Ch3-Financial Statements

Ch3-Financial - Financial Statements Chapter 3 Process Engineering Economics Introduction Some basic knowledge of accounting and financial

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Financial Statements Chapter 3 – Process Engineering Economics
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Introduction Some basic knowledge of accounting and financial statements is necessary for an engineering professional to: 1. Analyze the firm’s operations 2. Determine whether the firm is making a profit 3. Determine whether the company will continue to make a profit
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Introduction Accounting systems input business transactions in the form of receipts and invoices First they are entered chronologically in a journal Then they are classified and posted in the appropriate account in a ledger Periodically accounts are closed and summary documents are prepared as an income statement and balance sheet
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Fig 3.1: Flow of information through an accounting system Business transaction takes place Business document is prepared Information is entered chronologically in a Journal Debits and credits are posted to accounts in a Ledger Financial statements are prepared an presented in Income Statement and Balance Sheet Formal reports are issued to stockholders and gov’t agencies
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The Accounting Equation In the simplest terms, the accounting equation can be expressed as: Assets = Equities Assets – the economic resources a company owns and which are expected to benefit future operations (e.g. – buildings, furniture, trademarks) Equities – claims against the firm
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The Accounting Equation Equities may be further classified into liabilities and owner’s equity Assets = Liabilities + Owner’s Equity Liabilities – outside claims against the assets of the firm (e.g. borrowed funds, taxes owed). They require settlement in the future Owner’s (Stockholders’) Equity – if liabilities are deducted from the assets, the difference is the amount belonging to the company’s owners
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The Accounting Equation Any transaction that takes place causes changes in the accounting equation. For example, an increase in assets must be accompanied by one of the following: Increase in liabilities Increase in owner’s equity Decrease in assets
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Whenever economic events occur, the accounting equation changes and the events are recorded in books. The left side of the book is designated the debit side while the right side is the credit side
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The Journal All transactions are recorded chronologically in a general journal. The date of the transaction is shown in the first column An account title and brief description of the transaction is shown in the second column The Ledger page of each transaction is shown in the third column It serves as a cross-reference between the general ledger and various ledger accounts The amount of each debit/credit entry is listed in the next two columns
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The Ledger Journal entries are transferred to a ledger. This process is called posting
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This note was uploaded on 02/14/2011 for the course PETCHEM 201 taught by Professor Ameen during the Spring '11 term at TU Braunschweig.

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Ch3-Financial - Financial Statements Chapter 3 Process Engineering Economics Introduction Some basic knowledge of accounting and financial

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