Founded by a former IRS Agent

Founded by a former IRS Agent

Ask a CPA: Accounting and Bookkeeping Basics

July 15, 2015

Ask a CPA: Accounting and Bookkeeping Basics

With stringent government regulations and ever-changing policies, it is crucial to know and understand how your business and personal finances can and should be documented. We are here to help people everywhere learn and refresh their understanding of basic accounting and bookkeeping.

What Are Retained Earnings?

Retained earnings are a corporation’s cumulative earnings from when the corporation was formed minus the dividends it has declared since. The amount of retained earnings as of a balance sheet’s date is reported as a separate line item in the stockholders’ equity section of the balance sheet. A negative amount is reported as deficit.

What Is A Nominal Account In Accounting?

Nominal accounts in accounting are the temporary accounts, like the income statement accounts. In other words, nominal accounts report revenues, expenses, gains and losses. Nominal accounts are closed at the end of each accounting period or year. Their account balances are transferred to a permanent account. The balances from the income statement accounts transfer to the owner’s equity account if the enterprise is a sole proprietorship. If the business is a corporation, the balances end up in the retained earnings account.

What Are Adjusting Entries?

Adjusting entries are usually made on the last day of an accounting period so that financial statements reflect the revenues that have been earned and the expenses that were incurred during the accounting period.

Adjusting entries may occur for reasons like:

  • Revenue has been earned, but it has not yet been recorded.
  • An expense may have been incurred, but it hasn’t yet been recorded.
  • A company may have paid for six-months of insurance coverage, but the accounting period is only one month.
  • A customer paid a company in advance of receiving goods or services. Until the goods or services are delivered, the amount is reported as a liability. After the goods or services are delivered, an entry is needed to reduce the liability and to report the revenues.

Adjusting entries will involve one income statement account and one balance sheet account.

Which Balance Sheet Items Change If A Company Earns A Profit?

Because each transaction affects at least two accounts, there will be multiple changes to the balance sheet. One change is that the owner’s equity or stockholders’ equity will increase by the amount of net income. Other changes depend on the revenue and expense transactions. When a company earns a profit, there are numerous entries to various balance sheet accounts, but the change may not be significant. For instance, a credit sale will increase Accounts Receivable, but then decrease the account by the same amount once the money is received. It works the same way for Accounts Payable.

How Can I Learn Bookkeeping With Little Cost?

You can use the internet to learn bookkeeping online at little cost. You may find a plethora of information for clear explanations of all things accounting at no cost on QuickBooks is the leading software for small businesses in the U.S. and is fast and easy to learn. The website offers training videos on QuickBooks as well as other software beginning at about $25 per month. After you have grasped the material on, learned QuickBooks, then search out a business, bookkeeping service or non-profit organization that will provide you with real-world, hands-on experience. It may take time and effort to fully understand the concepts, but the value of the time spent will be extraordinary.

Save time and money by hiring Pogosian & Company, CPA bookkeeping service in Glendale. Pogosian provides unrivaled bookkeeping services with a personalized touch by experienced CPA’s.

It’s time to schedule an appointment with Pogosian Nazaryan & Company.