This week I have learned that accounting involves more than recording transactions and balancing accounts. Along with journalizing transactions and adjusting entries, the accounting cycle involves closing entries and preparing a post-closing trial balance. I believe that the most important skills learned in an accounting position is to understand the basic equation of accounting, assets + liabilities + stockholder’s equity. Most accounting goes back to this equation as the basis for balancing accounts when transactions are journalize.
The two types of accounting methods used to maintain financial records and prepare reports are the accrual and cash basis accounting. Accrual basis accounting is accepted under the Generally Accepted Accounting Principles (GAAP). This principle states that the accounting transactions are recognized and recorded when the expense or revenue actually occurred, not when cash changes hands (James, 2012). The benefit of accrual basis accounting is expenses and revenues which can be matched as they happen, and much more effective for monitoring cash flow (Epstein, n.d.). Accrual accounting has a more complicated recording process than cash basis accounting which can be a disadvantage when it comes time to pay taxes. Since this accounting method requires that expenses and revenue are recorded right away, the taxes must be paid on the recorded revenue; even if it’s not been paid (Reference For Business, 2012).
The adjusting entries are recorded at the end of every accounting period after the trial balance. There are five types of adjusting entries that are made: accrued revenues, accrued expenses, unearned revenues, prepaid expenses, and depreciation.
Adjusting entries are completed when posting revenues and expenses to the accounting period for which they actually occurred. We use adjustments to show when the money actually changed hands