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Re: Purchase parts/services same as sales?

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.