Thanks to a top local group of CPAs in East San Diego for getting back to us with this answer to a reader's question regarding the classification of assets and liabilities on the balance sheet.
Overview: On the balance sheet, assets and liabilities are classified as either current or long term to indicate relative liquidity. Liquidity is a measure of how quickly items can be converted into cash.
Current assets: These assets can be expected to be converted into cash within the next twelve months or within the business's normal operating cycle if longer than a year. Cash, accounts receivable, notes receivable due within one year, and prepaid expenses are current assets. If a business is involved in merchandising (the sale of goods), the balance sheet contains an additional current asset - inventory. Any CPA firm would agree.
Long term assets: These assets include land, buildings, furniture and fixtures, machinery, and notes receivable due after one year.
Current liabilities: These are debts that are due to be paid within one year or within the normal operating cycle, if longer. Examples include notes payable, accounts payable and salaries payable.
Long-term liabilities: These liabilities, managed by accountants, are not classified as current. They consist of such items as mortgages notes payable, etc.
The following question ("How do you prepare a worksheet for a service business in North Albuquerque?") was recently posed by a local CPA firm in the North Albuquerque, NM area. Their response for our readers:
The unadjusted or opening trial balance is prepared in the first two columns of the worksheet. Adjustments are then made to the accounts to arrive at an adjusted trial balance. Account balances from the adjusted trial balance then go either to the income statement or to balance sheet columns.
Local CPAs in the North ABQ area weigh in on preparing a worksheet:
The preparation of the worksheet provides a quick review of all of the ledger balances as well as the adjusting journal entries.
Special thanks to Kent's CPA firm in south Orlando for sending in this tidbit about bank reconciliation.
There are two records of a company's cash: its cash account in the general ledger and the bank statement. The two balances are rarely in agreement and require a competent CPA firm to help.
The bank statement: This monthly statement mailed by the bank to the business indicates what the business has in its cash account.
The general ledger: This records the day-to-day transactions of the business.
According to the south Orlando accountants, reasons for discrepancies include:
Special thanks for one of the best CPAs in West St. Louis for clarifying the following. Most business transactions are carried out by cash, although businesses commonly maintain small petty cash funds for making small payments. Companies frequently have excess cash that they invest in short-term or marketable securities. A company's assets, including cash, are protected by internal controls.
Internal controls: Detailed procedures are adopted by an enterprise to ensure accurate accounting records, safeguard a company's assets, and promote operational efficiency. Internal control requires a separation of employee duties so that employee opportunities for committing fraud are minimized.
Cash: Cash is probably what you think it is. Postage stamps, IOUs and post-dated checks are not treated as cash, however. To protect cash, all businesses in west St. Louis set up a bank account.
Bank account: A major method for maintaining control over cash by a top CPA is the bank account. The documents used to control a bank account include the signature card, the deposit ticket, the check and the bank statement.
Today we interview a local CPA firm in North Indianapolis about a common accounting misconception - Prepaid Expenses:
According to the CPAs in North Indy we spoke with, a prepaid expense account is debited when an expense is paid in advance. An expenditure made in the current period that will benefit both the current and future periods is another safe definition.
Common examples of this include a 2 year purchase on an insurance policy for a company. At the end of the year, the adjusted journal entry to record the amount of insurance that has expired and must be reclassified as an expense would appear as:
December 31 - Insurance Expense 1,000
The following explanation on a basic accounting concept comes to us courtesy of one of the best CPAs in North Fresno, California. According to the CPA firm we talked to in North Fresno, revenues must be assigned to the period in which they are earned and expenses must be assigned to the accounting period in which they were used to produce revenue under the matching principle.
In order to apply the matching rule, adjusting entries are required at the end of an accounting period. These entries are used to apportion income and expenses between two or more accounting periods and make life easier on CPAs in general. They are also used to record expenses incurred but not paid for the period, and to record revenues earned but not yet received.
After the accounts have been adjusted, closing entries transfer revenue, expense, and owners withdrawal balances from their respective accounts to the owner's capital account.
We contacted one of the best CPA firms in south Denver for clarification:
Overview: All of a company's accounts are contained in a book called a general ledger, or simply a ledger.
The ledger is just a group of actual accounts.
Special thanks to the Megger CPAs of South Denver for the answer.
Branches of Accounting Defined
Mike writes in with a question regarding his new business venture in the Houston area. He wants to know about the different types of accountants that can help with new business setup. The major branches of accounting are public, private and government accounting.
Public accounting: The public accounting profession has achieved the same stature as medicine and law. Public accounting refers to the work done by independent Certified Public Accounting (CPA) firms that audit the books of companies to insure that their financial statements and records are not materially misstated.
Private accounting refers primarily to the private sector of the economy and involves the analysis and recording of financial information by accountants who are employees of the business entity.
Governmental accounting: This branch refers primarily to the accounting functions performed for federal, state and local government institutions. Governmental accounting also includes the financial reporting functions applicable to hospitals, charitable organizations, colleges and voluntary health and welfare organizations.
Overview: Accounting information is most commonly used by individuals and groups who must make decisions concerning the operations of a business.
Management: In order to maintain a profitable enterprise, management must maintain sufficient funds to meet the entity's liabilities as they become due. Virtually all businesses publish financial statements, which show the financial condition of the company and also indicate whether or not the company is making a profit.
Society: Several groups in society, including the IRS, labor unions, and financial analysts, are the stock exchanges are interested in the profitability and operations of the entity.
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