Different Types of Accounting

In this paper I will compare and contrast different types of accounting. The focus will be on the following types; accrual, cash flow and fund accounting. I aim to show the strength and weakness of each, how entries are made for each, how and if each method handles depreciation, how inventory is accounted for and if there any differences between organizations that use a certain method. Accrual accounting is mostly used by organizations that are for profit. Accounts using this method are prepared with financial transactions accrued. Organizations using this method report revenues and expenses in the accounting period their economic substance is realized, not the period they are received or paid for in cash. An example would be a patient is billed $240 for an office visit. The amount billed is reported in the accounting period it was billed, not the period, which could be six months later, the insurance agency paid the claim. Accrual accounting gives a clearer picture of what a business is earning by including cash and non-cash items, to help analyze a profit. There are four types of balancing accounts when using this method to avoid fabricated earnings and losses that could transpire when currency is not received or paid out in the accounting period as associated earnings and expenses are recognized. The reason being is revenues and expenses are recognized when incurred not when cash is paid out or received in accrual accounts. Accrual accounting allows depreciation and it uses the following methods; straight line methods, declining balance method, double declining method, sum of digit year’s method and activity based depreciation methods. The depreciation does not mean a company is operating in the red. The depreciation only shows a portion of the company’s assets were used to produce revenue for the time period specified. The amount shown as depreciation cannot be recouped through the sale or disposal of the asset. Cash flow accounting method is a simple method for an individual or organizations that do not have many cash transactions or when there is a significant time between each transaction. This method is usually not used by hospitals, a group practice, or any large organization that has to make their financial statement available to the public. Cash accounting does not show an adequate and correct analysis of a company’s performance. Cash flow accounting is much like the name suggests, flow of cash through a business. This method recognizes income when cash is received expenses when cash is paid out. Under this method of accounting cash received is called cash receipts and expenses paid are called cash payments. This process does not recognize the following; promise to pay, and the potential to receive money or services at a later time. Cash flow accounting does not show depreciation. Depreciation is not noted because it is a non-cash expense incurred by a business. The only thing recorded in the cash flow accounting system is cash expenses. Fund accounting system is used by non-profit organizations, government organizations and the public division. When using fund accounting assets and liabilities are grouped according to the purpose they are used. These organizations, such as a hospital, use this method to show how money is spent, not how much profit was earned. The non-profit organization may have several general ledgers depending on the needs of the business. When the business is concerned with making a profit, private physician office, they have only a general ledger under this method. Fund accounting can be seen in a physician’s office or hospital. Computer software actually makes this method easy to use because it provides flexibility. The accounts are given numbers and each transaction processed corresponds with an account number.

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