Ian Hilton cash v accrual accounting

Ian Hilton cash v accrual accounting - 068 STUDENTS ACCRUAL...

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DECEMBER/JANUARY 2006 NATIONAL ACCOUNTANT 068 STUDENTS ACCRUAL VS CASH ACCOUNTING IAN HILTON ‘The full bench of the High Court spent much of yesterday grappling with the intricacies of accrual accounting. 1 “D id you see the newspaper cutting about accrual accounting?” asked Dick. “Must have missed it,” replied Tom. “Why, does it worry you?” “Well, it does,” said Dick. “You know how Harry (an accountant) is always on about that all people should understand accounting and that it is exciting to learn and easy to follow.” “Yes,” said Tom. Dick continued, “Harry thinks young students should learn accounting yet here we have the greatest legal brains in the country spending almost a day trying to understand accrual accounting. This indicates to me that accounting is too difficult to teach to students.” “I’ve never heard such nonsense,” exclaimed Harry as he arrived. “You will be saying it’s difficult to learn to speak Chinese but millions of children do it.” “Yes, mainly in China,” said Tom. “Let me explain the concepts of accrual accounting to you (and the High Court if necessary) and you will see how simple it is,” said Harry.“I will explain it in three steps: (i) the matching concept (ii) accrual accounting (iii) balance day adjustments “That is; why we need it; what it is; and where it takes us. First, the matching concept. This is why net profit is not the same as the cash surplus in the accounting records. It appears that one of the most difficult concepts for non accountants to accept is that ‘profit is not cash’. Profit is determined for a particular period of time. The matching concept requires that all revenues for that period of time be matched with all the relevant expenses of that period. “Revenue is earned within the accounting period. Expenses are incurred within the accounting period. Note, there is no mention here of cash being received for the revenue earned or cash being paid out for expenses incurred. What is required is that all costs associated with the realisation of the revenue be matched to the relevant period. Revenue Time Expenses Accounting Period “The test for revenue is: when is it earned. Revenue is earned as a result of a performance in an economic exchange – that is, a contract and agreement is entered into. The agreement is for a performance for a consideration, which will ultimately culminate in the receipt of cash. But get this fact – when the performance is completed the revenue has been earned. Revenue has been earned at that point. Cash may be paid at once or it may not be paid for some time in the future. “The recognition of expenses follows a similar pattern. Expenses are incurred when goods or services are provided for a consideration which in time will be cash. The incurring of an expense is independent of the actual cash payment. The payment of the cash is not the criterion for the recognition of an expense.” “You appear, as always,” said Dick, “to want
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Ian Hilton cash v accrual accounting - 068 STUDENTS ACCRUAL...

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