15 Audio accounting lessons with three e-books included: Accounting Cheat Sheet, Learn Financial Accounting Different, & Learn Debits & Credits.
I took financial accounting three times as a history major and my grades were as follows: W, C, A. W stands for withdrawn, if you don't know. But after I received an A from an exceptionally clear instructor, everything became easy, so long as I dedicated enough time and studied to learn. I drew pictures, read financial statements of publically traded companies, sang songs, and listened to self-made recordings at bedtime. I could not afford any more mistakes after graduating in history during a financial crisis. Three years later I had worked in public accounting, passed all of my CPA exams on the first try, and nearly completed a masters in accounting with a 3.9 GPA – all paid for with credit cards. Now I work for myself and help students, life is good. With enough time and motivation there is nothing to stop you with this particular profession, class, or topic.
Accounting is not just for businesses, but for any financial entity. And the most important entity of them all is you! Everyone spends money of some tangible kind, or intangible – in the form of trades and favors. Most of us do not need to know how to form a complete set of financials using journal entries; however, everyone should have an idea of what an income statement and balance sheet is. It is also helpful to understand that the value of money is constantly changing, referred to as the time value of money. It is a must to know what the five accounts are: assets, liabilities, equity, revenue, and expense.
Please join me in the journey of learning accounting fast and different. Please contact me with any way that I may assist you along the way. Thanks.
Accrual Basis Accounting and the Matching Principle
Accrual basis accounting is based upon Generally Accepted Accounting Principles (GAAP). This system is double entry and matches revenues and expenses during the proper period. For example, a company could have $50,000 in amounts billed to clients in December that it will not collect until January. Under the accrual basis of accounting, the company would record $50,000 of revenue because the amount was both earned and realizable. It was earned because services were performed to satisfaction, and realizable because the amounts were already billed to the client. The $50,000 is recorded in revenue and the asset account, accounts receivable (in this case, amounts owed to company for services). Since the revenue is recorded in December, the expenses for this same time period also match the revenue earned.
Accrual accounting takes into consideration liabilities that a company is increasing during the accounting period. For example, Shady Manufacturing does not pay $75,000 cash for employees, contractors, electricity, and supplies during the month of December. Under the accrual basis of accounting, Shady would record $75,000 of expense and $75,000 of liabilities in the form of accounts payable (money owed to suppliers) and accrued expenses (such as wages owed to employees). Accrual accounting matches the expenses to the proper time period (periodicity).
Accrual accounting is based on the principal that requires a company to match revenues to related expenses in the correct time period. Revenue must be recognized (recorded in the accounting record) when earned and realizable, meaning that services have been performed, goods have been shipped, and that payment is expected. Expenses must be recognized when incurred. The actual payment of cash is recorded, but will not affect revenue or expense accounts at that time.
John Gillingham has his own CPA firm, makes creative learning tools, and consults. He designs Accounting Play products for financial accounting students and professionals.
Gillingham has ten years of financial services experience, seven of which have been with CPA firms specializing in tax, accounting, and general consultancy. Prior clients while working with other firms include audit of a multi-national manufacturing entity, high-high net worth tax for individuals, and trust work. The focus has turned to San Francisco startups and owners that need deep tax and practical consulting. High-net worth tax experience is utilized as individuals and companies grow.