Financial Accounting Essentials You Always Wanted To Know

Accounting system contains detailed plans and performance reports meant for decision makers within the company

Financial Accounting system contains financial statements and disclosures meant for decision makers external to the company. A Managerial Ac

the expense is matched with revenue and recognized together

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

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

Most companies create an income statement at least quarterly.

An income statement is a statement of the company’s revenues and expenses over a period of time – month, quarter, half-year o year.

This forms the accounting equation and is as given below.
Assets = Liabilities + Stockholders’ Equity

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.

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