What kind of activity is Financial accounting?
A service activity
General-purpose external financial report (Annual Report)
Income Statement, Statement of Comprehensive Income, Balance Sheet, Statement of Changes in Owners' Equity, Statement of Cash Flows, Footnote Disclosures and supplementary schedules, Auditor's Opinion
Composition of GAAP
Includes principles, methods, and procedures that are generally accepted by the accounting profession.
Majority of GAAP includes the pronouncements issued by the Committee on Accounting Procedure (CAP), the Accounting Principles Board (APB), and the FASB
Codification
The sole authoritative source for such GAAP and includes guidance from the above sources
Accrual Basis of Accounting
Revenues are recognized when earned, regardless of the period of cash collection
Expenses are recognized when incurred, regardless of the period of cash payment.
Cash Basis of Accounting
Revenues are recognized when cash is received.
Expenses are recognized when paid.
Why is Accrual Basis of Account preferred over Cash basis?
It reflects a better association of revenues and expenses with the appropriate accounting period.
The accrual basis of accounting recognizes all resource changes when they occur.
The cash basis of accounting limits the recognition of resource changes to c
What is deferral?
Cash received before revenue earned -- Rent, subscriptions, gift certificates
Cash paid before expense incurred -- Prepaid insurance, supplies, rent, PP&E
What is accrual
Revenue earned before cash received -- Sales on account, interest, rent
Expense incurred before cash paid -- Salaries, wages, interest, taxes