1) A friend of mine is self employed and he only counts the currency he takes in as income and only recognizes expenses as he pays them. As such what kind of accounting is he practicing? Is this acceptable under GAAP

2) What is the accounting equation? List one item for each of the elements of the accounting equation.

3) What is the proper order for completing the financial statements? Why is this order critical?

4) What is the difference between the "Unadjusted Trial Balance" and "Adjusted Trial Balance"

 

1. Your friend is using the cash basis of accounting. This basis is anot acceptable under GAAP because it violates the matching principle and time period principle. However, this basis is only allowed when used for internal purposes only and not for external purposes because it does not cleary reflect the actual financial status of a company.

2. The accounting equation is ASSET IS EQUAL TO LIABILITIES PLUS SHAREHOLDER'S EQUITY. An example of asset is cash. An example of liability is accounts payable. An example of shareholder's equity is accumulated profits or retained earnings.

3.

1. Income Statement

2. Statement of Retained Earnings - also called Statement of Owners' Equity

3. The Balance Sheet

4.The Statement of Cash Flows

This is critical because the data in one statement is carried over to the next statement. Following this order will help users to properly understand the data included in the statements.

4. Unadjusted trial balance is the list of accounts and balances for the year BEFORE any adjustments made while Adjusted trial balance reflects the accounts and balances of the entity after considering the adjusting entries for the period.