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Unformatted text preview: 3-13REVIEW OF A COMPANYS ACCOUNTING SYSTEM CHAPTER OBJECTIVESAfter careful study of this chapter, students will be able to: 1. Understand the components of an accounting system. 2. Know the major steps in the accounting cycle. 3. Prepare journal entries in the general journal. 4. Post to the general ledger and prepare a trial balance. 5. Prepare adjusting entries. 6. Prepare the financial statements. 7. Prepare closing entries. 8. Complete a worksheet (spreadsheet). 9. Use subsidiary ledgers. 10. Understand special journals. 11. Convert cash-basis financial statements to accrual-basis (Appendix). 3-2SYNOPSISThe Accounting System1. An accounting systemis a means by which a company records and stores the financial and managerial information from its transactions so that the information can be retrieved and reported in an accounting statement. 2. A basic accounting model provides a framework for the accounting system and serves as a basis for recording transactions. This model for a corporation, called the residual equity theorymodel, may be expressed as an equation: Assets = Liabilities + Stockholders' Equity Assetsare the corporation's economic resources. Liabilitiesare its obligations owed to creditors. Stockholders' equityis the owners' residual interest in the corporate assets. 3. The equation may be expanded to include other components: Contributed capitalincludes stockholders' investments in shares of stock sold by the corporation. Retained earningsis the lifetime amount of net income reinvested in the corporation rather than distributed to stockholders. Dividends(which are notexpenses) are amounts distributed to stockholders as a return on their investment. Revenuesare charges to customers for goods and services. Expensesare the costs incurred by the corporation in providing goods and services. 4. In financial accounting, a transactioninvolves the transfer of something of value between the company and another party. An eventis a happening that affects the company. An event may be (a) internal, such as the use of equipment in operations, or (b) external, such as a decline in price. 5. Source documentsare business documents (such as sales invoices, checks, and freight bills) which provide initial information for recording transactions or events. A company keeps its source documents to verify and substantiate the accounting records. 6. A company uses specific accountsto store the recorded monetary information from transactions and events. Accounts are organized by number in the company's chart of accounts, which is designed to arrange the accounts efficiently and to minimize recording errors. An account may be in different physical forms. It may be located on a disk in a computer system or on paper in a manual system. Under the double-entrysystem, the total dollar amount of the debits that a company records for each transaction or event must equal the total dollar amount of the credits it records....
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- Spring '11