Womack Report

Made it accounting today. Wish it would get warm again.

The Accounting cycle (see last time) is financial process a business conducts every month (or accounting period).

1. Journalize
2. Posting
3. Trial Balance
4. Prepare Adjusting Entries
1. Post Adjusting Entries
2. Prepare TRial Balance
5. Closing Entries
1. Post Closing Entries
2. Prepare Trial Balance
6. Prepare Financial Statement

Everything after step 4 occurs at end of period.

The Accounting Period Issue is the difficulty of assigning revenues and expenses to a period when those revenues or expenses will have effects outside a single period

The Continuity Issue is the concern that a business will fail while still having unresolved expenses or revenues. See the Accounting Period Issue. Generally, accountants assume a business will survive indefinitely. This is referred to as the business being a going concern.

The Matching Issue is the difference between when revenue is earned and cash is received. In small business, it’s possible to operate by recognizing revenue when cash is received, but this breaks down when revenues or expenses span multiple accounting periods. Accountants address this issue with the matching rule. This rule states that revenues are recognized in the period when they are earned, and expenses are recognized in the period in which they are incurred.

Adjusting Entries are journal entries made to balance accounts at the end of an accounting period. Adjusting entries might account for supplies consumed in the course of operations, for instance. Adjusting entries either bring accounts to proper balance, or recognize revenues or expenses.

1. Every adjusting entry affects at least one income statement account and one balance sheet account
2. Cash is never affected

There are four types of adjusting entries.

1. Prepaid expenses or deferred expenses. Consumable assets require adjustments at the end of period to reflect how much of the asset has actually been consumed in that period. This includes most supplies, prepaid rent, and prepaid insurance. These entries involve crediting the asset in question for the consumed amount, and debiting the relevent expense account.
2. Unrecorded Expenses.  Also called accrued expenses. These entries affect an expense account and a liability account.  These include income tax payable, wages payable, and interest payable.  In general, unrecorded expenses are expenses which are incurred in the period but not due until the next period.  For instance, if wages are paid on a regular schedule, and payday doesn’t fall on the last day of the pay period, there will be an unrecorded wage expense.