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BUSI W3013 Handout 02 | Page 1 F INANCIAL A CCOUNTING BUSI W3013 | F ALL 2009 H ANDOUT 02 PROFESSOR ANDREW SCHMIDT 1.0 The Accounting Cycle ……………………………………………………………… 1 2.0 Practice Exercises and Solutions ……………………………………………………………… 19 H ANDOUT O BJECTIVES : T HE A CCOUNTING C YCLE 1) Identify steps in the accounting cycle 2) Understand the basic T-account structure and how that structure is reflected in different types of accounts. 3) Discuss the relationship between the accounting equation and T-accounts. 4) Understand how different transactions affect the financial statements (using the accounting equation template). 5) Explain the need for adjusting entries and identify the common types of adjusting entries. 6) Understand why closing entries are needed for income statement accounts. 1.0. T HE A CCOUNTING C YCLE The accounting cycle is the process by which accountants produce the financial statements for a specific period of time. We will discuss the accounting cycle assuming a simplified manual system. Of course, today much of the process is computerized. Nevertheless, this exercise is important for several reasons. Most importantly, it facilitates a better understanding of the process that generates the financial statements (computerized systems perform essentially the same tasks). In addition, many text books as well as academic and practice publications use terms that are drawn from manual accounting systems (for example, the term “T-account”). Because our primary objective is to learn how to use financial statements and not how to prepare them, we will briefly review the technical aspects of the accounting process and focus on the substantial parts.
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BUSI W3013 Handout 02 | Page 2 The accounting cycle involves the following steps During the accounting period: 1. Collecting data about economic transactions from source documents (bills, invoices, vouchers, bank statements, etc.) 2. Recording the transactions in the journal 3. Posting from the journal to the ledger At the end of the accounting period: 4. Preparing the unadjusted trial balance 5. Recording and posting adjusting entries 6. Preparing the adjusted trial balance 7. Recording and posting closing entries, preparing the financial statements, and preparing the post- closing trial balance 1.1. The Accounting Cycle: Transaction Analysis The first step in constructing financial statements is the accounting recognition of economic events (i.e., transactions). Accounting recognition of transactions takes the form of an entry, which indicates the financial effects of the event on accounts that appear on a firm’s financial statements. When firms record transactions, the accounting equation equality must be maintained: Assets = Liabilities + Equity The double-entry accounting system expresses account balances using terms called debits and credits . The terms
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This note was uploaded on 02/27/2011 for the course BUSINESS 101 taught by Professor S during the Spring '10 term at Columbia College.

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