Classifications of Governmental Funds and Not for Profit Entity NetAssets

Governmental and Not for Profit entities follow a different form of accounting. An accounting form that is modified and tailored to fit the needs and goals of the entity; hence the modified accrual basis. Since governmental and not for profit entities are not focused on generating revenues, the assets they purchase and liabilities they are in debt to are treated and classified differently. The following is a brief description on how governmental and not for profit entities distinguish, recognize and classify assets.

Special Items vs. Extraordinary Items

Special items and extraordinary items may sound similar and their definition may be very close to one another, but in fact they are different. Let us define special items first. Special items are those that are unusual OR infrequent (but not both). On the other hand extraordinary items are those that are both unusual AND infrequent. This "OR", "AND" can make a world of difference in determining the nature of the event, its significance and the method in which it should be recognized.

In understanding the above definitions and the differences between the two types of items, it is noteworthy to mention that an extraordinary item is ALWAYS special; while a special item is NEVER extraordinary.

Financial Accounting 101: Basics of Journal Entries

Accounting is commonly referred to as the language of business. It is a language of numbers, filled with debits and credits that portray the financial story of an entity. There are different categories or genres of accounting per se. Financial accounting is for profit oriented entities. Governmental accounting is for governmental and not for profit entities. Managerial accounting is for internal and is mainly concerned with production. Federal income tax accounting is for both personal and corporate taxes.

Accounting Basics: Adjusting Entries

Accounting systematically divides arbitrary points in time into artificial time periods in order to assess the financial and economic conditions of an entity (Time Period Assumption). It is this division that allows a company to create periodic and annual financial statements and derive conclusions from them. As a result of this, certain transactions undertaken by a company must relate to the time period to which they correspond. In accounting this is referred to as the accrual basis of accounting. Accrual accounting mandates that companies record transactions that change a company's financial statements in the period in which the events or transactions undertaken occur.

Adjusting Entries: Prepaid Expenses

Prepaid expenses defer the recognition of expenses. Prepaid expenses are expenses that are paid for in advance by an entity. Because the future benefits that a company will receive from this type of transaction have not yet materialized, these advanced payments are recorded as assets. To record a prepaid expense, debit an asset account for the amount paid and credit cash.

Adjusting Entries: Unearned Revenues

Unearned revenues arise from prepayments to a company from customers or clients (consumers). Although, a company may have received cash, they have not performed any services or sold any goods, and, as a result may not recognize any revenue. Thus, these type of transactions defer revenue until a company has earned the right to claim it. When a company receives a prepayment, a liability account titled unearned revenue is credited.

Adjusting Entries: Accrued Expenses

Accrued Expenses are expenses that have been incurred by a company but have not yet been recognized because they have not been paid or recorded. At the statement date these expenses need to recorded through an adjusting entry to update the books of an entity. 

Adjusting Entries: Accrued Revenues

Accrued revenues are revenues that have not been billed or collected during the accounting period. Two examples illustrate why revenues accrue.

The Cash, Modified, & Accrual Basis of Accounting

There are different accounting methods of reporting financial statements. The three most common methods are the cash basis, modified accrual basis and accrual basis. Each method has its own rules, justifications and limitations. The common goal is the objective to provide a user with a financial snapshot of an entity. It is important to note the differences because that helps understand how to convert from one basis to the other.

Financial Accounting Standards Hierarchy

As an accounting student it can be very difficult to remember all the professional organizations that play a major role in standard setting, organizing, and implementing  of accounting rules and regulations. American standard setting organizations differ from International standard setting organizations which cause confusion and also it becomes hard to remember which organization takes precedence over which.

The Basics of Governmental Funds

Governmental funds account for the operations and financing activities of a government. There are five funds that make up governmental funds: general fund, special revenue fund, debt service fund, capital projects fund and permanent fund. Governmental funds use the modified basis of accrual accounting.

Exchange of Nonmonetary Assets

Non-monetary assets are assets that are physical, tangible type of assets, quite the opposite of cash and cash equivalents. Some examples of non-monetary assets are cars, trucks, buildings, etc. These assets can be traded with another party resulting in a gain or loss. Cash that is paid or received alongside non-monetary asset exchanges is referred to as ‘boot’. All losses and cash paid/received must always be recognized. One of the major benefits in exchanging non-monetary assets is the ability to trade an old asset for a new asset and sometimes cash, depending upon the exchange agreement.

