When deciding how to account for transactions, business owners must choose between a single or double-entry system and the accrual or cash basis method. Double-entry accrual accounting is one of the most common approaches.
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Fra Luca Bartomomeo de Pacioli, known as the father of modern accounting, published the first known work about double-entry accounting in the mid 15th century. His book possessed the same fundamental elements and methods that accountants use today.
A double-entry accounting system tracks financial activity in which the debits and credits of each transaction equal zero. Double-entry accrual accounting also employs the principles of accrual basis accounting, most notably the matching principle.
The chief rule in double-entry accrual accounting, the matching principle, requires accountants to record transactions in the period the work took place regardless of when cash exchanged hands. Accountants create entries called accruals and deferrals to comply with this requirement.
Common accounts specific to double-entry accrual accounting include accounts payable trade, accrued salaries, accrued vacation, prepaid insurance, unearned revenue and deferred rent. One side of each entry affects the accrual or deferral account and the other side affects an account that appears on the income statement.
Advantages and Disadvantages
Double-entry accrual accounting produces financial statements that reflect all income and expenses related to a particular accounting period, making it an effective approach to analysing revenue and costs. However, accountants must prepare a separate cash flow reconciliation to gauge actual cash reserves.
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