Preparing financial statements - Preparing financial statements The previous chapter presented adjustments that might be needed at the end of each

Preparing financial statements - Preparing financial...

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Preparing financial statements The previous chapter presented adjustments that might be needed at the end of each accounting period. These adjustments were necessary to bring a company's books and records current in anticipation of calculating and reporting income and financial position. This chapter begins by illustrating how such adjustments would be used to actually prepare financial statements. Assume that England Tours Company began operation early in 20X3. In the process of preparing its financial statements for the year ending December 31, 20X3, England determined that various adjusting entries were needed. These adjusting journal entries are shown on the following page. The numbers are all "assumed." But, if it is unclear as to why any one of these entries might be needed, definitely review the detailed discussion in the previous chapter. The illustration shows: England's trial balance before the adjusting entries the adjusting journal entries the posting of the adjusting journal entries to the general ledger the adjusted trial balance. If England attempts to prepare its financial statements based only on the unadjusted trial balance, the reported information would be incomplete and incorrect. the adjusting process Most of the time, a company will prepare its trial balance, analyze the trial balance for potential adjustments, and develop a list of necessary adjusting entries. Knowing what to adjust is not necessarily intuitive. It usually requires hands-on review by someone who is very knowledgeable about the business. As a practical matter, a company should not allow everyone to have access to the accounting system for purposes of entering year-end adjustments; too many errors and rogue entries will appear. Instead, a company will usually have a defined process where proposed entries are documented on a form (sometimes called a journal voucher). These forms are submitted to a chief accountant/controller for review and approval. The approved journal vouchers then serve as supporting documents to authorize data entry into the accounting system. financial statements The adjusted trial balance is ordinarily sufficient to facilitate preparation of financial statements. Take time to trace the amounts from England's adjusted trial balance to the following statements. accounting software The financial statement preparation process is mostly mechanical, and easily automated. Once the adjusting entries have been prepared and entered, every accounting software package will race through the steps of processing the data to produce the financial statements. As such, one might be inclined to discount the need to understand how to move amounts from an adjusted trial balance into a set of financial statements. In some respects that is true,
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just as it is true that one does not need to know how to add and subtract if they own a calculator. Of course, there is value in understanding addition and subtraction even with a calculator. In the same light, please consider that understanding the flow of transactions into
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