Sunday, February 5, 2012

Fundamental of Accounting Research Paper

Fundamental of Accounting Research Paper

1. Explain the effect of net income or net loss on owner’s equity.
Net income and net loss have a direct effect on the owner’s equity because owner’s equity comprises contribution from net income.

At the end of the period the net income is closed and the sum is transferred to the owner’s equity. In other words, any net income (positive figure) will increase owner’s equity. At the same time any net loss (negative figure) will decrease owner’s equity. This is precisely why any company should strive to increase owner’s equity, i.e. increase the net income of a given company, plus increase the price of the corporate stock.


2. Describe and explain accruals and deferrals.
Speaking about Accruals, I would like to note that Accruals consist of accrued expenses and accrued revenue.

a. Accrued expenses: Expenses that are incurred in the current accounting period but will not be paid until the next period. Accrued Expenses cover accrued salaries, accrued interest, rent, taxes, and utilities. All accrued expenses in a company are recorded by debiting a corporate proper expense account while at the same time crediting a corresponding liability account (Rachlin 76).

b. Accrued revenue: Revenue that is earned in the current accounting period but will not be received until the next period. Accrued Revenue comprises accrued rent income, accrued interest income, accrued utilities etc.
Speaking about Deferrals, I would like to note that Deferrals consist of deferred expenses and deferred revenue:

a. Deferred expense: Expenses that are paid in the current accounting period but will benefit future periods. Deferred expenses are also known as prepaid expenses or deferred charges. Speaking about types of deferred expenses, one should remember that they comprise prepaid insurance, prepaid rent, prepaid taxes, supplier, utilities that last for more than one period. Deferred expense can be recorded as an asset or as an expense.

b. Deferred revenue: Revenue that is received in the current accounting period but will not be fully earned until future periods. Deferred revenues cover sales of season tickets, subscriptions to newspapers, rent collected in advance. Deferred revenue also goes by the name of unearned revenue or deferred charge.

Deferred revenue can be recorded as a liability or as a revenue.

3. Identify the eight steps of the accounting cycle.
Accounting cycle is a series of routine activities that comprises the following steps:
1. Identifying an event that qualifies for a transaction.
2. Preparing a source document for a given transaction/event.
3. Analyzing and classifying a transaction. One needs to apply monetary terms, identify corresponding accounts, and whether they should be debited or credited (Tracy, 207).
4. Recording a transaction by making proper entries in a proper journal or ledger. One should use a chronological order.
5. Posting entries from journals to ledger accounts.
6. Preparing a trial balance, correcting mistakes and discrepancies.
7. Preparing adjusting entries to record accruals and deferrals. Posting adjusting entries
8. Preparing adjusting trial balance.
9. Preparing financial statements. Income statement, Balance Sheet, Statement of retained earnings, Cash flow statement.
10. Preparing closing journal entries. Posting them to the ledger.
11. Preparing reversing journal entries (should they be necessary).

4. Use the accounting equation to describe an organization’s financial position.
The accounting equation is represented by the following formula A-L=SE, where A-assets, L-liabilities, and SE-Stockholder’s equity. In other words, Stockholders’ equity equals Assets less liabilities. Corporate financial position is represented by the Statement of Financial Position or the Balance Sheet which does show exactly the same thing. It shows all corporate assets, liabilities and stockholder’s equity. By applying various ratios and other approaches one is able to precisely determine a corporate financial position compared to the other companies in the industry.

5. Identify and explain the elements of a balance sheet, income statement, and statement of cash flows. The flowing elements are present in each of the statements are depicted below:
Balance Sheet:
Assets-all assets the company possesses.
Liabilities-all liabilities the company possesses.
Stockholders’ equity-the difference between company’s assets and liabilities.
Income Statement:
Revenues-or the gross sales revenue received from selling goods.
Expenses-all expenses associated with selling good.
Net income-difference between the revenues and expenses.
Statement of Cash flows:
Operating activities-all changes to current assets and liabilities
Investing activities-changes in non-current assets.
Financing activities-changes in non-current liabilities and stockholder’s equity.
Ultimately one determines the cash at the end of the period.

6. Explain the process of depreciating and amortizing assets.
Depreciation and amortization are analogous terms with the only difference of deprecation being applied to physical goods and amortization being applied to intangible goods like goodwill. Depreciation means that a certain good wears out and gets destroyed over a period of time and thus loses its value and utility for which a company should account in order to objectively represent its assets and financial position. Typically depreciation is determined by the government regulations and various types of goods can be depreciated by using different methods and over different periods of time. The most common method is straight-line depreciation that equally divides the value of an asset by the number of years used in depreciation and then subtracts that amount at the end of each period from the asset. Amortization uses the same method yet is applied to a goodwill or subjectively determined value of an intangible good.

7. Calculate cost of sales using several different methods.
Cost of sales is also known as the Cost of Goods Sold (COGS).
In order to calculate the COGS one needs to do the following steps (Warren, 133):
1. Add cost of goods purchased within a given period to the beginning inventory to obtain cost of goods available for sale.
2. Subtract ending inventory or the goods left on hand at the end of the period to arrive at the cost of goods sold.

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