Characteristics of Cash Based System

Characteristics of Cash Based System

In this article we would explain the Characteristics of cash based system. These characteristics can be explained in terms of revenue recognition on receipt bases, expenses recognition on payment bases, lack of accuracy, suitability for small business etc.

Important characteristics of cash bases system have been described below;

1.    Revenue on Receipt bases:

In cash based system revenue is recorded in the books of accounts on receipt bases. Where in accrual based system the revenue is recorded on accrued/incurred bases (when revenue is earned).

2.    Expenses on payment bases:

In cash based system the expenses are recorded in the books of account on payment bases (when expenses are actually paid). Where under accrual system, the expenses are recorded on accrued/incurred bases (when the related benefit received by the company). For example, In accrual system salaries are recorded, when services have been performed by the employees.

3.   Does not Reflect True profit:

Cash based system does not reflect the actual profit earned by the business during the period, because revenue and expenses are recorded on the bases of payment, which is not an accurate bases and therefore actual profit cannot be calculated under cash based system.

4.   True Financial position

In Cash based system all assets and liabilities are not accounted for in the books of accounts. Thus statement of accurate financial position cannot be  prepared under cash bases system of accounting and thus actual financial position or true picture of business is not known to the world.

5.   Small  business Option

Cash bases system is used by the small businesses, where most of the financial o r business transactions are cash based.One important example of such business is a small retail store . This system is also preferred by the small scale business due to its low cost and simplicity.

6.   Simple to operate

Cash based system is simple to understand and apply and does not require special knowledge of accounting.

Characteristics of cash based system are listed below

Some important characteristics of cash based system are listed below

1.    Cash based system is simple & easy.

2.    Cash bases system is economical.

3.    Cash based system does not reflect the actual profit.

4.    Revenue is recorded on receipt bases.

5.    Expenses are recorded on payment bases.

Characteristics of Business Transactions

Characteristics of Business Transactions

In this article we would explain some important characteristics of business transaction.  These characteristics may be expressed in terms of business purpose, monetary terms, transaction recording, and reliable measurement.

1.   For the business Purpose:

Business transactions are entered into for the business. Thus personal affairs or transactions are not entered in the books of accounts.

2.   Monetary Value:

Business transactions must have some monetary value. Thus a non monetary transaction does not qualify to be a financial transaction. Examples of non monetary items are qualification, skills, hardworking.

3.   Transaction Recording:

Business Transactions are reordered with the help of debit and credit rules. Transactions are recorded in the journal. Each transaction would have dual aspect i.e. debit and credit aspect. The debit aspect is always equal to credit aspect.

4.   Reliable Measurement:

Business Transactions must be able to measure reliably for recording purposes.

5.   Examples of business transaction:

a.    Expenses payment.

b.    Asset purchased.

c.    Liability settlement.

d.    Transfer of asset.

6.   Types of business transaction:

Business transactions may be classified into simple business transaction and complex business transaction. A simple transaction is one time transaction and does not involve any complexity like purchase of plant on cash, while some transactions are of ongoing nature like financial lease, loan, construction contract etc.

a.    Simple business transaction.

b.    Complex business transaction.

List of characteristics of business transactions:

Some important characteristics of business transactions are listed below

a.    Business transaction entered for business purpose.

b.    It has some monetary value.

c.    It is recorded in journal.

d.    It is recorded in term of debit and credit.

e.    Reliable measurement is required for recognition.

Characteristics of periodic inventory System

Characteristics of periodic inventory System

In this article we would explain the characteristics of periodic inventory system. Theses characteristics have been explained in term of closing stock counting, no stock account, and trial balance reflection of opening balance.

Important Characteristics of periodic Inventory System

Important characteristics of periodic inventory system have been briefly described below;

1.   Closing Stock is counted:

The first important characteristics of periodic inventory that closing stock figure is obtained by the physical count of inventory at the end of the period/year.

2.   No Regular updating:

Inventory is not regularly updated in the stock account. Thus the updated status of inventory is not known until and unless the inventory is counted. This is the only way of knowing the updated inventory status under the periodic inventory system.

3.   Trial Reflect Opening Stock:

Trial balance reflect the opening stock and closing stock, while at the year end opening stock is transferred to profit& loss account and closing stock is created.

