Answer Questions Related To The Accounting Cycle Introductio

Answer Questions Related To The Accounting Cycleintroductiona Company

Answer Questions Related To The Accounting Cycleintroductiona Company

Answer questions related to the accounting cycle. Introduction A company may be profitable but cash poor, or generating millions of dollars in revenue but still not profitable. How the business transactions are reported in books is very important for regulators as well as investors. Accurate reporting of business transactions is essential for transparency. This course has introduced the accounting process of analyzing, classifying, and summarizing business transactions into accounts.

Now, you begin to examine things in more detail, including: The difference between the cash basis and accrual basis of accounting. The classes and types of adjusting entries (prepared at the end of an accounting time frame). Use of a worksheet to summarize the work completed during the accounting period. The preparation of an organization's closing entries. How to report financial data using a classified balance sheet.

Overview This assessment focuses on the need for adjusting entries, including: The difference between the cash and accrual bases of accounting. The concept of adjusting entries and how they are prepared. How to classify adjusting entries. The concept of asset depreciation and its effect on book values. Preparation Complete the Assessment 3 Template [DOCX] .

Review all suggested readings. Note: Accuracy in accounting is paramount so take your time and double-check your work for errors or omissions. Instructions Answer questions correctly. When you are satisfied with your responses, save and submit your template in the courseroom. Step 1: Compare and contrast how revenues and expenses are reported under the cash basis of accounting and the accrual basis of accounting.

Step 2: Explain why adjusting entries are necessary at the end of an accounting period. Step 3: Identify examples of an adjusting journal entry for various types of transactions. Step 4: Explain accumulated depreciation. Step 5: Identify which account balances are extended to the Income Statement columns, the Statement of Retained Earnings columns, and the Balance Sheet columns. Step 6: Determine the current ratio between assets and liabilities for a given year.

Step 7: List the accounting cycle steps in proper order. Competencies Measured By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria: Competency 1: Define accounting terminology and its application to accounting principles. Compare and contrast how revenues and expenses are reported under the cash basis of accounting and the accrual basis of accounting. Explain accumulated depreciation. List the accounting cycle steps in proper order.

Competency 2: Apply accounting cycle strategies to manage business financial events. Explain why adjusting entries are necessary at the end of an accounting period. Identify examples of an adjusting journal entry for various types of transactions. Identify which account balances are extended to the Income Statement columns, the Statement of Retained Earnings columns, and the Balance Sheet columns. Determine the current ratio between assets and liabilities for a given year.

Competency 4: Convey purpose, in an appropriate tone and style, incorporating supporting evidence and adhering to organizational, professional, and scholarly writing standards. Convey clear meaning through appropriate word choice and usage.

Paper For Above instruction

The accounting cycle is a systematic process that organizations use to record, summarize, and report their financial transactions. Understanding the distinction between different accounting methods, such as the cash basis and accrual basis, is fundamental to accurate financial reporting. This essay explores these methods, the importance of adjusting entries, depreciation, and the sequence of steps within the accounting cycle.

Comparison of the Cash Basis and Accrual Basis of Accounting

Revenues and expenses are reported differently depending on the chosen accounting method. The cash basis recognizes revenues and expenses only when cash is received or paid. For instance, a company records revenue when it receives payment, regardless of when the sale occurs, and records expenses when payment is made. Conversely, the accrual basis recognizes revenues when earned and expenses when incurred, aligning income and expenses with the period they relate to, providing a more comprehensive financial picture (Kieso, Weygandt, & Warfield, 2021).

The cash basis is simpler and often used by small businesses due to its straightforwardness. However, the accrual basis offers a more accurate reflection of a company's financial health, especially for larger organizations that extend credit to customers or suppliers (Graham, 2018). The primary difference lies in the timing of recognition, which directly impacts financial statements' clarity and comparability.

Necessity of Adjusting Entries

Adjusting entries are essential because they ensure that revenues and expenses are recognized in the correct accounting period, complying with the matching principle of accounting. For example, if a company incurs expenses in December but does not pay until January, an adjusting entry records this obligation in the December financial statements. Similarly, accrued revenues not yet received are adjusted to reflect earned income (Wild, Subramanyam, & Halsey, 2021).

