In addition to using the template to show the dollar

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ting transactions and events in a simple, concise manner for both analysis and interpretation. In addition to using the template to show the dollar effects of a transaction on the four finan- statements, we also include each transaction's journal entry and T-account representation in margin. These are part of the bookkeeping aspects of accounting. The margin entries can be red without any loss of insight gained from the template. (Journal entries and T-accounts use ms for account titles; a list of acronyms is in Appendix C near the end of the book.) The process leading up to preparing financial statements involves two steps: (1) recording trans- ns during the accounting period, and (2) adjusting accounting records to reflect events that have ed but are not yet evidenced by an external transaction. Weprovide a brief introduction to these teps, followed by a comprehensive example that includes preparation of financial statements.
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2-23 Module 2 I Overview of Business Activities and Financial Statements WE 100 Cash 100 WE 100 I Cash Analyzing and Recording Transactions: An Illustration All transactions affecting a company are recorded in its accounting records. For example, assume that a company paid $100 cash wages to employees. This is reflected in the following financial statement effects template. Balance Sheet t ..,lnCpme. SbitelJ1ent .', :';;;.: .... ~ '- i"'~ Transaction Cash Asset + Noncash Assets Liabil- + ities Rev- Expen- ' Net - = enues ses Income +100 -100 Wages = Expense Pay $100 cash for wages = -100 Retained Earnings -100 Cash 100 Cash assets are reduced by $100, and wage expense of $100 is reflected in the income statement, which reduces income and retained earnings by that amount. All transactions incurred by the company during the accounting period are recorded similarly. We show several further examples in our comprehensive illustration later in this section. Adjusting Accounts We must understand accounting adjustments (commonly called accruals) to fully analyze and inter- pret financial statements. In the transaction above, we record wage expense that has been earned by (and paid to) employees during the period. What if the employees were not paid for wages eamed at period-end? Should the expense still be recorded? The answer is yes. All expenses incurred to gener- ate, directly or indirectly, the revenues reported in the period must be recorded. This is the case even if those expenses are still unpaid at period-end. Failure to recognize wages expense would overstate net income for the period because wages have been earned and should be reported as expense in this period. Also, failure to record those wages at period-end would understate liabilities. Thus, neither the income statement nor the balance sheet would be accurate. Adjustments are, therefore, necessary to accurately portray financial condition and performance of a company. BUSINESS INSIGHT Accounting Scandals and Improper Adjustments Many accounting scandals involve the improper use of adjustments to manipulate income. The fol- lowing table highlights three specific adjustment manipulations by companies. These accounting scandals underscore the important role of adjustments in financial
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