4.   Cost of Sales:

At the end of the period, the purchases and opening stock is debited to cost of sales, while closing stock is credited to cost of sales. The balancing figure is transferred to comprehensive income account.

Characteristics list of periodic inventory system:

Some important characteristics of periodic inventory system are listed below

a.    Closing stock figure is obtained from physical count of inventory.

b.    Opening stock & purchases appear in trial balance.

c.    Opening stock & purchases are debited to cost of sales.

Characteristics of Receipt & Payment

Characteristics of Receipt & Payment

Characteristics of receipts & payment can be explained in term of cash summary, cash & bank, recording of transactions, reflection of revenue & capital expenditure.

Important Characteristics of Receipt & payment:

Important characteristics of receipt & payment account have been briefly explained below;

1.   Summary of Cash Transaction:

Receipt & payment account is summary of all financial transactions made in cash. Receipt & payment is a consolidated both cash and bank transaction. Thus we can say that receipt & payment account is a consolidated summary of cash transaction reflect both cash and bank transactions of the organization.

Receipts are reflected on the left side, while payments are reflected on right side of the receipt and payment account.

2.   Reflection Revenue & Capital expenditure:

Receipt and payment reflect both revenue and capital expenditure.

3.   Basic information:

Receipt & payment summary provides basic information about the following

a)    Opening balance of funds.

b)   Fund received during year.

c)    Fund consumed during the year

d)   Closing balance funds.

4.   No profit & loss information:

Receipt & payment account does not give any information about the profit or loss of the organization. A Separate account is prepared for profit or loss calculation is called income & expenditure account.

5.   Format of Receipt & payment Account:

Receipt and payment account can be prepared as following.

Receipt	Rupees	Payment	Rupees
Opening Bal	10,000	Salaries	10,000
Donations	5,000	Rent	5,000
Fees	5,000	Closing Balance	5,000
	20,000		20,000

Characteristics List of Receipt & Payment Account

Some important characteristics of receipt & payment account are listed below

a)    It is a cash summary of transaction.

b)   It reflects both revenue & capital expenditure made in cash.

c)    It has no direct link with profitability.

d)   It shows the opening and closing balance of cash & bank.

Characteristics of Perpetual inventory

Characteristics of Perpetual inventory

Characteristics of perpetual inventory system may be explained in term of movement recording, automatic updating of inventory. These characteristics have been briefly described below;

Important Characteristics of perpetual inventory system

Some important characteristics of perpetual inventory system have been discussed below;

1.   Inventory Account

Inventory account is used instead of purchase account for recording the purchases. However, some organization also use purchases account, but these purchases are transferred to stock. Thus the scheme of entries would be as under

First Method

In this method only one entry is recorded in inventory account. Inventory is debited, while cash or payable is credited.

Date	Particular	Folio	Dr.	Cr.
21.08.2016	Inventory		50,000
21.08.2016	Cash			50,000

Second Method

In this method inventory purchases is first recorded in purchase account and then transferred to inventory account. The journal entries would be as follow

Date	Particular	Folio	Dr.	Cr.
21.08.2016	Purchases		70,000
21.08.2016	Cash			70,000

Date	Particular	Folio	Dr.	Cr.
21.08.2016	Inventory		70,000
21.08.2016	Purchases			70,000

2.   Inventory Movement Recording

All movement in stock shall are recorded in the stock account i.e. sales, purchase, normal loss. Any inward movement of inventory will be debited to inventory account, while outward movement of inventory is credited to inventory account.

3.   Stock Account updated

Stock account is updated with each transaction. Thus at any point of time, the inventory account shows the position of stock at hand. In periodical inventory system we need to count the stock for inventory status.

4.   Counting for Control purposes

In perpetual inventory accounting system, the stock is counted at the end of the year only for the control purposes. Thus counting of closing inventory is primarily is done for reconciling the record with physical status.

5.   Trial balance Appearance

In perpetual inventory accounting system, the trial balance discloses the cost of sales and closing stock figure. There are no mentioning of purchases and opening stock.

Characteristics List of Perpetual inventory System

1.    Inventory account is maintained.

2.    Inventory account is updated with each inventory related transaction.

3.    Physical counting is not required for updated status of inventory.