We have just begun a new segment of the Corporate Financial Accounting course. This segment focuses on adjustments that companies make in their financial reports. I am happy with the way the course progresses; it is easy to see the relationship between the segments in the course.
In the first segment, we learned about financial statements; in the second about transaction analysis. We are now in the third segment of the course and have had the first session in this segment.
So what does adjusting entries mean to the business manager?
My understanding of adjusting entries is that, it is an operation that a company engages in so as to make proper account for their business transactions. I understand that a company performs a lot of business transactions daily; they make sales and expenses. It is important that the sales made are recorded in the period in which they are earned and expenses are recorded in the period in which they are incurred. Companies achieve this once they adjust entries in their financial statements.
Companies require adjusting entries whenever they want to prepare financial statements. The company would analyze the accounts in the trial balance and ascertain if it is complete and up-to-date for financial statement purposes.
I have also learned that there are some timing concepts around adjusting entries. I have explained the concepts below:
A fiscal year and A calendar year: A fiscal year has a full length of one year. It begins on the first day of a month and ends on the last day of the Twelfth month. While a calendar year begins on January 1st and ends on December 31st. I learned that most companies use prefer and use the calendar accounting time period.
Accrual-basis accounting: Accrual is a term I understand to mean a charge for work done but has not been paid for. Hence, I understand that companies use accrual-basis accounting to record transactions they are yet to receive payment for. We know that when a company renders service or sells goods, the expected income is an asset; therefore a company must record the changes in the financial statements in the period they occurred.
I find these two timing concepts to be interesting. I think that it makes good sense to record transactions in the period in which they occur. We should focus on income earned rather than cash received. I learned though that cash-basis accounting is the alternative to accrual-basis.
With respect to accounting time period, I would also choose the calendar year if I had my company. I think that it makes account documentation simple and easy.
I also learned that there are some principles guiding revenue as well as expense. The principle on revenue states that you must recognize it when revenue is earned. While the principle on expenses states that you must recognize it when it is incur.
Having learned about the timing concepts of adjusting entries, I was able to attempt some tasks. I did well.
I look forward to learning more on this course segment.