Ping: a real accountant please? Re: OT- money and responsibility

You don't need backup. What you say here is 100% correct from a traditional accounting standpoint. I don't know what the GAAP is, but unless things have changed since I went to high school, you are telling the truth. Tony can say what he likes, but the reality is no one buys a tank of gas and counts it as an expense for each quarter tank they burn. It doesn't make any sense to do it that way. Even if you have a fleet of vehicles and you buy gas for all of them at once, it's all gasoline, it's all an expense and it's all going to get used at some point in time or another.

If that were the case, there would be billions of entries each time a person used a staple or a paper clip. You don't need to make 1,000 entries because you stapled things together. You make one entry (if your office does it that way) for office supplies (or staples if that's all you bought) and be done with it. You trust that the staples will be used wisely, but even if they aren't, you wasted a whopping $3 or so (I don't know what they cost as I haven't bought any in a long time).

Yes it is. Just because you have required a prepayment, does not mean you have earned this income. If the insurance company went out of business 3 months into a homeowners policy, 9 months of premium would be considered a liability by the bankruptcy court. The company would not have to make a bunch of adjusting entries because they entered bankruptcy. If their records are up to date, then they would correct reflect the prepaid, but unearned premiums.

I don't know what GAAP/FASB is for the insurance industry, but I can guarantee you are correct about this for rental income on a landlord's books..

Yes - absolutely. Same with a software support contract. The revenues have to be earned, not just paid. Anything paid in advance gets: debited to CASH credited to a liability account such as PREPAID SUBSCRIPTIONS.

Each month, the accountants have to accrue to income a months worth of subscription income with a posting such as: debited to PREPAID SUBSCRIPTIONS. credited to SUBSCRIPTION INCOME

This is basic accrual accounting in the US.

You are 100% correct.

Unless you have your own large gas tank and fuel dispenser. I once worked for a company that had a large internal gas station for the diesel trucks we operated. The fuel was an asset which we expensed on a monthly basis based on usage. This all comes under the accounting principal of materiality. Accounting for individual gas tanks is not material to the financial position of the company, where a large 50,000 gallon tank is.

Unless you have a large supplies inventory as part of your business operation. It is up to the accountants and auditors to determine what is material. Certainly in the case of a large fuel store, or a year of prepaid revenues, the immediate recognition of income or expense as opposed to a proper accrural could cause investors and lenders to make improper decisions.

Generally, money paid for something which covers more than one accounting period is a prepaid expense (asset) to the payer and an unearned income (liability) to the payee which is expensed/earned in equal amounts over the accounting periods in which it covers.

I think the confusion here is the word "liability." An insurance company is liable to pay for that which the insurance covers, but it must do so whether the insured making the claim has provided enough income to cover it or not. It is not a liability on the books until a payable event occurs. Pay-outs and premiums are completely different things.

That said, the most important thing is that it be correct when financials are produced for consumption. If financials are generated in December and the insured has paid through April, the income statement MUST reflect that 4 months of coverage/premiums is unearned income. Producing financials which knowingly recognizes income too early is fraudulent. Furthermore, if there is a pay-out, it may NOT consume unearned income. The party is still covered until their insurance has expired or has been canceled and, if canceled, the payment for the remaining months of coverage must be returned.

I am an accountant, by the way.

Thank you so much - I'll now try to stop this thread from taking your group as it's done ours.

Angela

Sorry, babe, but you're still wrong. Services owed are never a liability.

What the insurance company may have is a contingency account. That's an amount estimated that will be required to pay off claims. That has nothing to do with earned income, though. They don't link the individual policy to the contingency figure.

Still wrong. You have to account for the money received.

Still wrong. You don't defer income received. Deferred income is income that is expected but not yet received. Sell an asset for $1,000 and receive $100 down and $100 a month for nine months. The $100 is income and the $900 is deferred income and the $1,000 asset comes off the books balanced by these two entries. You list the $900 as deferred income because you expect the income but can't be assured you will collect it. Each payment received then moves from deferred income to income.

Future services or obligations (the obligation to allow the tenant to stay in the apartment) never appear on the balance sheet or P&L. They are not a liability.

Perfectly normal and happens all the time. Take a business consultant, for example. He quotes a fee of $10,000 to offer consulting services to a company for five years. The fee is paid up-front. The $10,000 is income at the time he receives it. Any expenses in years 2,3,4 and 5 are charged off to that year.

Still wrong.

No. Income is recognized when it is received. The only difference in how income is received is when a company is on either the cash method or the accrual method. In the cash method, the income is recognized when the cash is received. In the accrual method the income is recognized when the invoice is sent. In either case, services or obligations owed are not considered in the treatment of income.

