1. In developing an accounting information system, it is important to establish procedures whereby all transactions that affect the components of the accounting equation are recorded. Why then, is it often necessary to adjust the accounts before financial statements are prepared even in a properly designed accounting system? Identify the major types of adjustments that are frequently made and give a specific example of each.
2. The Income Statement is an important financial statement used by individuals who are interested in the operations of a business. Explain how the accounting period concept and the revenue and expense recognition criteria provide guidance to accountants in preparing the Income Statement.
The financial statements reveal the operational results and the financial position of the entity. Four basic commonly prepared statements by the publicly traded companies are the income statement, balance sheet, statement of changes in equity and cash flow statement. The balances in accounts shall be adjusted before the preparation of the financial statements, even under the properly designed systems of audit. The reason behind this is that the some transactions are recognized on premature basis and some impacts on the accounting equations have not recorded (Hanson, Robison and Black 2017). The deferrals as well as the prepayments are the kinds of adjustments for the recorded transactions that shall be assigned over the future periods and over the current periods. For instance, the types of deferrals adjustments are prepaid insurance, prepaid rent, and the unearned revenue. On the other hand, the accruals are the adjustments for the unrecorded transactions that shall be recognized under the current period. For instance, the accrual adjustments are the wages and salaries payable, interest receivable and interest payables.
The income statement is the financial statement that reveals the financial performance of the company over the particular period of time. The performance of the company is measured on the basis of how efficiently the company manages its revenue and expenses and through operating as well as non-operating activities. The assumptions associated with the time period segregates the economic life of the accounting company like the business enterprise into the arbitrary periods for time (Hand and Martin 2017). The matching principle and the revenue recognition are basic rules for the purpose of allocating the expenses and revenues over the arbitrary time periods with regard to the accrual method of accounting. The principle of revenue recognition states that the time period under which the revenue is to be assigned and recognized is the statement of income under which the revenue shall be reported. On the other hand, the matching principles states that the time period under which the costs are to be assigned and recognized as the expenses is the statement of income under which the expenses shall be matched and reported against the revenues while the net income is determined.
Hand, J.R. and Martin, N., 2017. Biases in Analysts' Multiyear Forecasted Income Statements, Balance Sheets, and Cash Flow Statements.
Hanson, S.D., Robison, L.J. and Black, J.R., 2017. Financial Management for Small Businesses: Financial Statements & Present Value Models. Michigan State University.