hybrid method of accounting
Hybrid Method of Accounting
With the steady rise in the volume and sizes of businesses, conventional accounting evolved into double entry systems, subsequently cost accounting and managerial accounting were also introduced. Today, the world of finance, is yet again on the cusp of completing the next step of evolving from current system of financial accounting to hybrid accounting.
- If the cash basis method is used for recording transactions, then the accounting entries are passed in the books of accounts only after a transaction is physically completed or is being completed. In other words, the entry is passed when money changes hands, that is either when you actually pay or you receive money.
- In contrast, when one is using the accrual basis method, the entry is passed after the contract to purchase or sale is finalized. That is, you have sold goods today and the purchaser plans to pay you tomorrow, you do not wait till tomorrow to pass the accounting entry. You do that immediately. Money does not necessarily have to change hands immediately, but still you pass the entry.
- Anticipation and Costing: This is the first step. Any business organization needs to spend money to produce goods or provide services. The business then resorts to the costing of the product, that is, the expenditure is assessed, considering the per unit cost that the company incurs.
- Actual Transaction, Journal, Ledger: In case if the transaction is sanctioned by the accounts and finance department, it is entered and recorded on a cash transactional basis. All the entries throughout the year go through the journal and ledger. In cases where the direct cash is used, a cash book entry is done.
- Tax and Duties: This is a salient feature of the hybrid method. Every transaction is taxed or something needs to be paid to the government. Instead of ascertain tax at the year-end, it is calculated right during the transaction. Often a monetary provision for such tax is made as soon as the transaction is made.
- Predictable Expenditures: This one is similar to the tax provision. There are certain expenditures which can be predicted. In such cases, cost analysis of expenditures such as raw material procurement, maintenance charges, power consumption, liability payoffs is done and provision for the same is made. This also helps in cost and profit ascertainment.
- Inventory Analysis: The inventory and its worth is frequently analyzed as it is a crucial part of the asset side of the balance sheet.
- Consolidation of Accounts: Consolidation of accounts is done by companies which own and operate several businesses and establishments. Different accounts, incomes, expenditures, assets and liabilities and other significant accounts are consolidated on a daily basis, so that management personnel can view the entire thing as a single individual company's statements.
- Cost Analysis Statements: Preparation of cost analysis statements is a salient feature where financial accounting and costing brilliantly mix. In a said company, there are several processes working at the same time. A statement indicating the expenditures of each process, per unit and per minute/hour is calculated. The total sales and profit figures of every process are also calculated and indicated on the statement. This is done on a daily basis.
- Final Accounts: The final accounts are often prepared on a daily basis, these usually include an income and expenditure account, a balance sheet and a cash flow statement (which hints the rise and fall in cash flow). Now, these statements are strictly accrual in nature, and contain market prices of all assets and liabilities. The statement indicates the financial status of the company on a daily basis.
- Indexes: Due to the highly dynamic nature of modern businesses, graphs indicating, three chief components, namely, assets, liabilities, income and expenditures, are updated every day.
- Hybrid accounting is a perfect tool that gives us a macro and micro view of the financial status of the business.
- This kind of system uses pre-transactional as well as post-transactional analysis, which helps in not just keeping track of money, but also rationalizes all finance related decisions.
- The third factor is that the hybrid accounting successfully combines multiple accounting methods, which indirectly combines all the merits.
- Hybrid accounting also provides daily updates, which are both cash based and accrual based, and hence while taking decisions, the management do not have to worry about things like, 'how much are we going to spend on maintenance this year', or 'how much tax are we going to owe this year', or 'how much is the worth of our inventory or assets'. This eagle eye's view ensures the precision in decision-making by the management. All the crucial data is precisely analyzed and is present right under their noses.
- Last but not the least, such a system is capable of providing information and resourceful and precise data, regarding every possible cent and dollar that the company deals with, every single day. It's a prefect system, and enables the company to be prepared financially, for any problem as the system in itself is an early warning system.