In the accounting process, there may be economic events that do not immediately trigger the recording of the transaction. These are addressed via adjusting entries, which serve to match expenses to revenues in the accounting period in which they occur. There are two general classes of adjustments: Accruals – revenues or expenses that have accrued [...]

Revenue, expense, and capital withdrawal (dividend) accounts are temporary accounts that are reset at the end of the accounting period so that they will have zero balances at the start of the next period. Closing entries are the journal entries used to transfer the balances of these temporary accounts to permanent accounts. After the closing [...]

Businesses report information in the form of financial statements issued on a periodic basis. GAAP requires the following four financial statements:  Balance Sheet – statement of financial position at a given point in time.   Income Statement – revenues minus expenses for a given time period ending at a specified date. Statement of Owner’s Equity – [...]

Accounting standards are needed so that financial statements will fairly and consistently describe financial performance. Without standards, users of financial statements would need to learn the accounting rules of each company, and comparisons between companies would be difficult. Accounting standards used today are referred to as Generally Accepted Accounting Principles (GAAP). These principles are “generally [...]

Traditional financial reporting systems provide an indication of how a firm has performed in the past, but offer little information about how it might perform in the future. For example, a firm might reduce its level of customer service in order to boost current earnings, but then future earnings might be negatively impacted due to [...]