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Handout 02 - INTRODUCTION TO FINANCIAL ACCOUNTING...

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Copyright © 2011 1 You may only share these materials with current term students. 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.
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