Working With Financial Statements

Working With Financial Statements:

There are four main principles that have led to the success of the accounting system which the accountants use in preparing financial report of a company but we shall only focus on two. One of the principles is the Revenue Recognition Principle whereby the accountant is expected to present a financial report by indicating the cash flow of the company. As one of the main accounting principles in the U.S. Generally Accepted Accounting Principles, revenue recognition can basically be considered as how revenue is recognized or treated. On the basis of cash accounting, revenue is simply recognized when cash is received despite the performance of the services and delivery of goods. On the contrary, revenue is recognized in accrual basis accounting when they are realizable or earned regardless of when cash is received. However, revenue is recognized when two conditions are met i.e. The completion of the earning process and assurance of payment ("Revenue Recognition," n.d.).

The other principle is the Expense Recognition Principle which is also known as the Matching Principle. In this case, the accountant presents a financial report showing both the revenue and the expenditure columns. The expenditure column will show how much money the company has spent and on the reason for the expense. From the two columns, it will be very easy for a company to realize its loss or gain. The matching principle is based on the fact that expenses should be matched against revenues after the revenues are first recognized. This enables an evaluation of the company's performance since the income statement contains measures for revenue or accomplishment and expenses or effort. The expense recognition principle is implemented through one of these three ways i.e. associating cause and effect, systematic and rational allocation, and immediate recognition ("Expense Recognition," 2008).

It is very important for the accountants to create a column for adjusting journal entry at the end each accounting period or at the end of each financial year. These entries may include prepaid expenses, unearned revenues, accrued expenses, and accrued revenues. With the prepaid expenses, these are the expenses paid for and are to be used on a later date such as insurance which is paid on a monthly basis. On the financial report the accountant creates an entry known as the prepaid expenses and then moves the cash from the expense column to prepaid expense column. The second entry is the unearned revenues in which the company receives cash for a service that is to be offered later. An example is a situation where the client pays the company a deposit for goods to be delivered in the next two to three months. The accountant is therefore expected to prepare an unearned revenue entry by moving the cash from unearned revenue account to the revenue account (Davoren, n.d.).

Another adjusting journal entry is the accrued expense entry, which are the expenses incurred by a company before giving out the payments. For instance, if a company has taken a loan from the bank, the bank has to give the company an amount that it should submit on a monthly basis and a period by which the loan should be cleared. The amount that the bank gives is always inclusive of a certain percent of interest, which is referred to as the accrued expense. In such a case, the accountant indicates this cash on the relevant expense column before making payments but after payments are made, the cash is moved to the expense owed column.