Finance

Something new that I learned from this chapter is ‘deferrals and accruals’.  I learned that organizations find it difficult to measure revenues and expenses. However, with the two concepts ‘deferrals and accruals,' the company can keep records on revenue and expenses, and make adjustments if needed.  I have also understood that accrual entries record all recognized revenues or expenses without counting other business transactions. On the other hand, deferral entries record all events associated with revenue and expense without recognition of revenues and expenses. The cool thing with what I am learning is that I can now differentiate deferral entries and accrual entries.  I now know that in recording all financial statements, companies must understand recognition so that they can recognize the revenue and expenses.

            The concept that is unclear to me is the ‘adjustment processes. First, I understand that all tentative financial statements are recorded in a trial balance. Then, needed adjustments may be made so that a final financial statement can be made. However, I need clarity on whether some transactions such as prepaid insurance, prepaid rent, among other prepaid expenses that do not fit the annual reporting period should be included.

Response

I agree with the statement that the adjustment process is matching the expenses with revenues.  It is also important to note that the adjustment process is important as it ensures that the financial statements help the organization evaluate its financial position and performance. As a result, the organization managers are able to make decisions on how to control the financial resources.  In addition, the adjustment process allows the organization to evaluate whether the asset values met the real value.

On accruals and deferrals, it is important to understand that both are accounting adjustment entries. The former occurs before payment and the later occur after a payment. Accruals involve reporting of all expenses prior to the receipt, and deferral involves the reporting of all payments of expense even if the payment was made in prior periods such as insurance and rent.