Financial Accounting Module 2.docx - Harvard Core Financial...

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Harvard Core Financial Accounting Module 2 Financial Accounting Module 2 2.1.1 Financial Statement Accounts The Recording Process All accounting transactions, no matter how big or small they are, have an impact on the financial position of a business. Each transaction is recorded in the company’s financial records in what is known as the recording process, outlined in this diagram: We already looked at the first two steps—identifying and understanding transactions and how they impact the accounting equation. In this module, we will cover the next three steps in the recording process—creating journal entries, posting to T-accounts, and creating a trial balance. These steps will help us to gain a better understanding of how transactions are ultimately used to create financial statements, covered in future modules. Materiality and the Chart of Accounts When a business chooses what accounts to include in its chart of accounts, the concept of materiality is an important consideration. Remember that something is considered to be material if it is reasonably likely to impact the decision-making of those who are using the financial statements. Most companies have accounts such as “Other Expenses” or “Miscellaneous Expenses” to record small amounts that do not fall into any of their established accounts, such as Rent Expense or Interest Expense. It is important to make sure that management will have enough detailed information to allow them to manage the business. However, there is a point at which the details are insignificant and the cost of recording them is not worth the information that they provide. Look at this list to familiarize yourself with some common accounts: Assets Liabilities Owners' Equity Revenues Expenses Cash Accounts Payable Common Stock Sales Cost of Goods Sold Accounts Receivable Interest Payable Capital Stock Sales Revenue Interest Expense Notes Receivable Notes Payable Additional Paid-In Capital Interest Revenue Rent expense Interest Receivable Current Portion of Notes Payable Preferred Stock Rent Revenue Office Supplies Expense Inventory Wages Payable Treasury Stock Miscellaneous Revenue Travel Expense Investments Taxes Payable Retained Earnings Other Revenue Research & Development
Harvard Core Financial Accounting Module 2 (R&D) Expense Fixed Assets Accrued Interest Depreciation Expense Property, Plant, & Equipment (P,P,&E) Accrued Wages Other Expenses Prepaid Insurance Accrued Taxes Prepaid Rent Deferred Revenue Other Prepaid Expenses Short Term Debt Goodwill Long Term Debt Other Intangible Assets Deferred Tax Liability Deferred Tax Asset Other Liabilities As you proceed through the course materials and become familiar with looking at financial statements outside of this course, you will most likely encounter numerous accounts, some of which you may not have seen before. However, there are some key words and guidelines that can help you identify specific account types. Let’s look at some examples:

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