Performing Accounting Analysis

For any accounting question, follow this sequence:

1. Identify the applicable framework (GAAP, IFRS, or tax code — specify which)
2. State the relevant standard/section (e.g., ASC 606, IRC §162)
3. Apply it to the specific facts with numbers shown in full (no rounding without stating it)
4. Show the journal entry or calculation explicitly
5. Flag any assumptions made due to missing information

Example:

Question: Company receives $12,000 for a 12-month service contract on Oct 1.
How much revenue is recognized by Dec 31?

Framework: ASC 606 (Revenue from Contracts with Customers)
Analysis: Performance obligation satisfied ratably over 12 months.
3 months elapsed (Oct-Dec) / 12 months total = 25%
Revenue recognized = $12,000 × 25% = $3,000

Journal Entry (Oct 1):
  Dr. Cash                    12,000
      Cr. Deferred Revenue           12,000

Journal Entry (Dec 31, adjusting):
  Dr. Deferred Revenue         3,000
      Cr. Service Revenue             3,000

Remaining deferred revenue balance: $9,000

Progress checklist for complex engagements:

• Clarify the entity type (individual, corp, partnership, nonprofit) — rules differ
• Identify accounting basis (cash vs. accrual)
• Determine applicable framework (US GAAP, IFRS, tax basis)
• Gather/confirm all relevant figures — never assume unstated numbers
• Perform calculation or classification
• Cross-check with double-entry logic (debits = credits)
• State the answer with supporting citation to standard/code section
• Note any judgment calls, estimates, or areas requiring client-specific policy election

For financial statement analysis:

1. Verify statements tie out (balance sheet balances, retained earnings rolls forward correctly)
2. Check for consistency across periods (comparability)
3. Identify unusual fluctuations and provide plausible explanations
4. Compute relevant ratios (liquidity, solvency, profitability) only when asked or clearly useful
5. State limitations of the analysis (e.g., no access to full general ledger)

For tax questions:

1. Identify tax year and confirm current law applies (tax law changes yearly)
2. Distinguish book-tax differences (permanent vs. temporary)
3. Cite specific IRC section or Treasury Regulation
4. Explicitly state this is not a substitute for filed professional tax advice if stakes are high

Example 1: Depreciation Input: "Asset costs $50,000, salvage value $5,000, useful life 9 years. Calculate straight-line depreciation." Output:

Depreciable base = $50,000 - $5,000 = $45,000
Annual depreciation = $45,000 / 9 = $5,000/year

Journal Entry (annual):
  Dr. Depreciation Expense     5,000
      Cr. Accumulated Depreciation   5,000

Example 2: Reconciliation discrepancy Input: "Bank statement shows $10,450. Book balance shows $9,900. Outstanding checks $600, deposit in transit $50, bank fee $100 not yet recorded." Output:

Bank side:
  Statement balance             $10,450
  Less: outstanding checks         (600)
  Add: deposit in transit             50
  Adjusted bank balance          $9,900

Book side:
  Book balance                   $9,900
  Less: bank fee not recorded      (100)
  Wait — reconcile fully:

Book balance                    $9,900
Less: bank service fee            (100)
Adjusted book balance            $9,800

Discrepancy identified: adjusted bank ($9,900) ≠ adjusted book ($9,800) = $100 difference,
caused precisely by the unrecorded bank fee. Record:
  Dr. Bank Fee Expense   100
      Cr. Cash                  100
After entry, both sides equal $9,800.

Example 3: Classification question Input: "Is a $500 laptop expensed or capitalized?" Output:

Depends on company capitalization policy threshold (commonly $2,500-$5,000 under
de minimis safe harbor per Treas. Reg. §1.263(a)-1(f) for tax purposes).
If policy threshold > $500: Expense immediately as office supplies/equipment expense.
If no policy or threshold ≤ $500: Capitalize and depreciate per MACRS (5-year property).
Recommend confirming client's written capitalization policy before finalizing treatment.