Financial Accounting
Core concepts
The accounting cycle runs from transaction analysis through journal entries, posting to the ledger, an unadjusted trial balance, adjusting entries, an adjusted trial balance, financial statements, and closing entries. Candidates must be fluent in accrual accounting: revenue is recognized when the performance obligation is satisfied, and expenses are matched to the periods they help generate revenue. Know the adjusting-entry families-accrued revenues, accrued expenses, deferred (unearned) revenues, and prepaid expenses-and how each affects the balance sheet and income statement. Depreciation methods (straight-line, declining balance, units of production), inventory costing (FIFO, LIFO, weighted average), and lower-of-cost-or-market rules recur constantly.
Traps
Questions love the distinction between cash basis and accrual basis: a cash receipt does not equal revenue, and a cash payment does not equal expense. Watch for adjusting entries that affect only balance sheet accounts (e.g., reclassifying a prepaid to expense) versus those hitting both statements. Another trap is confusing accumulated depreciation (a contra-asset) with depreciation expense. Inventory errors that self-correct in the following period are also tested.
Worked example
A company pays $6,000 on October 1 for a 12-month insurance policy. At December 31, three months have expired. The adjusting entry debits Insurance Expense $1,500 (6,000 × 3/12) and credits Prepaid Insurance $1,500. Remaining prepaid balance is $4,500-a current asset. Rule of thumb: always convert annual amounts to a monthly or per-period rate before prorating.