6.1 CURRENT BASIS OF ACCOUNTING
The report of each transactions of
an organization have to be recorded completely and precise. The bases of
accounting of an organization’s budget and financial statements according to
these transaction are recognised which are assets, liabilities, expenses and
revenues are recognised and what measurement and valuation bases are then
applied to all of the amounts are recognised.
6.1.1 MODIFIED CASH
The modified cash basis of accounting uses components of both
the accrual basis and cash basis of accounting. An organization must record
revenue when it is earned and expenses when an organization are incurred
regardless of any adjustments in cash under the accrual basis. An organization
perceive a transaction when there is either incoming cash or outgoing cash,
hence the receipt of money from a client triggers the recordation of revenue,
while the payment of a supplier triggers the recordation of an asset under the
cash basis. The modified cash basis also uses double entry account, so the
subsequent is transactions can be used to form a complete set of financial
statements. It isn’t possible to have a modified cash basis of accounting
utilizing only the single entry system.
There are no exact details for what is permitted under the
modified cash basis, since it has created through common usage. There is no
accounting standard that has imposed any guidelines on its usage. If the
modified cash basis is used, transactions should be handled in the similar way
on a consistent basis, so the subsequent financial statements are comparable
after some time.
The modified cash basis is not permitted under Generally
Accepted Accounting Principles (GAAP) or International Financial Reporting
Standards (IFRS) which implies that business utilizing this basis will need to
modify the recordation of those components of its transactions that were
recorded under the cash basis, so that they are now accrual basis transactions.
Otherwise, an outside auditor won’t approved on its financial statements.
However, these changes are less than what might be required if a business were
to make a full transition from the cash basis to the accrual basis of
Conversely, the modified cash basis might be adequate as long
as there is no need for the financial statements to be agreeable with GAAP or
IFRS; this might be the case if the financial statements are only to be
utilized internally; this circumstances most ordinarily emerges when a business
is privately held and has no need for financing.
6.1.2 CASH ACCOUNTING
Cash accounting is an accounting strategy that records income
when it is received and records expenses in the period in which they are paid.
There are three important things to remember while determining if cash
accounting is the correct technique for the business. First of all, when an
organization is paid through some type of barter arrangement, these
transactions must be recorded at the fair market cash value of what was sold or
received. Secondly, an organization cannot delay recognition of income when
using cash accounting. Income must be perceived when it is valuably received.
Income is valuably received, when the money is made accessible to the seller.
Finally, the cash accounting technique has implications for tax under this
strategy, it’s just conceivable to deduct the expenses that are incurred during
the accounting year, so it might affect an organization’s net income.
Cash accounting is one of the two main accounting strategies,
accrual accounting being the other. In the accrual accounting strategy, revenue
and expenses are recorded when they are incurred, paying little mind to when
money really changes hands.
6.1.3 MODIFIED ACCRUAL
Modified accrual accounting merger aspects of accrual basis
accounting with cash basis accounting. The aim of this kind of accounting is
measure the flows of current financial resources in governmental fund financial
statements. The standards for modified accrual accounting are set by the
Government Accounting Standards Board (GASB). As the name suggests, this way to
accounting is primarily utilized by government elements. The accounting
prerequisites of government entities are thought to be adequately not the same
as those of for-profit entity to require this different approach.
The two main features of this kind of accounting are revenues
are perceived when they become available and measurable. Accessibility arises
when the revenue is accessible to finance current expenditure to be paid within
60 days. Measurability occur when the cash flow from the revenue can be
reasonably estimated. Secondly, expenditures are perceived when liabilities are
incurred. This is a similar approach utilized under the accrual basis of
accounting, however stock and prepaid items can be perceived as expenditures
when bought, instead of first being capitalized as an asset. In addition, depreciation
cost is not perceived. Rather, assets are expensed when purcahsed.
There are few naming conventions that distinguish modified
accrual accounting from accrual basis and cash basis accounting. For instance,
net income is instead called an excess or deficiency, while expenses are rather
referred to as expenditures.
Accrual accounting is when transactions are recorded in the
books of records as they happen regardless of whether the payment for that
specific goods and services has not been received or made. This technique is
more appropriate in assessing the strength of the organization in financial
The function of accrual accounting is helpful in organizations
where there are a lot of credit transactions or the products and services are
sold on credit, which essentially implies that there was no exchange of cash.
If an organization the goods or products on credit, the sale is
recorded in the books based on the invoice generated. There is a probability
that an organization might not have received the payment by cash at that
specific point in time.
An expense is occurred or recorded when the raw material is
requested and not when the actual payment is made to the supplier by either
money or cheque. The main disadvantage of this type of accounting system is
that as a firm, may paying tax on revenues notwithstanding when the firm may
have not received the cash (credit).
Under the accrual method of accrual accounting expenses are
adjusted with revenues on the income statement. It helps give a superior
picture of the organization’s financial condition.
CURRENT BASIS OF ACCOUNTING BASED ON COMPONENTS
The qualification for the statutory bodies to take after
accrual accounting is stipulated in the statutory bodies (Accounts and Annual
Report) Act 1980. Unless determined generally by their bylaws, every statutory
bodies either make up their financial statements under the full accrual or modified
accrual basis of accounting.
FEDERAL AND STATE GOVERNMENTS
The accounting principle indicates modifies cash as a basis for
accounting in both the federal and state governments. This qualification is
stipulated in Treasury Circular No.8 1974 and was hence assimilated in the
Treasury Instruction 1997.
Local governments used modified accrual accounting. It consolidates
cash-basis accounting and accrual-basis accounting and it concentrates on the “determination
of financial position and changes in financial position”. Governmental agencies
used and accepted the modified accrual accounting because these elements have
an entirely different objective from profit and non-profit.
LIMITATION OF MODIFIED CASH BASIS
Firstly, while the simplicity of the single-entry system
required for the cash method is an advantage, it is also a disadvantage. The
accrual strategy require the utilization of a double-entry system, which
depends on accounting equations. This system gives far more control of
transaction posting, and diminishes the chance of mistakes.
Next, it doesn’t give a means of matching these transactions to
particular items of stock. There are no accounts receivable or accounts payable
records; this can make troubles for organizations that do not get payment for
products immediately or have outstanding bills that have yet to be paid.
Other than that, while it indicates the income of an
organization, it might offer a misleading picture of longer-term profitability.
The cash strategy doesn’t indicate income that has been invoiced but not
received. Besides, it doesn’t consider future expenses. It can also be
misleading. For an instance, your books may show one month as being to a
profitable. Nonetheless, deeper insight may reveal that sales were in moderate,
but various of client’s paid their outstanding bills.
Moreover, since partial payments are not recorded all things
considered in a cash accounting system, the cash accounting balance sheet may
not reflects all monies due.
Finally, based on Internal Revenue Service (IRS), an
organization can’t utilize the cash strategy if the business looks after stock,
is a corporation, or has gross receipts in excess of five million dollars each
year. These are the general rules, but there are exceptions, so if an
organization feel that the business decrease into one of these categories, an
organization should consult a professional.