Working with Financial Statements

Working With Financial Statements
In business companies make periodic disclosures about their financials to interested parties in documents known as financial statements.   Financial statements are usually prepared by accountants.   The goal is to provide accurate financial information that would be material in the decisions made by managers, investors, and government agencies.   To ensure that these financial statements are useful it is important that the information is prepared and presented in a timely and consistent manner. Furthermore, financial statements must be prepared in accordance with generally accepted accounting principles (GAAP).   The paragraphs that follow we will detail some of these principles as they relate to the importance of timing in reporting items on financial statements.   Two important GAAP principles are the revenue and expense recognition principles.   Additionally prepaid expenses, unearned revenue, accrued expenses, and accrued revenues are each categories of financial statements that require adjustments to maintain the revenue and expense recognition principles and are further explained in subsequent paragraphs.
Revenue/Expense Recognition Principles
A company uses the revenue recognition principle as a method of recognizing revenue in the period in which it is earned.   A company that provides a service will recognize the revenue earned at the time the service is completed (current period), not at the time the payment is made in full.   Expense are to follow revenues, therefore the expense recognition principle links to the revenue recognition principle in that expenses should math revenues for that period.   The expense recognition principle is also known as the matching principle.   For the company who performs a service, considering the time the service was completed, if they delayed paying monthly salaried employees until the next month, the company would make an entry to the salaries payable account on its current month’s balance...