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Financial Accounting Essentials You Always Wanted To Know

    Александр Чикиткинhas quoted2 years ago
    the expense is matched with revenue and recognized together
    Александр Чикиткинhas quoted2 years ago
    there are two criteria that help determine when to recognize revenue. They are as below:
    a) The promised work must be done before revenue is recognized
    b) Cash collection should be reasonably assured before revenue is recognized
    Александр Чикиткинhas quoted2 years ago
    Revenue Recognition
    There will be transactions that continue for long, starting from order generation to receiving the payment. But this period could see several income statements being created. In such a case it becomes difficult to decide whether the revenue for that transaction should be included (recognized) in the income statement. Following two criteria are used to determine when to recognize revenue:
    a) Before recognizing revenue, the promised work must be done, meaning that the goods should have been delivered or the service must have been provided
    b) Before recognizing revenue, cash must have been collected, or, at least, collection must be reasonably assured
    Александр Чикиткинhas quoted2 years ago
    Most companies create an income statement at least quarterly.
    Александр Чикиткинhas quoted2 years ago
    An income statement is a statement of the company’s revenues and expenses over a period of time – month, quarter, half-year o year.
    Александр Чикиткинhas quoted2 years ago
    This forms the accounting equation and is as given below.
    Assets = Liabilities + Stockholders’ Equity
    Александр Чикиткинhas quoted2 years ago
    Each year the company reports either profit or loss in its financial statements. These get added to or subtracted from the retained earnings in the balance sheet.
    Александр Чикиткинhas quoted2 years ago
    Paid-in Capital
    When owners of a company invest cash or other assets in the business, they receive shares of stock in exchange. This gets added to paid-in capital
    Александр Чикиткинhas quoted2 years ago
    The three predominant components of owners’ equity are Paid-in Capital, Retained Earnings and Treasury Stock.
    Александр Чикиткинhas quoted2 years ago
    For example, if a company has sold equipment with a one year warranty, it is obligated to provide service if a fault is detected. This becomes the company’s liability.
    Александр Чикиткинhas quoted2 years ago
    “probable future sacrifices” hint towards a payment of some kind that the company would need to make in future, like payment to creditors, bank, suppliers etc.
    Александр Чикиткинhas quoted2 years ago
    Liabilities
    These are the obligations of economic nature for a firm that might need future sacrifice of benefits of economic nature that are a result of current obligations to give away assets or to provide services to others in future due to past transactions or events
    Александр Чикиткинhas quoted2 years ago
    Below are some examples of Liabilities:
    a) Short-term loans payable
    b) Accounts payable
    c) Accrued salaries and wages
    d) Long-term notes and debentures
    e) Long-term loans payable
    Александр Чикиткинhas quoted2 years ago
    Following are some examples of Assets:
    a) Cash
    b) Accounts Receivable
    c) Inventory
    d) Prepaid expenses
    e) Land
    f) Buildings
    g) Fixtures and equipment
    h) Marketable securities
    i) Goodwill
    Александр Чикиткинhas quoted2 years ago
    Assets
    These are economic resources of a firm that provide probable future economic benefit due to ownership or control as a result of past transactions or events.
    Александр Чикиткинhas quoted2 years ago
    There are three items that go in a balance sheet:
    a) Assets,
    b) Liabilities and
    c) Owners’ Equity (also called Stockholders’ Equity).
    Александр Чикиткинhas quoted2 years ago
    A balance sheet is a snapshot of a company’s source and application of funds on any given date
    Александр Чикиткинhas quoted2 years ago
    The accounting rules are described as GAAP (Generally Accepted Accounting Principles).
    Александр Чикиткинhas quoted2 years ago
    The Statement of Cash Flows reports that amount of cash collected and paid by a company in the given period
    Александр Чикиткинhas quoted2 years ago
    Income Statement (also known as Profit and Loss Statement) reports the revenue earned by the company over a period of time and the expenses incurred
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