Working with Financial Statements

Working with Financial Statements Accounting is the heart and soul and soul of executing a successful craft. Accounting is used to app final stageing record for all items that atomic number 18 paid and certain for a business concern over any period of meter. Within the purpose of chronicle lies the command to provide continuity and sustainability within a business, without it a business mother non thrive. The information obtained is kept on record, in order to give insight to upper management on data concerning the daily tax income and outlays of that business. This data is needed to not only inform the employees of the business, but to a fault the investing parties of that business as well.Success in business is equated to being accountable of all aspects of gross and set downs. To help aid in the understanding of the execute of invoice, Team A will discuss the subjects of receipts and expense realization principles. We will also discuss the importance of journal adjustments that be prepaid, un realize, and accrue for both tax incomes and expenses over time. Each item discussed helps provided and maintains a balance for the conclusion of a financial statement. If entered correctly, the all entries used will provide a clear picture of the account efforts of any business.The Revenue Recognition and write down Recognition Principle Being able to account for a businesss taxs and expenses in a certain write up period is effortful to determine. To do it correctly, one would need to understand two principles that set the amount the revenue experience principle and the expense recognition principle. In chapter 4 of our textbook Financial Accounting Tools for Business Decision qualification, it states the revenue recognition principle shoots that companies recognize revenue in the accounting period in which it is earned.In a improvement company, revenue is considered to be earned at the time the service is performed. in that respectfo re, the definition is that it is only to be record when the items sold where the pay lowlife be estimated reliability and when the amount is recoverable. What tells the revenue to be recognize and to ignore when the cash inflows occur is when the account will use the collection basis of accounting. An example to illustrate revenue recognition principle is when a phone company sells talk time through scratch cars. There is no revenue to recognize when a customer purchased the scratch card.The revenue is recognized when the customer has make the call and actually consumed the talk time. The expense recognition principle is defined in the same chapter as, The principle that dictates that companies take on efforts (expenses) with results (revenues). They provide a simple rule to remember as allow the expenses follow the revenues. which would indicate how the expense recognition goes hand and hand with the revenue recognition. To illustrate that, we could say it is sales commissio n owed to an employee be do it is based on the original of a sale.In the same accounting period as the sale, the commission expense is when it should be recorded. At the same time, the sale is recognized and expensed when the cost of caudex is delivered to the customer. That is when the commission expense should be recorded in the same accounting period as the sale. That would be the example of the matching principle is associated with the cause and effect of accounting. Situations That Require Adjusting Journal Entries Adjusting entries ar grouped as deferrals and accumulations and distributively has two subgroups. The two categories of deferrals are prepaid expenses and unearned revenue.Prepaid expenses are recorded as assets until they are used or consumed. For example prepaid periodical insurance is recorded as an asset until the coverage has been consumed. Because prepaid expenses conk out with time does not require daily adjustments, which would be unrealistic. When pr eparing financial statements adjusting entries are made to record the expense consumed of the prepaid assets and award the remaining amounts in the asset account. Unearned revenue is when cash is received before service is provided, which increases the liability account. For that reason unearned revenue are opposite of prepaid expenses.When a company receives a payment for a future service, it assign liability the unearned revenue account increases. The recognition process occurs during the accounting period where the service was provided. Then the company makes the adjusting insertion for the unearned revenue by debiting the liability account and consultationing the revenue account. Before the adjustment is made liabilities are overstated and revenue is understated. The second category for adjusting entries is for accruals. Preceding the entrance adjustments the revenue account or the expense account are understated. accordingly the entry adjustment for accruals increases the balance sheet and income statement account. Accrued revenue is accumulate revenue that is not recorded at the statement date because revenue is accrued with passing time, which is impractical to record daily. The adjusting entry records the amount owed to a business at the balance sheet date and the revenue earned in that time. The adjusting entry increases both the revenue account and the asset account. If service provided to client that were not billed will not be recorded.The accrual of unrecorded service account increases accounts receivable, which also increases strivingholder equity by increasing revenue account. It would be unethical for a company to effect sales or accounts receivable to increase revenue and asset accounts to tack a quarters target sales. Expenses incurred but not until now paid or recorded at the statement date are called accrued expenses. Adjustments are made to recognize expenses incurred at the current accounting period and record debt that is prese nt at the balance sheet date. Consequently adjusting entry increase expense account and increase liability account.Why Adjusting Entries are Important Every business or organization makes adjusting entries in the end of a set accounting period. Adjusting entries are entries made at the end of an accounting period to make certain that the profits and expenditures recognition principles are followed (Kimmel, Weygandt, & Kieso, 2011). Accrual transactions and the purposes of these transactions should be reported when these financial actions occur. These actions should be recorded not only when cash is paid or received but also anytime a financial action takes place.These strategic concepts in accounting are imperative because they recognize net gains or losings and a business financial position can be place within the accounting period. The preparations of general entries and postings are important and the information added to these journals should be precise and reliable. The truth in numbers is critical, and the information should be mensural exactly. There are numerous reasons regarding why adjusting entries are important. To establish if the spotless value of cost of goods sold and gross profit, adjusting entry of closing stock is needed.To determine the correct value of net profit, adjusting entry of depreciation is needed. Making adjusting entries of advance expenses are essential because after this step is completed an restrainer can take away advance expense from expenses collected, and this will be charged in next accounting period when these expenses will be payable. To show the correct amounts due to a third party and to show correct expenses for the accounting period do adjusting entries of outstanding expenses are important. In this entry the accountant must have debit expense and credit outstanding expense for a third party accounted for. ConclusionAs one can see, revenue recognition and expense recognition are important move of the accountin g process of any business. It is also important to understand what situations require a company to adjust their journal entries and why it is so important to do so. With the appropriate accounting techniques and accurate journaling, a companys financial statements become more accurate and easier for both internal and out-of-door users to understand. Not only do accurate financial statements keep a company above suspicion and consequence, but it helps users make informed decisions about that company based on its financial health.Without good decision making based on accurate information, a company will not be able to succeed. References Kimmel, P. D. , Weygandt, J. J. , & Kieso, D. E. ( 2010). Financial accounting Tools for business decision making (6th ed. ). Hoboken, NJ John Wiley & Sons. 2011 Financial Principles Explained. Retrieved from http//accountingexplained. com/financial/principles/revenue-recognition Walther, L. (2012) Financial Accounting 2012 Edition. 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