Change "earned" to "received" and your statement makes a little sense.

How can you possibly make a statement like this when you don't know what GAAP is?

GAAP is an acronym for Generally Accepted Accounting Principles. It is the bible for the accountant. It is the set of rules that accountants use to determine what is done.

Have an audit performed by a professional firm of CPAs and there will be a line at the bottom stating that all entries were made according to GAAP. It's their way of saying "I did it the way it was supposed to be done."

There you go, Walter. All of your knowledge of accounting is based on a high school course that you probably slept through. Are you are now going to tell us that the toe bone is connected to the foot bone and the foot bone is connected to the ankle bone because you dissected a frog in high school?

On Thu, 05 May 2005 07:11:28 GMT, ___cliff rayman___

GAAP for the insurance industry requires that the premium income be recognized generally over the life of the policy. Unearned premium is carried on the balance sheet as a liability. You can reference the AICPA Audit and Accounting guide for the Property and Liability Insurance Companies.

It's been a few years since I audited P&C companies, but this was basic accounting - nothing esoteric.

Bill

I don't need to know what every acronym under the sun stands for to know when someone is right in what they're saying.

And this from a man who claims to be Christian but doesn't believe what the bible says? And a man who doesn't know the difference between a debit and a credit card?

That's fine.

I didn't sleep through my accounting class. It was one of my favorites in all my high school years. Face facts ... Angrie was right and you were wrong ... but you'll hide behind my not knowing what GAAP is. As I said, I'm not a CPA and they get paid for what they know very well. If I were a CPA, I'd be an expert in the field and this discussion would've never gotten to this point.

I never dissected a frog, either.

Tony, you're either a real MBA, or you play one quite convincingly on Usenet. . If you're right there's no need for it. It merely serves to make you look snide. Basic etiquette, m'dear. (There - now we're even.)

The people in the alt.accounting group seem to agree with me in unison. Did you see their reponses? What will it take to convince you?

In the accrual method the income is

Not necessarily. If I send an invoice for 5 years of rent, or for a magazine sub....oh, never mind. Please see my previous posts.

Tony, my self-esteem is soaring today! Thanks! By the way, I fired my MBA Financial Planner a few weeks back. I never could convince him I was right in that argument over charitable deductions, even though I was. Check out misc.taxes.moderated group if you want to see what I got him in a snit about.

A PS: Aren't you doing your own taxes?

You have hit the nail on the head when you said "owed". Things that are "owed" are a liability. Things that we own or are owed to us are an asset. Services that we must render in the future for cash received in advance definetly need to appear as a liability on the financial statement. They certainly do not go into the asset section. You are saying that they go into the equity section, because they have been received, but clearly they have not earned until we have rendered the services. Here is what the MIT business school has to say about it:

Sorry, but this statement is absolutely not correct. Income is not earned when the invoice is sent. The date an invoice is sent is not a consideration for recognition of income under GAAP. Income is earned, when the services have been rendered. When your are obligated (owe) services in the future, this appears as a liablity on the balance sheet. No sense arguing with us here, just look it up on the internet.

Thanks for your reply. It's good to have a real accountant respond and not a person that took accounting in high school and considers a house a liability on the books.

My interpretation of what you are saying is that there are adjusting entries in the year-end financials to reflect the position of the company accurately.

When a premium is received, it is considered income. The entry does not normally break down this income into sub-catagories that reflect how much of the income is currently earned and how much will be earned at a future time. There might be exceptions, but I think this is the general rule.

At year-end, adjusting entries are made to more accurately indicate how that income should be accounted for. Expenses are also subject to adjusting entries at year-end.

There are several types of adjusting entries that are made at year-end. Contingencies are recorded that may or may not affect the company in the future.

Now, go back and change my "year-end" to some other term for companies that publish financials for certain purposes like large corporations that issue quarterly reports that may affect their stock prices. For a non-listed "ordinary" company with a limited number of stockholders, "year-ends" are usually sufficient.

When I was having my company's financials done by Touche, Ross (when there was a Touche, Ross), this is the way they did it. Because I had a large line of credit (over two million dollars), I had to submit audited financials to the bank. The adjusting entries were done at year-end unless there was a situation that required more immediate recognition of an adjustment. For example, the contingency for Bad Debt might be adjusted mid-year if some extraordinary situation came to light.

I cannot conceive of a company that has a two year contract to provide a service, and receives payment for that service in one lump sum, to book that income as 1/24th income and 23/24th unearned income the first month and adjusts that entry monthly. Assuming the lump payment is made in the first month of the company's fiscal year, the entire figure would be booked as income. On the 12th month, the company could make an adjusting entry to reflect that half of that income is should be considered next year's income.

