Fluent Essays

Assignment Content Competency Apply the principles of accrual accounting and accounting cycles. Student Success Criteria View the grading rubric for this deliverable by selecting the “This item is graded with a rubric” link, which is located in the Details & Information pane. Scenario The Director of Accounting has some concerns about the month-end close cutoff procedures that are currently in place at County General Hospital and is looking to you for some recommendations. Their main concern is that not all revenues and expenses are recorded in the proper months. This is of particular concern because the fiscal year end (December 31st) is coming up, and the Director of Accounting does not want any audit adjustments. Instructions The director has formally reached out to you via email with a list of transactions that they are concerned about: The company delivered services in September $10,000 payment that was made in November. The company is 80\% done on a $50,000 contract for services but have not billed the client yet. On December 1st the company purchased a one-year insurance policy on behalf of their executives for $12,000 and debited prepaid insurance. The companies last pay period ends on December 24th. The biweekly payroll is consistent at $500,000 per pay period. Interest payment on the company bonds ($1,000,000 face value, 6\%) is made semiannually on January 15th and July 15th. The company’s electric meter is read on the 15th of each month, and the bill is not received until the first of the following month. The electric bill is consistently running $5,000 per month. The company utilizes a storage facility on the other side of town. The landlord, as part of an inducement to the company, has agreed to delay the December cash payment for use until January 15th of next year. The company signed a monthly rental agreement of $2,000 per month on December 1st. The direction has also asked the following questions: Will these transactions require an adjusting entry? Why? Is it an accrual or deferral and give your justification? What are the accounts that will be debited and credited for this entry? The director closes the email by asking that you create a memo with your findings that they can take to the Vice President of Accounting. In accounting, we define a business transaction as a financial or economic event that impacts a company. The event must be measurable in terms of money and affect the financial position of the company. For example, a company purchases a new truck for their business for $25,000 by signing a note payable. This event can be measured in terms of money and it has an impact on the financial position of the company. It therefore must be included in the accounting records of the company. An example of an event that would NOT be included in the accounting records would be if a company hired a nationally renowned new CEO. While this may be of great benefit to the company in the long run, we cannot assign a monetary value to this event, and therefore, do not include it in the accounting records. Business Transactions Business transactions that have to be recorded in the accounting records also have other characteristics. We already discussed how they have to be able to be stated in a monetary value (dollars in the U.S.) and they have to impact the financial position of the company. However, there are three more important requirements: 1. The transaction is that of the company and not the owner or the employees. It is required that the records of the company must be separate from those of the owner. 2. The transaction must be authorized by someone with the authority to do so on behalf of the company. 3. There is adequate documentation of the transaction available to support the business transaction. Documenting Transactions One of the most critical aspects of the recording is to have adequate documentation of the transaction. Proper internal controls require appropriate electronic or paper documentation that supports the business transaction. By “supports” we mean it documents the monetary value, the effect on the company’s financial position, it was properly authorized, and it relates to the business entity. A source document is an original record that contains the data to substantiate a transaction that is entered into the accounting system. Typically, the source documents required will fall into two categories: Internal and external documents. INTERNAL DOCUMENTS Examples of Internal Documents: · order requisitions · purchase orders · receiving reports and disbursement requests. EXTERNAL DOCUMENTS Examples of External documents: · bank statements · invoices · receipts Internal documents consist of forms that are prepared by the company itself. Examples are order requisitions, purchase orders, receiving reports and disbursement requests. These forms will often contain the required authorization information. External documents consist of forms and other documents that are prepared by third parties. External documents often offer evidence that can be considered more reliable as they are prepared independent of the company itself. Examples include bank statements, invoices and receipts. Since the end products of business transactions are the financial statements of a company, properly accounting for each business transaction is important to reach this end result. Every time a company enters into a business transaction, a paper or electronic trail is created. We must take steps to preserve this trail as it provides documentation and evidence of the transaction and its characteristics. What is the Accounting Cycle? The accounting cycle represents the process of recording a company’s financial transactions from the when the transaction occurs until the preparation of the financial statements and the accounts are closed at the end of the period. Typically, a company has a monthly accounting cycle culminating with a yearly financial close at the end of the fiscal year. Steps in the Accounting Cycle TRANSACTIONS Business transactions need to be identified and analyzed for their impact on the financial position of the company. Only