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Accrual accounting is governed by two important principles: revenue recognition and matching. The revenue recognition principle states that revenue should be reported when it is earned, rather than when the cash is received. The matching principle states that an expense should be reported in the same accounting period as the revenue generated by the expense.

How an Accounting Period Works There are typically multiple accounting periods currently active at any given point in time. For example, assume the accounting department of XYZ Company is closing the financial records for the month of June.

This indicates the accounting period is the month June , although the entity may also wish to aggregate accounting data by quarter April through June , half year January through June , or an entire fiscal year. Accounting periods are useful to analysts and potential shareholders because it allows them to identify trends in a single company's performance over a period of time.

They can also use accounting periods to compare the performance of two or more companies during the same period of time. Accounting Period Types A calendar year with respect to accounting periods indicates that an entity begins aggregating accounting records on the first day of January and subsequently stops the accumulation of data on the last day of December. This annual accounting period imitates a basic month calendar period.

An entity may also elect to report financial data through the use of a fiscal year. A fiscal year arbitrarily sets the beginning of the accounting period to any date, and financial data is accumulated for one year from this date. For example, a fiscal year starting April 1 would end on March 31 of the following year. The federal government has a fiscal year that runs from October 1 to September 30, while many nonprofits have a fiscal year that runs from July 1 to June Financial statements, such as the income statement and balance sheet , identify the accounting period in their headers.

The income statement includes a company's revenue and expenses from the entire accounting period. The header will identify the last date of the accounting period, for example, "as of June 30, 20XX. The accrual method of accounting encompasses these two principles. Accrual method of accounting Accounting periods are established for reporting and analysis purposes. In theory, an entity hopes to experience consistency in growth across accounting periods to display stability and an outlook of long-term profitability.

The method of accounting that supports this theory is the accrual method of accounting. The accrual method of accounting requires an accounting entry to be made when an economic event occurs regardless of the timing of the cash element in the event. For example, the accrual method of accounting requires the depreciation of a fixed asset over the life of the asset.

This recognition of expenses over numerous accounting periods enables relative comparability across the periods as opposed to a complete expense when the item was paid for. Revenue recognition principle An important accounting rule used in the accrual method of accounting is the revenue recognition principle. The revenue recognition principle states that revenue should be recognized when the money is earned, not when the cash changes hands.

For example, a company may earn revenue prior to receiving cash if it allows customers to make purchases on credit. At the time of service or upon transferring a good to the customer, the company will recognize both revenue and an accounts receivable. Bookkeeping Guidebook What is an Accounting Period? An accounting period is the span of time covered by a set of financial statements.

This period defines the time range over which business transactions are accumulated into financial statements. It is needed by investors so that they can compare the results of successive time periods. For internal financial reporting, an accounting period is generally considered to be one month. A few firms compile financial information in four-week increments, so that they have 13 accounting periods per year.

Whatever accounting period is used should be applied consistently over time. If a set of financial statements cover the results of an entire year, then the accounting period is one year. If the accounting period is for a twelve month period ending on a date other than December 31, then the accounting period is called a fiscal year, as opposed to a calendar year.

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This annual accounting period imitates a basic month calendar period. An entity may also elect to report financial data through the use of a fiscal year. A fiscal year arbitrarily sets the beginning of the accounting period to any date, and financial data is accumulated for one year from this date.

For example, a fiscal year starting April 1 would end on March 31 of the following year. The federal government has a fiscal year that runs from October 1 to September 30, while many nonprofits have a fiscal year that runs from July 1 to June Financial statements, such as the income statement and balance sheet , identify the accounting period in their headers.

The income statement includes a company's revenue and expenses from the entire accounting period. The header will identify the last date of the accounting period, for example, "as of June 30, 20XX. The accrual method of accounting encompasses these two principles. Accrual method of accounting Accounting periods are established for reporting and analysis purposes. In theory, an entity hopes to experience consistency in growth across accounting periods to display stability and an outlook of long-term profitability.

The method of accounting that supports this theory is the accrual method of accounting. The accrual method of accounting requires an accounting entry to be made when an economic event occurs regardless of the timing of the cash element in the event. For example, the accrual method of accounting requires the depreciation of a fixed asset over the life of the asset.

This recognition of expenses over numerous accounting periods enables relative comparability across the periods as opposed to a complete expense when the item was paid for. Revenue recognition principle An important accounting rule used in the accrual method of accounting is the revenue recognition principle. The revenue recognition principle states that revenue should be recognized when the money is earned, not when the cash changes hands.

For example, a company may earn revenue prior to receiving cash if it allows customers to make purchases on credit. At the time of service or upon transferring a good to the customer, the company will recognize both revenue and an accounts receivable. Important If a company hasn't earned revenue when cash is received, it will need to set up a deferred revenue account which indicates the revenue has not yet been earned.

Matching principle A primary accounting rule relating to the use of an accounting period is the matching principle. The matching principle requires that expenses are reported in the accounting period in which the associated revenue is reported. For example, the period for which the cost of goods sold COGS is reported will be the same period in which the revenue is reported for the same goods. Using the example of depreciation from above, the depreciation and subsequent spread of expense over multiple periods better matches the use of fixed assets with its ability to generate revenue.

If a company were to expense an expensive machine in the year of purchase, it still has a long time to generate revenues for the business. That would be a mismatch of revenue and expense. However, by spreading the expense over the useful life of the fixed asset , it better matches the expense to its related revenue.

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More importantly Jason is patient and he listens. Financial accounting is performed to conform to external regulations. It is not for internal employees to analyze and make financial decisions— managerial accounting is used for this purpose. Cost Accounting Cost accounting is considered a type of managerial accounting. Cost accounting is most commonly used in the manufacturing industry, an industry that has a lot of resources and costs to manage.

Cost accounting concerns itself with recording and analyzing manufacturing costs. Then it looks at how they affect a business, and how these costs can be better managed, according to Accounting Tools. Auditing There are two types of auditing: external and internal auditing.

This is to make sure they are presented correctly and comply with GAAP. Internal auditing involves evaluating how a business divides up accounting duties. As well as who is authorized to do what accounting task and what procedures and policies are in place. Internal auditing helps a business zero in on fraud, mismanagement and waste. It also identifies and controls any potential weaknesses in its policies or procedures. The focus of managerial accounting is to provide data.

Managerial accounting includes budgeting and forecasting and cost analysis. As well as financial analysis, reviewing past business decisions and more. Cost accounting is a type of managerial accounting. FreshBooks has simple online accounting software for small businesses.

This makes it easy to produce these reports. Accounting Information Systems AIS concerns itself with everything to do with accounting systems and processes. This involves their construction, installment, application, and observation. This can include accounting software management. As well as the management of bookkeeping and accounting employees.

Tax Accounting Tax accounting involves planning for tax time and the preparation of tax returns. This branch of accounting aids businesses to be compliant with regulations set up by the IRS. Tax accounting also helps businesses figure out their income tax and other taxes and how to legally reduce their amount of tax owing. Tax accounting also analyzes tax-related business decisions and any other issues related to taxes.

Forensic Accounting This specialized accounting service is trending in accounting and is becoming increasingly popular.