In personal finance, a chequebook records most transactions, with statements from banks or investment accounts providing records of the rest. In business, accounting journals and ledgers are set up to record transactions as they happen. The process of accounting records these transactions and records what has been gotten and what has been given up in exchange, what flows in and what flows out. In the market economy, something is given up in order to get something, so each trade involves at least one thing given up and one thing gotten-two things flowing in at least two directions. The Accounting Processįinancial decisions result in transactions, actual trades that buy or sell, invest or borrow. As a result, incomes and expenses are noted when the cash is received or paid, or when the cash flows. In personal finance, it almost always makes more sense to use cash accounting, to define and account for events when the cash changes hands. Another advantage of accrual accounting is that it gives a business a more accurate picture of its present situation. A transaction can be completed over time and distance, which allows for extended-and extensive-trade. In this way, accrual accounting allows for the separation in time of the exchange of goods and the exchange of cash. Accrual accounting is the opposite of cash accounting, in which transactions are recognized only when cash is exchanged.Īccrual accounting defines earning as an economic event signified by an exchange of goods rather than by an exchange of cash. Anticipated or preceding payments and receipts (cash flows) are recorded as accrued or deferred. That is, transactions are recorded at the time they occur rather than when payment is actually made or received. In this system events are accounted for even if cash does not change hands. The method of accounting universally used in business today is known as accrual accounting.
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