Lesson 12: The movements that drive the Value Cycle
When an event happens that has a financial impact upon the business, we record a transaction. Stemming from the original asset-obligation duality, a transaction always has two equal and opposite effects. In Colour Accounting these effects are shown with tickets: one green and one yellow. Each effect has an impact upon one of the five elements of the business.
The five BaSIS Framework elements are subdivided into accounts. In Colour Accounting the accounts are shown as buckets. Accountants sometimes use the word ‘bucket’ in place of ‘account’ as an in-joke!
The five BaSIS Framework elements are subdivided into accounts. In Colour Accounting the accounts are shown as buckets. Accountants sometimes use the word ‘bucket’ in place of ‘account’ as an in-joke!
Accrual accounting v cash accounting
Accrual accounting is actually normal accounting, but it is given this name to differentiate it from the sub-set system of cash accounting.
Accrual accounting is the system of accounting that records income when it is earned and expenses when they have been incurred - the timing of the movement of cash that may be associated with the income or expense is not relevant. That is, when value in any form is generated, and when value in any form is sacrificed, the activity is recorded.
Cash accounting is a subset of accrual accounting that records cash receipts and cash payments only, irrespective of the purpose for those receipts or payments. For example, payment for an asset is not by nature differentiated from payment for an expense - they are both an example of spending cash. A business using cash accounting has a bank account, and simply records cash in and cash out. If they owe, or are owed, they must keep track of this by another means.
Accrual accounting is actually normal accounting, but it is given this name to differentiate it from the sub-set system of cash accounting.
Accrual accounting is the system of accounting that records income when it is earned and expenses when they have been incurred - the timing of the movement of cash that may be associated with the income or expense is not relevant. That is, when value in any form is generated, and when value in any form is sacrificed, the activity is recorded.
Cash accounting is a subset of accrual accounting that records cash receipts and cash payments only, irrespective of the purpose for those receipts or payments. For example, payment for an asset is not by nature differentiated from payment for an expense - they are both an example of spending cash. A business using cash accounting has a bank account, and simply records cash in and cash out. If they owe, or are owed, they must keep track of this by another means.
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Accrual Accounting: various scenarios
With accrual accounting, many of the required entries come about because of a timing difference in the underlying event and the consequent movement of the cash. In the diagram at left, we have summarised the three main scenarios for each of income earned and expenses incurred:
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The balance sheet names used to record these type of transactions can often be confusing for students, mainly because they sound like they are referring to income or expenses. As soon as you see words like "prepaid", "in advance" and "deferred", that should alert you that these are balance sheet type accounts.
[Duration: 2:41]
[Duration: 2:41]
Using colour, rather than debits and credits, makes learning accounting easy and quick...
[Duration 0:24]
[Duration 0:24]
In the following video, Peter Frampton explains how the green and yellow in Colour Accounting, represent debits and credits. And he also throws in a bit of Latin for good measure!
[Duration 2:29]
[Duration 2:29]
Resources**
- Student Workbook - Lesson 12 [2.8MB] - download
- Classic Business Transactions [892KB] - download
- Colour Accounting Buckets template - green [352KB] - download
- Colour Accounting Buckets template - yellow [348KB] - download
- BaSIS Framework [1.4MB] - download
- Transaction sheet - blank* [1.2MB} - download
* If you need to, you can make your own Classic Business Transactions sheet. Download the blank transaction sheet, print it out (you will need 2 sheets), add you own colour if necessary, and use the 15 Classic Business Transactions from p60 of the Student Workbook (Lesson 12) to write up the transactions on your printed sheets.
** Each of the Resources downloads is in colour, but you may not have access to a colour printer. And you really do need these to be in colour to get the full benefit of Colour Accounting. The following video shows how you can add colour manually.