Do You Know How the Hybrid Method of Accounting Works?
Apr 20, 2019
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Today, the world of finance, is on the cusp of completing the step of evolving from current system of financial accounting to hybrid accounting. Read on to know more.
Within the field of accounting, there are several systems and sub-methods. These different methods have evolved overtime and have been used as per necessity.
Simply put, larger the size of the business the greater is the volume and number of transactions. A large number of transactions, means the need of a sophisticated method of accounting. In any case, the principle need and significance of accounting can be summed up on 3 words, "keeping track of money".
Hybrid accounting, as the name itself suggests is a modern off-shoot of accounting, where more than one method of accounting is used. The use of several methods, and types of accounting together in an integrated manner is termed as hybrid accounting.
The hybrid method of accounting usually works with the help of both accrual method (book-entry before the transaction) and cash method (book entry during/after the transaction) of transactional entries.
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.
When 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 have to change hands immediately, but still you pass the entry.
The Publication 538, of the Internal Revenue Service (IRS) prescribes some terms and conditions which apply to hybrid method or combination method of accounting. These rules have to be followed for income assessment.
Now, one must take into note that the hybrid accounting is used as per need. That is, there is no exact established system of accountancy. It clearly implies that rather than being a single discipline, it is an integrated form of several methods and systems of accounting.
Usually in hybrid accounting, a mixture of cost accounting (often also known as costing), common financial accounting (based upon the double entry system) and managerial accounting is used.
How does the Hybrid Method of Accounting Work?
The hybrid method is an integration of several other methods. In the absence of an established hybrid method, businesses and companies basically formulate and improvise their own hybrid systems of accountancy. The existence of financial accounting software makes the formulation, development, improvisation and operation of a hybrid system quite easy.
1. 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.
2. 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.
3. 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.
4. 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.
5. Inventory Analysis
The inventory and its worth is frequently analyzed as it is a crucial part of the asset side of the balance sheet.
6. 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.
7. 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.
8. 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.
Due to the highly dynamic nature of modern businesses, graphs indicating, three chief components, namely, assets, liabilities, income and expenditures, are updated every day.
This entire process is possible only due to the existence of superior quality financial software. Most of the entries are automated, due to which statements can be prepared on everyday.
Benefits of using Hybrid Accounting
There are a significant number of benefits of this accounting system. One of the best merit though is that you can modify it as you want, as there are no hard and fast rules.
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'.
The eagle eye's view in hybrid accounting 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.
These benefits can be used to make well-informed and successful decisions. Since the data presented is accurate, the decision can be taken confidently with a well thought-out logic, to derive a precise result.
The hybrid method can be potentially used by almost everybody, from small establishments to giant corporations. However, the significance and need is felt more in larger companies since the number of transactions and the volume of finances is giant.
Another significant way in which the companies use this method is, disclosing the financial status and all relevant figures to the shareholders, investors and creditors, on a daily basis.
To sum up the hybrid accounting method in one sentence, one can say: "income, expenditure, assets and liabilities, per unit, per minute, per hour, per day, per month, per quarter and per year". You can have these figures right under your nose.