Handout 02 - INTRODUCTION TO FINANCIAL ACCOUNTING...

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I
NTRODUCTION TO
F
INANCIAL
A
CCOUNTING
33:010:272 S
ECTIONS
08 & 09 |FALL 2011
P
ROFESSOR
J
ULIAN
Y
EO
Class Notes 2: Balance Sheet, the Accounting Equation, and Accounting Cycle
In this document, we examine how the accounting system captures business transactions
while providing an update of the resources owned by the company and the claimants of
those resources. In order to understand how the accounting system ‘works’, we need to
understand:
1. The simple relation which governs the accounting system - the accounting
equation
2. The mechanics of the double entry system – an accountant’s way of recording
business transactions
3. Steps accountants take to prepare financial reports
Upon completion of this topic, you should be able to
 Cite the simple relation which governs the accounting system ( i.e., A = L + E)
 Understand how transactions are captured by the accounting system ( i.e., ∆ A =
∆L + ∆E)
 Appreciate the accounting cycle and why each step is necessary in generating
financial reports
 Concepts of stocks and flows in financial reporting
 Able to construct simple financial statements
1. The simple relation which governs the accounting system - the accounting
equation
ASSETS = LIABILITIES + OWNERS’ EQUITY
resources the claims against the claims against the
entity controls entity by outsiders entity by shareholders
We can use this relation to study a single exchange or the cumulative effect of millions of
exchanges.
Example 1: An exchange perspective.