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Simple Business

The ma jor limitation with this cash-based method is that it does not record
the depreciation in the value of the equip ment.
In this e xa mple , equip ment with a value of $200 is recorded in the balance
If the value of the equipment declined to $180 over the year, then this would
represent a $20 loss to the business.
This amount could be included as a depreciation e xpense, to more accurately
reflect the net profit of the business over the periods.
Most physical assets decline in value over time, and a depreciat ion e xpense is
generally ca lculated by allocating the cost of the asset over the usable life of
the equipment.
This is broadly similar to recording a declining in ma rket va lue, although the
accounting approach is a book-keeping approach, rather than a ma rket-va lue
The other ma jor d ifference between a cash accounting system and a fu ll set
of accounts is the accrual accounting method.
This approach records each transaction in the p eriod that it applies to, rather
than the date that the actual payment is made.
Accrual accounting produces a more accurate record of the changes in value
during a particula r period than cash -based accounting.
However, accrual accounting is more co mp le x to imp le ment and reconcile,
and many organisations use cash accounting instead.
Basic accounts such as these would generally be suitable for managing
businesses that did not involve large ite ms of equip ment, and for the purposes
such as bank loans.
Basic accounts would not be suitable for capital -intensive industries
involving significant equipment or p lant values, or for forma l reporting to
regulatory authorities and stock exchanges.
2.1.3. Double-Entry Bookkeeping
Accounting is based on a system known as d ouble-entry bookkeeping.