Can you help me understand this Accounting question?
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Respond n 150 words
Hi Instructor and class,
The topic I want to discuss is from Chapter 4, accrual versus cash basis. “Accrual‐basis accounting means that transactions that change a company’s financial statements are recorded in the periods in which the events occur, even if cash was not exchanged” (Kimmel, Weygandt, & Kieso, 2016, p. 153). My company uses this when they allow the school to purchase books and merchandise on credit. Although the transaction is run through the register and system as a payment, we do not receive payment for at least 90 days. The transaction is treated as sales for the day. However, when the payment (check) comes in it is deposited directly into the company’s bank account.
In contrast there is the cash basis option. “Cash-basis accounting companies record revenue at the time they receive cash. They record an expense at the time they pay out cash. The cash basis seems appealing due to its simplicity, but it often produces misleading financial statements” (Kimmel, Weygandt, & Kieso, 2016, p. 153). This could change the information obtained if the transaction was recorded in our system on September 13, 2019 but we did not receive payment until January 15, 2020. It would show that revenue was received in 2020 when it really occurred in 2019.
Like the information provided above offer gift cards to our customers. Although they have been purchased with a form of payment (cash, card, or check), we can not report the revenue until the card is used. “Should revenue be recorded at the time the gift card is sold, or when it is exercised? How should expired gift cards be accounted for?” (Kimmel, Weygandt, & Kieso, 2016, p. 153). Many would consider gift cards to be an unearned revenue.
Kimmel, P.D., Weygandt, J.J., & Kieso, D.E. (2016). Accounting Tools for Business Decision Making (6th ed.). Retrieved from The University of Phoenix eBook Collection database
Respon in a 150 words
When watching the Cash basis versus Accrual basis video, I had picked Judith that operates a hair salon. When it comes to Judith, her operation is based off of Accounting cycle in action. Judith’s stores transactions includes a wide range of things like, hair car services, hair products, employees wages, services and insurance. Judith has to make sure that she keeps up with all of these things, that is why she reports it to the Journal. A journal is a detail account of the financial transactions of the business. When reporting the transactions to the journal, it is best to report them as they occur in order, so that you have step by step or day by day of each item/services/expenses that has been made. An example that was given, if a item is purchase by a vendor, then it needs to be reported to the journal, by increasing your inventory value, and then decrease the liability payment on the ledger.
One of the topics that came to mind when reading chapter 3 was Stockholders Equity. I am very familiar with this because when I used to operate my grandmothers construction company, it was a corporation, so for the corporation, we had 1000 stock shares, with the Virginia state commission department. When it comes to Stocks, the companies can report stocks in different ways then others on their financial statements. Some of the ways that they can be reported are :
- Common stock and retained earnings: in the stockholders’ equity section of the balance sheet.
- Dividends: on the retained earnings statement.
- Revenues and expenses: on the income statement.
Dividends, revenues, and expenses are eventually transferred to retained earnings at the end of the period. As a result, a change in any one of these three items affects stockholders’ equity. Looking at previous years tax papers, one year our stocks was 697,345, the following year our total income was over 1 million, in which our stocks for that year had showed a larger amount then the previous. It was very confusing when trying to read these and figure out why they would change and what was the meaning of them. But after the accounting department had explained them to me, then it had made more sense.
When it comes to the United States adopting the IFRS standard protocol when it comes to the financial statements, it has its advantages and disadvantages.
- greater comparability
- more flexibility
- focus on investors
- Not globally accepted
- Standards manipulation
- increased costs