Accounting Methods and Reconciliation

(Accounting Methods and Reconciliation)

complete 2 short discussion questions for accounting and math course

There are two types of basic accounting methods; Cash Base Accounting vs. Accrual Base Accounting. Discuss the differences between each of these methods. Please provide the different accounting treatments (i.e. journal entries) of the following transaction for both Cash Base Accounting vs. Accrual Base Accounting:

Example: You are an accountant for a landscaping company (Grantham Landscaping LLC) and have mowed a large park for the local county government. You charge the client $2,000 for the job. The county agrees to pay you 6 months from the date of the service.

Question B

We are all used to the conveniences that come with modern banking. We not only can pay our bills online but can have some paid automatically every month from our account. We can get our checking account balances on a daily basis. With all the automated banking processes that are available today, why do you think that bank reconciliation is necessary?

ANSWER BOTH QUESTIONS WITH AT LEAST 200 WORDS

A: Cash Base Accounting vs. Accrual Base Accounting

The two main accounting methods, Cash Base Accounting and Accrual Base Accounting, differ in the timing of when revenues and expenses are recognized.

Cash Base Accounting: Revenue is recognized only when cash is received, and expenses are recorded when cash is paid. This method is simpler and often used by small businesses or sole proprietors.
Accrual Base Accounting: Revenue is recognized when earned (e.g., when the service is provided), and expenses are recorded when incurred, regardless of when cash is received or paid. This method adheres to the matching principle and provides a more accurate picture of a company’s financial health.

Accounting Treatments for Grantham Landscaping LLC:

Transaction: The company mowed a park and charged $2,000, with payment to be received in 6 months.

Cash Base Accounting:
- At the time of service (no journal entry since cash is not yet received):
  - No entry recorded.
- When payment is received:
  - Debit Cash $2,000
  - Credit Revenue $2,000
Accrual Base Accounting:
- At the time of service:
  - Debit Accounts Receivable $2,000
  - Credit Revenue $2,000
- When payment is received:
  - Debit Cash $2,000
  - Credit Accounts Receivable $2,000

Accrual accounting gives a better representation of financial performance since revenue is recorded when earned, even if payment is delayed.

B: Importance of Bank Reconciliation

Bank reconciliation is a critical process, even with modern automated banking systems. It ensures the accuracy of a company’s financial records and provides several benefits:

Error Detection: Automated systems, while convenient, are not immune to errors. Bank reconciliation helps identify discrepancies between the bank’s records and the company’s books, such as incorrect deposits, unauthorized transactions, or missed entries.
Fraud Prevention: Reconciling accounts helps detect unauthorized transactions or potential fraudulent activities. Without regular reconciliation, these issues might go unnoticed, leading to financial losses.
Cash Flow Management: A reconciled bank account ensures that the company has an accurate understanding of its available cash. This helps avoid overdrafts, missed payments, or cash shortages.
Audit and Compliance: Reconciliation provides a clear audit trail and ensures compliance with financial reporting standards. It demonstrates due diligence in managing financial resources.
Adjustments and Timing Differences: Transactions like outstanding checks or deposits in transit might not immediately appear in bank statements. Reconciling accounts allows companies to account for these timing differences accurately.

Accounting Methods and Reconciliation