WA W2 BUS 1102 - Written Assignment PDF

Preview

Summary

Written Assignment...

Description

Career paths in accounting University of the People BUS 1102 Basic Accounting 9 September 2020 Career paths in accounting University of the People BUS 1102 Basic Accounting 9 September 2020 University of the People BUS 1102 Basic Accounting Written Assignment Week 2

3 February 2021

You are a new accountant at a salon. The salon had previously used cash basis accounting to prepare its financial records but now considers switching to an accrual basis method. You have been tasked by the owner with determining if this transition is appropriate. When you go through the records you notice that this transition will greatly impact how the salon reports revenues and expenses. The salon will now report some revenues and expenses before it receives or pays cash. You are tasked with creating a document for the owner that addresses the following:



How will change positively impact its business reporting?



How will change negatively impact its business reporting?



As the accountant, would you recommend the salon transition from a cash basis to an accrual basis? Please explain your answer, citing research information.

We must identify the difference between Cash basis accounting and an Accrual basis accounting: 

ash basis accounting: where revenues and expenses are only recorded until the cash is received or paid. So, if a company sold an item to a customer on a credit basis, it has to wait until the customer pays so they can record it as a revenue on its balance sheet. For example, if an electronic store sells a customer a flat screen a on credit in October, but does not receive payment until December, then the revenue for this sale is not recorded until December.



Accrual basis accounting: It is a method that requires to record all the revenue and expenses at the time when the goods are sold or received even though without receiving the cash yet. For example, if a store sold an item, they have to record this service in their income statement whether they received the money or not.

Advantage of Accrual Accounting and positive impact on salon business reporting: For the salon to switch frosh cash basis accounting to accrual basis accounting some advantages which can impact the business in a very good way. Accrual basis accounting can be more detailed regarding the company finances, it shows a better financial view. So, it shows me exactly when the amount of money which was earned and the amount of money which was spent. Also, accrual basis accounting conforms to GAAP and it's useful for the small business as when they expand, they don't have to change their method of accounting. Also, accrual basis accounting is mandatory for business income for some banks.

Negative in Salon Business reporting: If we compared the two accounting methods, we would find the accrual basis accounting is more complicated and time-consuming especially for a small business like a salon which will be so difficult to manage to track the account receivable and the account payable. And it also might be misleading as you will have on the income statement for example that you have earned $1000 in the month of Jan but actually, you didn't receive that cash yet, so it will affect badly on managing the bills and other liabilities. For me, I would recommend the salon to continue in cash basis accounting as it's simple and suitable for that type of business. where the business shows revenue when it received the cash and shows expenses when it spends the cash. So you don't have the hassle of tracking receivables and payables, plus the ledger is easy to read. Also, another benefit for cash basis accounting is that you can postpone the tax as it only recognizes the revenue that is actually received while this is not the case in accrual basis accounting. It is very important in cash or accrual accounting method to adjust entries update on its accounting record at the end of any transactions that have not yet been recorded. It is very important and necessary to ensure the income statement and balance sheet present the correct update numbers (Franklin, M. Graybeal, P. & Cooper, D. (2020)

Reference: Franklin, M. Graybeal, P. & Cooper, D. (2020). Principles of accounting, volume 1: Financial accounting. Open Stax Rice...