Business Types. Financial Statements. Accruals and Deferrals

Business Types

Corporations are required to organize and incorporate under the laws of a state. Corporations issue shares of stock to signify ownership interest in the firm. These shares can be freely traded by the owners, who are known as stockholders. The owners elect the board of directors, who have the ultimate responsibility for managing the corporation.

Financial Statements

Each statement is used in a different way, depending on the needs of the user. The income statement is used to determine a company's profitability, while the balance sheet assesses whether the company has enough assets to cover any outstanding liabilities. The statement of cash flows can be used by creditors to determine whether a company is liquid or not, because the statement tracks inflows and outflows for operating, investing, and financing activities. Finally, the statement of owners' equity breaks down a company's capital and ownership accounts.

The Accounting Equation

Because there are many stakeholders that rely on the financial information that a company produces, companies follow specific rules referred to as Generally Accepted Accounting Principles (GAAP). These standards identify how different situations should be handled in the records. This increases comparability between companies, because they are following similar guidelines.

Accrual and Deferral Basis

The accrual basis of accounting requires that we recognize revenues in the period when we have earned the revenues and expenses in the period when we have incurred the expenses.

Accruals and Deferrals

Expenses will have the term "expense" at the end of the account name. All expenses will go on the income statement with the exception of any expense that begins with the word "Prepaid" which means that we have prepaid for something that will become a future expense to us, not a current one.

Posting Journal entries

Normal Balances are normally posted in the trial balance. Examples of where you typically put these balances:

• Assets: Debit

• Liabilities: Credit

• Stockholders' Equity: Credit

• Revenues: Credit

• Expenses: Debit

There will be exceptions related to contra accounts such as dividends, which is an equity account but reduces the balance like expenses do.