In an unaudited financial in a closely held company, I'm not even sure you need to make the adjustment.

Yeah, I am. Northwestern (Evanston) didn't give me a sheepskin, but they did allow me to buy a plaque with a statement of authenticity laminated on it. Evidently, they have not rescinded it since I'm still on the begging mail list.

One of the advantages of having started and run a successful business for over 30 years is that you really don't give a rat's ass about who thinks you're snide and who thinks you're speaking from experience.

I don't read alt.accounting. They do binaries there with dirty Rorschach pictures of crumpled pocket protectors, don't they?

You get one of them to come over here and post a url to a financial statement of, say, a pest control company with an annual contract to de-bug houses listing the service agreements they have been paid for in advance. You know, one of those deals where you can pay $25 a month or $250 a year in advance. See if those services are individually listed on the financials with the remaining number of months of each listed as unearned income.

You could book the receivable if you want to. It really depends on what you do with your financial report. If you're using it to provide to your bank for a line of credit, they may want some assurance that the other party will honor the lease. If the building is rented to an eBay store or a starter repair shop owned by a kid that lives with his mother, they may c*ck an eyebrow.

Why would you use a financial planner to do your taxes? Most of these "financial planners" are guys selling insurance policies. If you lost an argument over charitable deductions with a CPA, he was probably right. Especially if he's one that agrees to represent you in a dispute with the IRS.

I don't read misc.taxes.moderated. That's the one with FS: Offshore Bank. No Reserve., isn't it?

I do now. Now that I sold my company, retired, and consolidated some things, It's a piece of cake with Turbo Tax.

Will Orkin do? From their 2004 financial statements:

"Under the newly adopted accounting method, which the Company believes is preferable and more closely conforms to the guidance provided in applicable accounting literature, the revenue received is deferred and recognized on a straight-line basis over the remaining contract term."

Yep, they book the contract revenue as a liability and recognize the income as the services are rendered. If they don't they are inflating revenues every bit as much as Enron was.

Wanna guess what three letters of my alphabet soup are? Watching this thread has been a laugh a minute.

PS: The debits go on the door side of the T-account and the credits go on the window side.

Carry on.

THere we go with that snide business again. What am I - chopped liver? Doesn't matter, because Walter also happens to be right in this instance.

is wrong.

No, that's not what she said. She said that the period being reported on should only include the income earned in that period. I'm saying that if you close your books monthly, then the income should show monthly. You're saying it's all income when it comes in the mail.

No, it isn't.

No it isn't.

One of the goals in Accounting is to keep the figures from swinging wildly at anyone time. How would you be able to tell if you were making or losing money in any given quarter if you had to wait for the year-end entries?

uh I'll make the simple explanation- the Adjusting Entries are usually just to correct errors and adjust for things like bad debt expense. If you needed to move income from defered to earned, that would also be an adjusting entry. Closing Entries are ....sort of used to do things like setting expense totals back to zero so a new period can begin. I can go much deeper, but I don't think I need to.

I think the "contingencies" you're thinking of are the type of things usually found in the "Notes To Financials" section. Those type things can be one-time or annual adjustments, but they're put on the books as soon as they're known.

Unless you are a manager or owner who wants to know if you're actually making a profit before the year is over.

Because that's when you paid them to come and do your books. If you had been keeping 100% accurate records, they wouldn't have needed to adjust anything. They would have just audited you and been done. (Like that ever happens...)

Bad Debt Expense is an adjusting entry that happens once per period.

Well, that's just because you're not an accountant. or the manager in a service company. No shame in that. Fortunately, computers make these things much easier than they used to be. Bet even when I was working on green ledger pads we deferred income.

Which would create a huge negative swing in the income at year end. There are better ways. Like, never showing it there in the first place.

Yes, if you can keep your books in your head, then you're right. The rest of us use accounting packages.

I really am shocked - I've never seen you get so nasty. Probably because you're so very often correct about most things.

Apparently, though, I have much more experience in Accounting than you do - a fact that's quickly becoming obvious to the rest of the Usenet world..

If I may quote..... "take an Accounting class sometime." Apparently your brain has deleted some bits of information that you haven't needed since graduation.

I'm just going to clip this thread here, because the people in alt.accounting were kind enough to provide their opinions, which I'm pretty sure convinced just about everybody else in AMOE that I'm right and you're not.

:)

I can attest that Tony is a real bona fide MBA since doesn't know the difference between a debit and a credit card. What's in your wallet?

Rita

Dust.

Loren

I know the difference, but I just don't know which that particular card is. The only time I use it is at the Post Office to pay for shipping/postage. Doesn't seem to make a difference to me.