LO 4 Notes - Prepare financial statements from incomplete information.pdf - ACCT 220 Learning Outcome 4 4 Prepare financial statements from incomplete

LO 4 Notes - Prepare financial statements from incomplete information.pdf

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ACCT 220 Learning Outcome 4 4. Prepare financial statements from incomplete information. 4.1. Describe preparation of financial statements from incomplete information 4.2. Prepare financial statements from incomplete information The content of this learning outcome is only briefly covered in the text book. Generally accepted accounting principles require the use of the accrual basis of accounting. Revenues are recognized when they are earned, and expenses are recognized as they are incurred. The result is that the determination of income is different from the flow of cash. While most large businesses use accrual accounting, some small enterprises might only keep track of day to day cash flows, preparing their accounting on a strict cash basis, accounting for revenues only when received, and expenses only when paid. Some businesses in service industries prepare accounting on a modified cash basis, some assets are recognized and some are not. Receivables and payables might be recorded, capital assets might be recognized and depreciated, but no consideration is given to work in process, unearned revenues or prepaid expenses. For day to day management, these accounting systems provide owners and managers with the information they need. These systems do not, however, result in financial statements that meet the requirements of GAAP. Additionally, while most large businesses use a complete double-entry accounting system, with journals, ledgers, and balanced accounts, not all businesses record activities in this manner. A single-entry accountingsystem is easy to establish and maintain. The result of single-entry accounting will be a listing of cash receipts and cash disbursements over a period of time. These systems are typically on a cash basis, balance sheet accounts are not recorded or tracked through the single entry process. A synoptic journal, or one-write system are popular examples of single-entry accounting systems. Regardless, these businesses will require accrual based financial statements at year end for various purposes, including loan applications and tax returns. At some point, financial statements from incomplete records will have to be produced. Reading: Pages 181 to 185 All of Appendix 4A While this LO has two learning steps, the instruction for this LO is best done by combining the steps in the form of notes and demonstrations throughout.
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Complete records are best accomplished through a systematic model based on double-entry accounting. However, many small businesses, especially sole proprietorships, do not maintain these types of accounting records. “Accounting” for these small businesses may consist only of a record of receipts in the form of a deposit book, a record of payments in the form of cancelled cheques or cheque stubs, bank statements and tax files. However, enough information can normally be assembled to provide a reasonably accurate income statement and balance sheet. While a sole proprietor may not attach importance to formal accounting procedures, they are often well aware of the approximate financial position of the business.
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