Re: Purchase parts/services same as sales?

[Keith Nybakke <..hidden..>]

At 6:06 PM -0800 1/15/07, Chris Travers wrote:

> Are you cash basis or accrual basis?


Operationally, it makes no difference. So, I'm not sure I understand 
the question.

I'm not talking about a job shop where people come in off the street 
and get products immediately, which could be cash basis from an 
operational viewpoint.

I'm describing a business where there is an accounts receivable and 
and accounts payable ledger and a general ledger, too, of course. 
These are all features of an accrual system. And, it's double entry, 
just like all good accounting systems.

> What you say makes sense from a cash basis perspective, but it leaves
> me very uneasy from an accrual perspective.


At tax time, it is easy to take this set of books and extract 
information for cash basis or accrual basis reporting purposes. It 
just depends on how you are set up to file by the IRS. Lots of small 
businesses are set up as cash businesses for tax reporting, but 
eventually become accrual when the value of inventory or receivables 
becomes too great to qualify as a cash business. There's more to it 
than that, but you get the idea.

For ongoing operations, then,  it is an accrual system.

What makes you uneasy about accounting that is driven by activity 
instead of driven by materials in and out of stock, which is what an 
assembly based system does?

Assembly systems capture material flowing into inventory, flowing out 
as components, then hanging around for a while as WIP, finally being 
placed into finished goods inventory, awaiting a sale. Labor and 
overhead is added at each step, increasing the value of the product 
as it moves through the value stream.

Imagine a system where a unique product flows through the production 
system, attracting labor and material to it as it moves along like a 
snowball rolling down a hill. The finished product never enters 
inventory and it is tracked as it moves through the operations that 
make it a finished product. As it is tracked, the consumption of 
material and labor is recorded. Finally, all the steps on the work 
order are completed and the product is shipped, triggering an invoice 
(a receivable). The materials consumed by the product are removed 
from inventory and labor is assessed for its contribution to the 
product.


> Cash basis support is something else that needs to be reworked, IMO as
> it is currently pretty brittle.

That's okay. We can set that issue aside.

Thanks.

Keith