Finanical Accounting Concepts Phase 2 DB - Essay Example

Financial Accounting Concepts The Sample Income ment may be prepared for the details provided as follows: DETAILS DEBITS CREDITSRevenues for May 2005$150,000 Operating ExpensesAdvertising expense$1,500 Utilities$1,200 Wages$78,000 Total Operating Expenses$80,700 Net Operating Income before taxes69,300Depreciation$1,200 Property taxes10,000Net Income $58,100 The basic accounting information is that Income – Expenses is equal to the Net Income. However, there are some expenses that cannot be classified under the category of operating expenses.

One of these is depreciation, since there may be a one time expense on machinery but this amount is not recorded all at once on the statement. Rather the depreciation amount is reflected in sections over a period of years. Therefore the depreciation amount shown on the income statement above is the partial expense incurred on some asset, which is being accounted in phases. This is also the reason why the expense incurred on Furniture is not shown on the income statement, The expense incurred on the furniture ($1500) will be shown in reduced amounts for a period of years in subsequent income statements.

It is only after calculating the net operating income that taxes will be accounted in at the end because taxes qualify as non recurring items that may occur only once a year. The Income Statement reflects the inflow and outflow of expenses and revenues. However, the Owner’s equity statement is a statement that reflects the position of the owner’s capital in the business. Therefore it reflects the shares position, the kinds of shares (common, preferred or deferred preferred shares) and their distribution.

However, a balance sheet is a comprehensive statement that reflects the financial position of a firm at the end of a financial year. While the Income statement shows mainly operating expenses and net revenues, the balance sheet is a summary of a Company’s entire financial condition at any given point of time, therefore it includes all assets of the Company, all liabilities and net worth. This statement also takes into account the ownership of non fluid assets and share ownership in the Company.

Therefore, in a balance sheet, the accounting equation would be: Assets – Liabilities + Owner’s Equity. The Accounting Cycle includes the process of recording entries of receipts and expenses in a journal in chronological order according to dates. These entries are then posted to the ledger, both under debits and credits, under the appropriate account heading. The trial balance is then prepared to ensure that all debits are equal to all credits. Any errors or discrepancies are then resolved with individual journal entries, in order to yield the adjusted trial balance.

This forms the basis for the preparation of the various kinds of financial statements, such as cash statements, income statements and balance sheets. The final steps in preparing these statements are in the posting of the closing entries and the preparation of the final statements.