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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Copyright © 2011 2 You may only share these materials with current term students. • The firm purchases inventory for $30 in cash. ∆ assets = ∆ liabilities + ∆ owners' equity - 30 (cash) + 30 (inventory) 0 0 • The firm purchases a machine for $57, payment is due next month. ∆ assets = ∆ liabilities + ∆ owners' equity • The firm pays a supplier $16 in cash for inventories bought on credit. ∆ assets = ∆ liabilities + ∆ owners' equity • The owners provide the firm with $100 cash. ∆ assets = ∆ liabilities + ∆ owners' equity Cumulative perspective as of a given point in time? Example 2: Cumulative perspective • The firm has $100 in cash and $60 in notes payable. assets = liabilities + ∆ owners' equity 100 60 ?
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Copyright © 2011 3 You may only share these materials with current term students. • The firm has owners’ equity of $100 and assets of $123. assets = liabilities + ∆ owners' equity Example 3: Indicate the effects of the following transactions on the balance sheet equation using this format: (1) A firm uses 3,000 shares of $10-par value common stock at par for cash. Transaction
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This document was uploaded on 10/25/2011 for the course ACCOUNTING 33:010:272 at Rutgers.

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Handout 02 - INTRODUCTION TO FINANCIAL ACCOUNTING...

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