Coupon Accepted Successfully!


Methods of record keeping

The accounting process starts with keeping a record of each and every financial business transaction. The recording of data and information pertaining to each and every business transaction that takes place within the organization is known as book-keeping. Book keeping is usually done using by one of two methods - the ‘Single Entry Method’ or the ‘Double Entry Method’. The Double Entry method is preferred because it is easier to identify mistakes. Under the double entry method, each transaction has two aspects, a debit and a credit, and both sides must always tally. Thus, it is extremely useful in minimizing any recording errors. Double entry book keeping can be undertaken in two ways:

Cash system – Under the cash system, transactions are only recognized when actually money is paid out. The date on which a person is actually liable to pay is irrelevant.
For example, if A, a bookshop owner sold a book to a customer on 2nd July 2011 and gives him 30 days’ credit period to pay, he will not account for the sale until he If he receives payment on 2nd August, then he will record the sale as having taken place on 2nd August 2011.
Similarly, expenses are also recognized only when they are paid.


Accrual system – Under the accrual system, income is acknowledged on the date when it is earned and the transaction is recorded in the books of account as on that date, and not on the actual date of payment. For example, if A, a bookshop owner, sold a book to a customer on 2nd July 2011 and gives him 30 days’ credit period to pay, he will account for the sale on 2nd July 2011 itself, and not on the date of receiving payment. If money is not received, the transaction will show that the purchaser is liable to pay for the sale. On the date of payment, a transaction showing receipt of cash will be recorded, and the purchaser’s liability to pay will be extinguished.
Similarly, expenses are also recognized when they are due, and not when they are paid.




Does it matter if you choose one accounting method over the other, or if you keep changing your accounting methods?

The profits or losses of a business may look significantly different, depending on the accounting method the business has chosen. For example, a business may enter into a supply agreement which allows for a long credit period. It may so happen that following the cash system would require the business to enter the transaction much later, but under the accrual system it will be required to enter it immediately. Assume that the business is making a 20% profit on the units it has sold on credit. If the business follows the cash system and does not record the transaction, its financial statements will indicate correspondingly lower profits.

However, note that both methods are recognized under Indian tax law, as long as a method is uniformly adopted and there has been no change simply for avoiding tax liability. Changing accounting methods over different financial years will make it difficult to compare your financial results for those years as the principles for recording the transactions have varied.



Test Your Skills Now!
Take a Quiz now
Reviewer Name