In essence, there are four types of financial statements with each having a distinct purpose within the organization. They are namely statement of financial position or the balance sheet, the statement of cash flow, the income statement also known as the profit and loss account, and the statement of cash flows. The statement of financial position or the balance sheet provides shareholders, investors, stakeholders and the management with the overall financial health of the organization (Wolk, 2009). It also provides the relationship between an entity’s assets, liabilities and equity of the organization. The income statement or the profit and loss account provides the entity’s financial performance with respect to the profit making activities of the entity. It is a combination of the income and expense accounts (Holland, & Chartered Institute of Management Accountants, 2005).
The statement of cash flows provides the movement of funds or cash in the entity within a given financial period. The main classification of activities within the statement of cash flows includes the operating, financing and investing activities in an entity. Another type of financial statement is the statement of changes of equity. This refers to the statement used to refer to movement of the investor equity during a financial period. All statements are equally important; however, the balance sheet assumes many roles for stakeholders and management of the entity. It provides investor related information and overall profitability levels of an entity in relation to debts and assets (Holland, & Chartered Institute of Management Accountants, 2005).
Assignment 2: Answer with 150 words or more with one resource
Adjustment of journal entries is essential for two distinct reasons. The reasons are that one accounting entry may affect two financial periods and the need to conform to the matching principles and revenue recognition principles. Entities reconcile journals given that it may inefficient to record all transactions on a daily basis, some costs are not recurrent to the entity and some items may go unrecorded hence the need for reevaluations and reconciliations (Wolk, 2009). The failure to adjust entries would result in double entries in single accounts and omission of entries resulting in inaccurate financial information. In addition, this ensures that all information derived from journal entries is up to date for the inclusion in development of financial statements (Wild, 2007).
Assignment 3: Answer with 150 words or more with one resource
Prepaid expenses and accrued expenses all relate to the goods and services in receipt by an entity from its vendors or suppliers. Prepaid expenses amount to the payments made by the entity in advance for goods or services to be received in the future. They are usually classified as part of assets within the balance sheet. Accrued expenses relate to debts held by an entity to its vendors for services and goods. This means an entity has received goods or services but has not yet made payment for such (Wolk, 2009). For instance advertising expenses that are overpaid at the end of a financial period ending June 31st by $250 are recorded as prepaid expenses and carried over to the next financial period. Accrued advertising expenses on in excess of $250 at the end of a financial period ending 31st June are carried over to july1st the next period as accrued expenses for the new financial period (Holland, & Chartered Institute of Management Accountants, 2005).
The objectives of week 2 guided the readings. They included the need to provide differences between accrual and cash accounting, preparation of financial statements and adjustment of financial entries (Wolk, 2009). In essence, cash accounting refers to the accounting practice whereby the receipts accruable to an entity are recorded as they are received. This is similar to the expenses accruable to an entity whereby they are recorded as they are paid out to creditors and other vendors. On the other hand, accrual accounting refers to the recognition of revenues and expenses as they are incurred by an entity. Accrual accounting is widely used by corporations as provided by the Generally Accepted Accounting Principles (Wild, 2007).
The objectives for the week revolve around the preparation of financial statements using the accrual and cash accounting procedures. The two methods are applied in different circumstances. Accrual is used mainly in corporations whereas the cash accounting method is applied in small business that need immediate indication of their respective expenses and assets held by the business (Wild, 2007). Some of the issues that were learnt this week include:
- the timing issues relative to accrual accounting methods,
- the basics of adjusting journal entries
- adjustments in the trial balance and respective journals and financial statements
- bank reconciliations and closure of books
- and the quality of earnings from use of accrual methods of accounting
The adjustment of the trial balance was relatively challenging due to the need to make double entries in the respective journal entries for a balanced trial balance. Bank reconciliations are relatively easy and can be perfected with daily practice (Wolk, 2009).
P1-3A (located in CH1)
|Assets ($)||Liabilities and owners equity|
|Cash||$ 4,600||Notes payable||$12,000|
|Accounts receivable||4,000||Accounts payable||500|
|Service revenue 7,500|
|Advertising expense 400|
|Utilities expense 300|
|Salaries and wages expense 1,400|
|Total expenses : 4500||(4500)|
Retained Earnings Statement
|Net income Profits :||3,000|
|Less Dividends Paid out: 1,400||(1400)|
|Ending Retained Earnings||3,000|
Owners’ equity = assets − liabilities (Wolk, 2009).
P3-5A (located in CH3)
|Receipt (shareholders) $18,000 M. Svetlana- $2,800 J. Madison-$700|
Salaries expense Account
|Architectural supplies $1,300|
Rent Expense account
|M. Svetlana $2,800 blueprints $1,900|
|Spring Green Company-$300|
|Spring Green Company||300|
Holland, J., & Chartered Institute of Management Accountants. (2005). Financial accounting fundamentals. Amsterdam: Elsevier.
Wolk, H. I. (2009). Accounting Theory. Los Angeles: Sage.
Wild, J. J. (2007). Financial accounting fundamentals. Boston: McGraw-Hill/Irwin.