Contra Accounts: For Assets, Liabilities & Equity

Reviewing the accounting basics, assets have a debit balance and are reduced by a credit entry; liabilities and owners’ equity accounts, in contrast, have a normal credit balance and are reduced by debits. However, there are some contra accounts that reduce/negate the balance of certain accounts.

The Manipulation Game: Current Assets

The accounting industry has undergone a variety of scandals over the years. The now infamous Enron incident and similar occurrences have dealt a major blow to the accounting profession and have left many wondering whether the information that companies provide about themselves are accurate representations. After all, the purpose of accounting is to provide meaningful and decisive information about a company to its interested parties. Whether this is the government, creditors, suppliers, shareholders or potential investors, all rely on the information that is provided to them by accounting systems and the related assurances that the accounting profession provides. Thus, in order to ensure proper financial analysis of a corporation, interested parties must become familiar with the window dressing techniques or window tactics that some corporations undertake.

Percentage of Completion v. Installment Sales Method

Percentage of Completion method and Installment Sales method are both methods of recognizing revenue. Percentage of completion method focuses on construction companies recording profits, while the installment sales method focuses on businesses who sell merchandise on account and are paid back in equal payments through a contractual obligation, almost like a lease.

Depreciation: The Cost Allocation Process

Depreciation is the allocation of cost spread out through the life of a fixed tangible asset. Assets like machinery, buildings, etc. However land is never depreciated. There are many depreciation methods that can be used for financial accounting and tax purposes.

The Different Types of Audits

An audit, where an auditor expresses positive assurance, is the highest level of service an auditor can perform. However, there are three main types of audits that can be performed. Each type of audit has a different objective, however many of the standards and procedures tend to be the same.

Audit Sampling

The purpose of sampling is to help an auditor obtain reasonable assurance that the financial statements are free of material misstatements. Although sampling allows the auditor to do less extensive work, the work done is more efficient and effective when it comes to finding out any incorrect account balances on the financial statements.

Auditing Hierarchy

As an accounting student it can be hard to remember and understand which standard setting organizational board is higher than the other, since most of the names of the organizations are very similar. This Auditing Hierarchy helps visualize which standard setting organization comes first and has more precedence in regards to Auditing standards.

CPA Exam: 120 or 150 Credit Track?

Since the requirements have changed to become a Certified Public Accountant; students are left with more options that lead to different paths. The requirements for experience do vary from state to state, however students need 150 credits to become certified. Future CPA candidates may still sit for the exam if they only have 120 credits, but will need to go back to school and obtain another 30 credits.

Auditing Intensive Exam

Auditing is a very important subject in the accounting industry. Majority of people's perception of a CPA means they will be performing tax services only. That may be true when it  is tax season, however CPA's are authorized to audit a company's financial statements and render an opinion. Auditing not only focuses on a company following GAAP rules on their financial statements, however also tax rules on their tax returns.

Reviews & Compilations

An auditor can perform both a review and compilation as a professional service. Both are very similar to an audit; however require less assurance and extensive work. A compilation normally is done for a nonpublic company. Many nonpublic companies can be really small stores, or businesses that do not have an accounting department; therefore a CPA can assist in compiling the financial statements. A review can be offered to both public and non-public companies. A review is somewhat in the middle, both nonpublic and public companies may pay a CPA to perform a review service. A public entity usually requires a review for all interim financial information.

Auditing Procedures & The Audit Risk Model

As accounting majors; we prefer numbers. It is assumed that accountants love numbers, and personally I prefer them more than words. However when it comes to Auditing; coming up with reports and letters that state the reasonableness of the financial statements credibility is what makes a CPA differ from any accountant.

Audit Opinions & Reports

The whole purpose behind an audit is for an auditor to issue an unbiased opinion regarding the financial statements. An auditor describes what he has audited, the procedures and also the opinion in an audit report.

Valuation and Common Sense

The book explains the nuances of different valuation methods and provides the reader with the tools for analyzing and valuing any business, no matter how complex. The book uses 202 figures, 336 tables, and more than 150 examples to help the reader absorb these concepts.

This book contains materials of the MBA and executive courses that Pablo Fernandez teaches in IESE Business School. It also includes some material presented in courses and congresses in Spain, US, Austria, Mexico, Argentina, Peru, Colombia, UK, Italy, France and Germany. The chapters have been modified many times as a consequence of the suggestions of his students since 1988, his work in class, and his work as a consultant specialized in valuation and acquisitions. The book also has results of the research conducted in the International Center for Financial Research at IESE.

The following is a link to the Textbook: Valuation & Common Sense 4th Edition