In the world of business, many companies will accept payments before providing service or delivery. Likewise, some may accept a good or service before they submit a payment. In both of these cases, the party acquiring unfulfilled obligations would partake in the recording of what is known as a LIABILITY.
A liability is basically obligations held by a company. It can also be referred to as a creditor's claim on an asset; a source of the company's assets; or even a creditor's claim against the assets currently held by the company. Nonetheless, a company must record each liability acquired within an accounting period as it directly affects the balance sheet at any point in time. It is relevant now to refer to the accounting equation:
Assets = Liabilities + Equity ----------> Liabilities = Equity - Assets
Note that an increase in liabilities yields an increase in assets as is reflected in the balance sheet.
Liabilities have a normal credit balance, thus are decreased when recorded as a debit. There are many different forms of liabilities, but many can be spotted by two key words: "UNEARNED" and "PAYABLE". Other common liability accounts include, but are not limited to, the following:
Notes Payable
Accounts ""
Wages ""
Salaries ""
Notes ""
Interest ""
Unearned Revenue
Fees Unearned
It is pretty easy to spot a liability on a balance sheet, and this is to the benefit of all entities involved in a particular transaction. The sooner one party fulfills its obligations/liabilities to another, the sooner both can resume normal business practices.
As liabilities are accrued, they are recorded as a credit. Inversely, as they are fulfilled, they are reduced by being recorded as a debit. An example of this is provided:
Assume that on May 4, Company X buys a TV at a cost of $500 on credit from Tele Co. Company X would record the transaction in the journal as follows:
May 4 Television 500
Accounts Payable - Tele Co 500
Now assume that on June 1, Company X pays the $500 in cash to Tele Co. (and that Tele made this sale in on Craigslist where no sales tax or interest rates applied). Company X would record the transaction as follows:
June 1 Accounts Payable - Tele Co. 500
Cash 500
The ledger for the ACCOUNTS PAYABLE account would appear as follows:
Accounts Payable In this case, since the account payable is completely fulfilled, the balance
500 | 500 in the account as of June 1 is $0.
| 0
On the flip side, a company can receive payment before providing service. This case is presented below:
Assume that on Jan. 1, Company X receives $500 cash for a tutoring service that is to take place over the next 5 months ($100/month) and is to start immediately. Company X would prepare this journal entry on Jan. 1:
Jan. 1 Cash 500
Unearned Tutoring Fees 500
On March 1, Company X has provided 2 months of service (worth $200) and will record the following journal entry:
March 1 Unearned Tutoring Fees 200 Note that revenue is recorded
Tutoring Revenue 200 when earned!!!
As a result of this entry, the company can recognize that 2 months' worth of tutoring revenue has been earned. Also, by analyzing an u[dated ledger, it will assure that 3 more months of service must be provided in order to earn the full revenue of $500.
A final note, business would not exist without liabilities... think about that this week.
Another final note...63 days till Christmas!
Sunday, October 23, 2016
Sunday, October 16, 2016
Holding Accounting Accountants Accountable
To all accountants out there: why?
As if you haven't gotten this question before, right? "Why would you want to be an accountant? All you do is add and subtract? ...debits and credits... It's so boring ...overpayed..." As a freshman Economics student who has no desire of becoming an official accountant, I cannot provide a reasonable reasonable response to the public onslaught of attacks against the career of accounting. What I can do, however, is heap some more unbiased coals onto the fire of the debate.
The following information is meant to provide some insight as to how important accounting is and how a few legal mixups can really screw things up.
Many laws and acts have been implemented to make sure that companies prepare and present financial information in a certain manner so that no party can, in a prefect world, utilize loop holes in the accounting process. The Sarbanes-Oxley Act (SOX) and Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as the GAAP, SEC, IASB, IFRS, and FASB (whose names are easy to find with a quick web search) are all proponents and enforcement acts/organizations that assure the clear objective of maintaining valid and consistent measurements in transactional recognitions across businesses as they adhere to a full-disclosure model of financial records presentation. Simply put, businesses - both service and not-for-profit organizations - must follow an extensive set of rules and guidelines regarding to the ways in which they prepare and present their financial statements. For more information on specific principles on this matter, consider visiting IFRS.com, FASB.org, and ifrs.org.
Now, these rules are important for a few reasons:
1. Making a mistake at any point in time - be it a legal or mathematical or logistical error - can be costly in a future financial period.
2. Financial fraud can result in disputes that ultimately destroy a company if not resolved quickly.
3. Failure to account for certain transactions correctly can result in an incorrect adjustment of management that may not benefit the business.
