[ORDER] BUS-FPX2061 ASSESSMENT 3 INSTRUCTIONS: COMPLETING THE ACCOUNTING CYCLE

BUS-FPX2061 ASSESSMENT 3 INSTRUCTIONS: COMPLETING THE ACCOUNTING CYCLE

Completing the Accounting Cycle: Foundational Concepts in Financial Reporting

The accounting cycle is the bedrock of financial reporting, a systematic sequence of steps that businesses follow to record, classify, and summarize financial transactions in a coherent manner. It culminates in the preparation of financial statements that provide stakeholders—from investors and creditors to management—with a clear picture of the entity’s economic performance and position.

Understanding this cycle, particularly the principles governing revenue and expense recognition, the crucial role of adjusting entries, and the meaning of asset valuation, is indispensable for any financial professional. This paper will delve into seven core components of the accounting cycle, analyzing the distinctions between key methodologies, the necessary procedures for recording and adjusting data, and the interpretive tools used for financial analysis. The principles discussed herein form the necessary foundation for accurate, transparent, and ethically sound financial practice.

The first critical decision in the accounting cycle involves the method used to recognize revenue and expenses. Two principal methodologies dominate this discussion: the cash basis and the accrual basis of accounting. Under the cash basis of accounting, revenues are strictly recorded when cash is physically received, and expenses are recognized only when payments are made BUS-FPX2061 Assessment 3. This method offers a straightforward, real-time snapshot of the company’s cash flow, making it simple to implement and understand.

It is often favored by small businesses or individuals who do not require rigorous compliance with formal accounting standards. Conversely, the accrual basis of accounting adheres to the fundamental principles of Generally Accepted Accounting Principles (GAAP). Under this method, revenues are recognized when they are earned—meaning when a sale is completed or a service is rendered—regardless of whether cash has been exchanged.

Similarly, expenses are recognized when they are incurred to generate that revenue, supporting the core concept of matching. The key difference, therefore, lies entirely in the timing of recognition. Cash basis reflects only immediate cash movements, while accrual basis captures the true economic activities of the business over a period. Since the accrual basis provides a far more accurate representation of profitability and financial health, it is the accepted and standard accounting method used by almost all publicly traded and larger private organizations, serving as a pillar of the financial principles outlined in the BUS-FPX2061 Assessment 3.

The operational phase of the accounting cycle hinges on two distinct types of journal entries: normal and adjusting. Normal journal entries are triggered by routine, day-to-day business transactions. These are event-driven entries, initiated by source documents such as sales invoices, purchase orders, or payment receipts, and recorded chronologically in the general journal before being posted to the ledger accounts. These entries capture the initial exchange of economic value. In contrast, adjusting entries are triggered not by a transaction, BUS-FPX2061 Assessment 3 but by the passage of time or the periodic necessity to prepare accurate financial statements. They are made exclusively at the end of an accounting period.

Adjusting entries are necessary to ensure strict adherence to the revenue recognition principle, which mandates revenue be recorded when earned, and the matching principle, which dictates that expenses incurred to generate revenue must be recorded in the same period as that revenue. Without these adjustments, pre-paid costs would be overstated as assets, services rendered but not yet paid for would be understated as revenue, and the resulting financial statements would be materially misleading. Therefore, these entries serve as the integrity check for the entire accounting system.

The necessity of making accurate adjusting entries inherently introduces significant ethical considerations. As adjusting entries directly impact the calculation of net income, an unscrupulous accountant could potentially manipulate these figures to meet earnings targets or influence stock prices, a practice commonly known as “earnings management.” For example, deliberately delaying the recording of an accrued expense or prematurely recognizing unearned revenue would unfairly inflate a period’s profit.

The ethical responsibility of the financial professional, particularly when completing tasks such as this BUS-FPX2061 Assessment 3, is to ensure that all adjusting entries are based on objective evidence and calculated with complete transparency and integrity. Fulfilling the true spirit of the matching and revenue recognition principles is paramount to maintaining the trust of all stakeholders who rely on the financial reports for decision-making. The commitment to ethical conduct ensures that the final figures reflect the economic substance over merely the legal form of transactions.

Adjusting entries fall into four primary categories, each rectifying a specific timing issue between cash flow and economic activity. The first example is the equal growth of an expense and a liability (accrued expense). If the last pay date falls before the period end, the wages earned by employees but not yet paid represent an expense already incurred and a corresponding liability (Salaries Payable).

The adjusting entry is a Debit to Payroll Expense and a Credit to Salaries Payable, ensuring the expense is recognized in the period the work was performed. The second type is the earning of revenue previously recorded as unearned (deferred revenue). When a customer prepays for a service, the initial cash receipt is recorded as a BUS-FPX2061 Assessment 3 liability (Unearned Revenue). As the service is performed, the liability is reduced, and actual revenue is recognized: Debit Unearned Revenue, Credit Service Revenue.

The third example, the equal growth of an asset and revenue (accrued revenue), occurs when a company sells products or performs services on credit. The revenue is earned immediately, but cash has not been received, thus creating an asset: Debit Accounts Receivable, Credit Revenue. Finally, the increase in an expense and decrease in an asset (deferred expense or prepaid expense adjustment)