Question

3. It is permissible to group cash money of wealth to cash money available from offers of commerce and other gained cash money, so that for all these monies that would be one Nisab and one alms year. However, it not permissible to group different kinds of money.

Required: Give examples of non-permissible kinds of money for grouping.

Q4. Discuss Cash-Basis Accounting and Accrual-Basis Accounting.

Answer 1

Question 3 cannot be answered as it requires access to specific text for understanding one Nisab and one alms year. Therefore, I have answered question 4.

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Question 4:

As the name suggests, cash-basis of accounting involves recording of revenues as and when the money/cash is received by the company and not when the sales takes place. Similarly, expenses are recorded when the money is paid by the company (with respect to expenses) and not when the company incurs them. For Instance, let us assume that the company sells inventory worth $5,000 in the month of October 2018. However, it collects cash in December 2018. This amount of revenue will be recorded in the financial statements in December 2018 (the month in which the cash is received) and not October 2018 (the month in which sales is made). Similarly, an electricity bill belonging to the month of October 2018 and paid in November 2018, will get recorded in the books of accounts in November 2018 and not in October 2018.

Under accrual-basis of accounting, the revenues are recorded as soon as the sales is made irrespective of when the cash is realized (by the company) on such sales. Similarly, all expenses are recorded as soon as they are incurred by the company irrespective of when the cash is paid by the company towards such expenses. For Instance, a credit sale of $5,000 will be immediately recorded by the company as a credit to sales revenue account and a debit to accounts receivables account under the accrual-method of accounting. Once, the cash is received by the company, the balance in the accounts receivable account will be reduced (with the amount so received). Similarly, for any purchases made on credit, the transaction is reported as a debit to purchases account and a credit to accounts payable account as soon as the bill/invoice is received by the company (from the supplier) irrespective of when the actual payment is made (by the company) against such bill/invoice.