4. YOU WILL LOSE MONEY IF YOU CAN'T PLAY BY THE RULES! People are out looking to sue; that's where the real business is.
5. CEOs and CFOs will look to YOU (the accountant) if a financial mishap is afoot.
6. Most of all, these rules prevent accountants from being in the wrong...because accountants hate nothing more than the mere possibility of being wrong; they are the elite statisticians who can manipulate addition and subtraction like no other, and should be recognized as such. Math is never wrong, and neither are accountants.
I know this isn't much, but one cannot deny the risks of being an accountant. Accounting is the backbone of a business's financial status in the world and the organization that allows for innovation and implementation. Moreover, when proficient accounting is not part of the picture, the business will undoubtedly fall apart.
Accounting aside, there are now 70 days until Christmas as of October 16.
Sunday, October 9, 2016
"It is what it is...that's why."
So there I was, sitting in my first accounting class, and the professor comes in and start talking about debits, credits, journal entries, ledgers, Spongebob, and Amish cookies. I sat in complete and utter confusion at the very mention of these seemingly foreign accounting terms. Previously, I had assumed debits were good and credits were bad. Why? I don't know. I left the class with a stark realization: I was ignorant. I went back to my dorm and stared at the wall, remarking to my roommate that I would be committing the coming months to learning a third language: that of the accountant. Thus my endeavor began...
Debits and credits.
I open my textbook and thumb through a few pages, writing down what I found to be important terms. After what seemed like hours of reading, I attempted a practice question - I believe it was just a simple journal entry. Anyways, despite the time I had spent reading, I had missed the most basic concept in accounting: debits vs. credits. I remember my professor stressing these terms in class, labeling them as simply "left" and "right", respectively, but I still couldn't grasp why they are the way they are. The professor dressed this in what I legitimately believe to be the most accurate description of accounting possible: "It is this way, because somebody said it was to be, so we accepted it" (paraphrased). That's about right.
To be more specific, debits and credits comprise the general method by which transactions are recorded in a way that increases or decreases an account. Common types of accounts are as follows:
ASSETS, DIVIDENDS, and EXPENSES (which are increased by a debit) as well as LIABILITIES, EQUITY, and REVENUE (which are increased by a credit). When something is considered to be increased by either a debit or credit, it's normal balance will be considered what it is increased by (a Dr. or Cr.). This trend also works inversely, a credit will decrease the accounts that are increased by a debit, and vice versa. This may seem confusing if you've never seen these terms matched with an actual representation of the action. Here is a simple example of a debit and credit involving assets.
Company X buys a truck, which is considered an asset. To record this transaction, the company will state that the asset account was increased in the debit column by the value of the truck, also including a decrease in cash (also an asset) used to buy the truck to be recorded as a credit. The journal entry is as follows:
Dr. Cr.
TRUCK 20,000
CASH 20,000
You will notice that there were two entries recorded above; this is known as a DOUBLE-ENTRY. A double-entry system requires that any transaction be recorded in at least two accounts. As exemplified, one account will be debited while the other(s) being credited, so as to either increase or decrease the accounts accordingly.
For those who are new to accounting, like myself, I would recommend diving into a textbook and watching YouTube videos. Simple repetition of terms will also be an effective method of remembering how to go about handling the recording of transactions with debits and credits. I have read about 350 pages of my textbook in just a few short weeks, and plan on reviewing and reading more so that I may no longer be ignorant of the art of accounting.
A final note, this stuff is pretty easy, and as my professor reminds us weekly, "people will give you money...and lots of it" if you learn to love accounting. Let's just say I'm still learning (I'm and ECON major with no clue what I can do with it. Accounting might be calling my name...).
Here's a haiku I wrote:
Debits and credits.
I open my textbook and thumb through a few pages, writing down what I found to be important terms. After what seemed like hours of reading, I attempted a practice question - I believe it was just a simple journal entry. Anyways, despite the time I had spent reading, I had missed the most basic concept in accounting: debits vs. credits. I remember my professor stressing these terms in class, labeling them as simply "left" and "right", respectively, but I still couldn't grasp why they are the way they are. The professor dressed this in what I legitimately believe to be the most accurate description of accounting possible: "It is this way, because somebody said it was to be, so we accepted it" (paraphrased). That's about right.
