Accounting Principles

May 13th, 2015
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Southeastern Oklahoma State University
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Relation between income statement and balance sheet. WE ACCOUNT FOR PURCHASES AS THEY HAPPEN, NOT WHEN WE PAY THEM. Any business with inventory must use only the accrual method.

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Accounting:Accounting principles see here: profit = sales - cost of goods soldExpenses = anything that isn't cost of goods sold (ex: advertising, rent, etc.).COST OF DOING BUSINESS regardless if you sell or notNet profit (also called earnings, net income, the bottom line) = gross profit - expensesRelation between income statement and balance sheet:INCOME STATEMENTS SHOW YOU HOW YOU GOT YOUR EARNINGS; BALANCE SHEET JUST SAYS WHAT THEY ARE.They also have the same ending inventory (its on balance sheet because we haven't used it)1 beginning and 1 ending balance sheets (2 snapshots in time) for accounting periodIncome statement connects the beginning and ending balance sheetRetained Earnings: earnings that are history, or earnings from past accounting periods called?Notes payable: loans to be paid back and usually long term (that's why second on balance sheet)Accounts payable: things bought on credit to pay back and need to be paid back soon (that's why first in balance sheet). There is usually no interest either.You can see now that the Cost of Production labor is tied up in inventory. Cost of production cannot be recognized (or expensed) until the Inventory is sold.Accounts receivable: people who paid us on credit, and therefore owe us moneyYou need to reduce accounts receivable when there's a bad debt. It becomes an expense, therefore reduces earnings.Prepaid expense h

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