasp of accounting procedures and protocols. It can also be based on the current economic climate and hiring trends. For example, an entry-level accountant will make much less than a certified account. Although the potential for growth is present, the industry is based on client needs and requests. Therefore, one who can facilitate this will stand out from those who do not possess full market capacity. In addition, educational levels can also determine pay scales and promotional factors. This is common in the financial spectrum and something that changes at a rapid rate.

An accounting salary for an entry-level position usually ranges from $45,000 to $69,000. This includes public accounting, tax, and auditing positions. It also depends on the size of the firm of financial institution you are employed with. Naturally, a larger firm may pay a higher salary then that of a medium sized or smaller enterprise. Managers and directors, however, can make anywhere from $84,000 to $160,000 per year. This is due to the executive nature of their job, and the intricate procedures, which must be learned or followed. Public accounting firm partners can generate up to $200,000, with the prospect of earning even more over time.