Forums Accounting What is accounting basics?

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    kritinidhi
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    What is accounting basics?

    #16339

    kritinidhi
    Member

    Accounting is a process of collecting, verifying, summarizing and communicating all the transactions related to money. Accounting has several subfields which include financial accounting, cost accounting, managerial accounting and auditing.

    Financial accounting helps the organization to calculate business transactions and in preparing financial transactions for the external users in accordance with Generally accepted accounting principles (GAAP).

    The basis of accounting can be defined as the time various financial transactions are recorded. There is two types basis of accounting.

    1. Cash basis of Accounting
    2. Accrual basis of accounting

    Cash basis of Accounting

    Under this basis of accounting, revenue is considered when cash is received and expenses are considered only when cash is paid out. Usually, this method is used by small scale companies. But this basis of accounting does not follow GAAP’s principles. This method is the easiest approach to recording transactions.

    Accrual basis of accounting

    Under this basis of accounting, revenue is considered when it is actually earned and expense is considered when expenditures are consumed. This approach includes greater knowledge of accounting since accruals must be recorded at regular time intervals. This method follows GAAP’s principles hence, this approach is more reliable than cash basis of accounting.

    The basis of accounting is must be disclosed before communicating financial statements to the external users.

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