those that have a financial impact are entered into the accounting system. Examples are revenues that have been earned and expenses that have been incurred. RECORDING Business transactions are recorded in chronological order in the journals of the companys double entry accounting system. They are recorded using journal entries that are comprised of at least two accounts. The debits and credits for each journal must balance (equal). POSTING TO THE GENERAL LEDGER Journal entries are then posted to the companys general ledger which is a collection of all of the companys accounts and where we keep track of the balance in each account. For example a companys Cash account would show all the increases (receipts) in cash on the debit side and decreases (payments of cash) on the credit side. The balance in any account can be determined by subtracting the smaller side from the larger PREPARE THE UNADJUSTED TRIAL BALANCE A trial balance is a numerical listing of all accounts in the ledger and there ending balance. It also serves to test the equality of all the debits and credits entered into the system. ADJUSTING ENTRIES Adjusting entries are sometimes called internal transaction and their purpose is to bring our accounting records into compliance with accrual accounting. Their purpose is to record any revenue that has been earned but not yet recorded and any expenses that have been incurred but not yet recorded. These entries are called accruals and deferrals. ADJUSTED TRIAL BALANCE Another trial balance is prepared, called the adjusted trial balance. This is prepared by taking the unadjusted trial balance in step 4 and adjusting the balances for the adjusting entries in step 5. The adjusted trial balance also serves as another test of the equality of debits and credits. FINANCIAL STATEMENTS A complete set of financials statements is now prepared: · Income Statement · Statement of Changes in Equity · Balance Sheet · Statement of Cash Flows CLOSING ENTRIES Once the financial statement are complete we need to begin the process of getting the accounting system ready for the next accounting period. This is accomplished by preparing the 4 closing journal entries. These entries bring the balance in all of the temporary accounts to zero. The four closing entries are: · Bring all revenue accounts to a zero balance and transfer the balances to the income summary account · Bring all expense accounts to zero and transfer the balances to the income summary account. · The income summary account now represents the amount of net income or loss. Since the net income or loss belongs to the owners, we need to bring the income summary account to zero and transfer the balance to the Owners Capital account · The owners withdrawal account (or dividend account) also needs to be brought to zero and also transferred to the Owners capital account. POST-CLOSING TRIAL BALANCE The post-closing trial balance is our final check to be sure our accounting records are ready for the next period. Since we have closed all of the revenue and expense accounts have all been brought to zero, the only accounts that should remain are the balance sheet accounts, called permanent accounts. The accounting cycle represents the process that companies follow each accounting period. The financial statements represent the culmination of the accounting cycle. Larger companies may break the responsibilities in the accounting cycle into separate departments while a small company may just have one bookkeeper performing the tasks associated with the cycle. Accounting Cycle Step - Adjusted Trial Balance Definition - Takes the unadjusted trial balance in step 4 and adjusting the balances for the adjusting entries in step 5. Accounting Cycle Step - Prepare the Unadjusted Trial Balance Definition - A trial balance is a numerical listing of all accounts in the ledger and there ending balance. Accounting Cycle Step - Transactions Definition - Business transactions need to be identified and analyzed for their impact on the financial position of the company. Accounting Cycle Step - Recording Definition - Transactions are recorded in chronological order in the companys double entry accounting system. Accounting Cycle Step - Posting to the General Ledger Definition - Entries are then posted to the companys general ledger which is a collection of all of the companys accounts. Accounting Cycle Step - Adjusting Entries Definition - Records any revenue that has been earned but not yet recorded and any expenses that have been incurred but not yet recorded. Robert Williams started a new business, Williams Lawn Service, on April 1, 2019. At the end of April, he wants to update his accounting records to reflect his first month of operations and prepare financial statements so he can see how he is doing. The following information can be seen in the widget on this page: The following are the transactions of Williams Lawn Service, owned by Robert Williams, for the month of April 2019: April 1 · Robert Williams invested $2,000 cash in his business. April 15 · Robert provided lawn services and received cash amounting to $5,400 from his customers. April 16th · Purchased supplies on account, $100. April 17th · Paid for gas and oil. $800. April 18th · Paid salaries, $5,000. April 21st · Provided services to a customer on credit, $600. April 28th · Robert provided lawn services and received cash of $6,000 April 29th · Paid for truck and equipment rental $2,500. April 20th · Robert withdrew $2,000 for personal use. In order to prepare his financial statements for the month of April, Robert will: 1. Record the above transactions in general journal form. 2 Prepare a trial balance. 3 Prepare an income statement from trial balance. 4.Prepare a statement of stockholders’ equity from the trial balance and income statement. 5.Prepare a balance sheet using the trial balance totals and the statement of owner’s equity. This example demonstrates how the financial information flows from the transaction, to the journals, to the accounts and is used in the preparation of the financial statements that management uses to monitor the company’s financial operations.