To be more specific, debits and credits comprise the general method by which transactions are recorded in a way that increases or decreases an account. Common types of accounts are as follows:
ASSETS, DIVIDENDS, and EXPENSES (which are increased by a debit) as well as LIABILITIES, EQUITY, and REVENUE (which are increased by a credit). When something is considered to be increased by either a debit or credit, it's normal balance will be considered what it is increased by (a Dr. or Cr.). This trend also works inversely, a credit will decrease the accounts that are increased by a debit, and vice versa. This may seem confusing if you've never seen these terms matched with an actual representation of the action. Here is a simple example of a debit and credit involving assets.
Company X buys a truck, which is considered an asset. To record this transaction, the company will state that the asset account was increased in the debit column by the value of the truck, also including a decrease in cash (also an asset) used to buy the truck to be recorded as a credit. The journal entry is as follows:
Dr. Cr.
TRUCK 20,000
CASH 20,000
You will notice that there were two entries recorded above; this is known as a DOUBLE-ENTRY. A double-entry system requires that any transaction be recorded in at least two accounts. As exemplified, one account will be debited while the other(s) being credited, so as to either increase or decrease the accounts accordingly.
For those who are new to accounting, like myself, I would recommend diving into a textbook and watching YouTube videos. Simple repetition of terms will also be an effective method of remembering how to go about handling the recording of transactions with debits and credits. I have read about 350 pages of my textbook in just a few short weeks, and plan on reviewing and reading more so that I may no longer be ignorant of the art of accounting.
A final note, this stuff is pretty easy, and as my professor reminds us weekly, "people will give you money...and lots of it" if you learn to love accounting. Let's just say I'm still learning (I'm and ECON major with no clue what I can do with it. Accounting might be calling my name...).
Here's a haiku I wrote:
I debited cash,
What a joyous transaction.
Then, 'twas credited.
Tuesday, October 4, 2016
It's beginning to look like...the end of a fiscal year.
For some reason, a typical accounting textbook will consider a natural business year to consist of 360 days. This just doesn't make sense. Since I am not going to be an accountant, I will not accept this notion of taking away days from my year. However, the number of days in a year is very important to the accounting process at the end of a fiscal year for a business. Typically, December 31 is the end of a fiscal year/period, although a business may choose whatever day it so desires. They may also break the year up into different accounting periods, normally being broken into quarters. No matter, the end of a period or fiscal year is a very exciting time for a business because this is when they can truly analyze their success or progress over time. When this time rolls around, accountants isolate themselves into a confined area, lit only by a computer screen displaying Microsoft Excel, where they will spend a few hours, days, or weeks closing out accounts to prepare various financial statements. Temporary accounts, such as revenues, sales, expenses, and dividends, are closed out so that they may start the next period with a balance of zero ($0). The income statement account is closed to retained earnings.
Some accounts are carried over into the next period and to be taken into consideration throughout future financial transactions and other endeavors. The balance sheet will obviously not be closed out to be zero because a company will typically continue to possess certain accounts of cash, inventory, liabilities, retained earnings, and others. These are referred to as permanent accounts. These account balances at the end of the year are carried over and documented as the beginning balance for the next period.
Sometimes, adjusting entries must be made to ensure that the financial statements accurately represent the revenues and expenses accumulated over the period. The most common reasons for adjusting reasons involve unearned revenues and expired assets (such as prepaid insurance). I will also note that there are so many reasonable hypothetical situations of unrecorded expenses and earned revenues that are often unavoidable for large, and small, businesses. This is why adjusting entries are a commonality of end of year accounting.
I As a final note, I want to let all of my readers know that, as of October 4, there are only 82 days until Christmas, the best day of the year. I will begin playing Christmas music, unapologetically, starting at 80 days remaining. So to all who have read this far, I want to wish you a very Merry Christmas!
Some accounts are carried over into the next period and to be taken into consideration throughout future financial transactions and other endeavors. The balance sheet will obviously not be closed out to be zero because a company will typically continue to possess certain accounts of cash, inventory, liabilities, retained earnings, and others. These are referred to as permanent accounts. These account balances at the end of the year are carried over and documented as the beginning balance for the next period.
Sometimes, adjusting entries must be made to ensure that the financial statements accurately represent the revenues and expenses accumulated over the period. The most common reasons for adjusting reasons involve unearned revenues and expired assets (such as prepaid insurance). I will also note that there are so many reasonable hypothetical situations of unrecorded expenses and earned revenues that are often unavoidable for large, and small, businesses. This is why adjusting entries are a commonality of end of year accounting.
I As a final note, I want to let all of my readers know that, as of October 4, there are only 82 days until Christmas, the best day of the year. I will begin playing Christmas music, unapologetically, starting at 80 days remaining. So to all who have read this far, I want to wish you a very Merry Christmas!
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