Without adjusting entries, financial statements could be misleading, portraying an inaccurate picture of a company's profitability and financial position. Adjustments typically involve accruals, deferrals, estimates, and depreciation, which collectively ensure accuracy in recording economic events (Horngren, Sundem, & Elliott, 2019).

Examples of Adjusting Journal Entries

Different types of transactions necessitate various adjusting entries. For accrued revenues, such as interest earned but not yet received, the entry debits Accounts Receivable and credits Revenue. For accrued expenses like wages payable, the entry debits Wages Expense and credits Wages Payable. Prepaid expenses, such as insurance paid upfront, require a debit to Insurance Expense and a credit to Prepaid Insurance as the benefit is utilized over time. Depreciation of equipment involves debiting Depreciation Expense and crediting Accumulated Depreciation, reducing the book value of assets systematically (Schroeder, Clark, & Cathey, 2020).

Accumulated Depreciation

Accumulated depreciation is a contra-asset account that aggregates total depreciation expenses deducted from a fixed asset over its useful life. It reduces the net book value of tangible assets on the balance sheet, reflecting wear and tear or obsolescence. This systematic allocation allows for consistent expense recognition over the asset’s useful life, aligning costs with revenue generation (EPstein & Jermakowicz, 2020). Recognizing accumulated depreciation ensures the financial statements represent the asset’s current value more accurately.

Reporting Accounts in Financial Statements

In preparing financial statements, account balances are extended to specific columns based on their nature. Revenues and expenses flow into the Income Statement, while assets, liabilities, and equity accounts extend into the Balance Sheet. The Statement of Retained Earnings captures changes in retained earnings, including net income from the income statement, which impacts the equity section. Proper classification and presentation of these accounts are vital for transparent financial reporting and compliance with accounting standards (Kimmel, Weygandt, & Kieso, 2019).

Current Ratio and Financial Health

The current ratio, calculated as current assets divided by current liabilities, measures a company's liquidity. A ratio above 1 indicates sufficient assets to cover short-term obligations, while a ratio below 1 suggests potential liquidity problems. For example, if a company has $200,000 in current assets and $100,000 in current liabilities, the current ratio is 2:1, indicating good liquidity (Brigham & Ehrhardt, 2019). Monitoring this ratio over periods helps management assess financial stability and make informed decisions.

The Steps of the Accounting Cycle

The accounting cycle comprises a sequence of steps to process financial data accurately. It begins with identifying and analyzing transactions, journalizing entries, posting to the general ledger, preparing an unadjusted trial balance, making adjusting entries, preparing an adjusted trial balance, generating financial statements, and finally closing temporary accounts to retained earnings (Harrison, Horngren, & Thomas, 2020). The cycle repeats each accounting period, ensuring ongoing accuracy in financial reporting.

Conclusion

Mastering the accounting cycle is vital for accurate financial reporting, regulatory compliance, and effective management decision-making. Recognizing the differences between cash and accrual accounting, understanding the necessity and types of adjusting entries, and systematically following the cycle steps ensures that financial statements reflect a true and fair view of a company's financial status. This understanding fosters transparency and trust among stakeholders and supports strategic planning and financial stability.

References

  • Brigham, E. F., & Ehrhardt, M. C. (2019). Financial Management: Theory & Practice (15th ed.). Cengage Learning.
  • Epstein, L., & Jermakowicz, E. (2020). IFRS: Characteristics and Challenges. Journal of International Accounting, Auditing and Taxation, 46, 100340.
  • Graham, J. R. (2018). Principles of Financial Regulation. Harvard Business Review Press.
  • Harrison, W. T., Horngren, C. T., & Thomas, J. (2020). Financial & Managerial Accounting (11th ed.). Pearson.
  • Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2019). Financial Accounting: Tools for Business Decision Making (8th ed.). Wiley.
  • Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2021). Intermediate Accounting (16th ed.). Wiley.
  • Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2020). Financial Accounting Theory. Wiley.
  • Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2021). Financial Statement Analysis (12th ed.). McGraw-Hill Education.

Related Assignments