A U.S. Trust survey of affluent Americans reported that 85% of respondents believed that there should be tighter regulation of financial disclosures; 66% said they did not trust the management of publicly traded companies. This report is due to the prevalence of misconduct associated with financial reporting in the corporate world. Executives of publicly traded companies are under a lot of pressure to deliver and some of them decide to adjust their numbers to meet expectations.
Financial statements contain different transactions that includes expenses, revenue earned, assets purchased. The financial statement is reported in a timely fashion, this means the reporting can be done monthly, quarterly or annually. Some of the questions that threaten the validity of the financial reporting system are: at what point has revenue been earned? at what point is the earnings process complete? When have expenses really been incurred? Likewise, moving revenues and expenses is one of the most common abuses of financial accounting.
For example, a Parent at St. Andrew’s High School pays #900,000 for three terms at the beginning of the 2020/2021 session. The money comes in as revenue for the company for a service that has not been rendered. This revenue will extend beyond the year of payment, 2020. The school will have to take this information into consideration and make necessary adjustments when preparing their 2020 financial report.
Adjusting accounts considers timing issues, the basics of adjusting entries and the adjusted trial balance and financial statements.
- Fiscal and calendar years
- Accrual- vs. cash-basis accounting
- Recognizing revenues and expenses
The Basics of Adjusting Entries
- Types of adjusting entries
- Adjusting entries for deferrals
- Adjusting entries for accruals
- Summary of basic relationships
The Adjusted Trial Balance and Financial Statements
- Preparing the adjusted trial balance
- Preparing financial statements
The economic life of a business is divided into artificial time periods. This is important because the company management would always need a feedback on the financial state of the company. Also, Internal Revenue Service requires all businesses to file annual tax returns. If accountants keep waiting for the perfect time when all revenues and expense will be captured, they might have to wait till the end of that business.
Adjustments are therefore necessary in preparing financial statements. This convenient assumption is referred to as the time period assumption. The artificial time period can be monthly, quarterly, annually. Monthly and quarterly time periods are called interim periods. Many business transactions affect more than one of these arbitrary time periods.
Fiscal and Calendar Years
Both small and large companies prepare financial statements periodically in order to assess their financial condition and results of operations. Accounting time periods are generally a month, a quarter, or a year. Most large companies must prepare both quarterly and annual financial statements.
An accounting time period that is one year in length is a fiscal year. A fiscal year usually begins with the first day of a month and ends twelve months later on the last day of a month. Most businesses use the calendar year (January 1 to December 31) as their accounting period. Some do not.
All calendar years are fiscal years but not all fiscal years are calendar years.