The reporting system and the accounting cycle
How do transactions become financial statements, and who sets the rules for what those statements report?
- Optional text
- Kieso Chapter 1, sections 1.1-1.2; Chapter 2, sections 2.1-2.4
- Meetings
- 5Tue 9/1 through Tue 9/15
- Review due
- Wednesday, September 1611:59 PM, extended deadline
- Assessed on
- Exam 1, and the company projectExam 1 is Tuesday, September 29
From automated records to accounting conclusions
Most businesses automate routine transaction processing. Those systems apply rules that people configured, and they can post entries, update ledger accounts, and prepare a trial balance. Accountants review the results, investigate exceptions, and determine whether the balances are complete and correct.
This unit follows transactions through the journal, ledger, trial balance, adjustments, financial statements, and closing entries. It also examines errors that a balanced trial balance cannot reveal.
You will also learn who sets United States accounting standards, where to find authoritative guidance, and how the financial statements help investors and lenders make decisions.
Later units use the same accounting-cycle concepts. Revenue, inventory, receivables, and long-lived assets all require decisions about timing, measurement, and adjustment.
What you should be able to do
These objectives describe the skills assessed in the Unit 1 review assignment and Exam 1.
- 1.1 Follow a transaction from the event through the journal and the ledger to the trial balance, and explain what equal trial balance totals test and which recording errors can remain hidden. Analyze , level 4 of 6
- 1.2 Sort a period-end economic event into its adjustment type, compute the adjustment, and state how omitting the entry affects net income, assets, liabilities, and equity. Analyze , level 4 of 6
- 1.3 Build the financial statements and the closing entries from an adjusted trial balance, and explain how net income and ending equity connect the statements and why the repeated amounts must agree. Execute , level 3 of 6
- 1.4a Distinguish US GAAP from other standards by source and authority. Explain , level 2 of 6
- 1.4b Determine the authoritative US GAAP that governs a reporting question. Analyze , level 4 of 6
- 1.4c Evaluate financial information for decision usefulness. Evaluate , level 5 of 6
- 1.5 Interpret reported financial information using relevant context from the company's public filings. Analyze , level 4 of 6
Class schedule and materials
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Transactions flow into the unadjusted trial balance. Equal debit and credit totals can still hide missing or incorrect entries.
iClicker registration, rust check, and syllabus and technology check due Wed 9/2, 11:59 PM
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Use period-end evidence to determine the required balances, record adjusting entries, and trace the effects of omitted entries.
Introduction assignment due Fri 9/4, 11:59 PM
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Building financial statements from the adjusted trial balance; how closing entries reset the temporary accounts for the next period.
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Who sets United States generally accepted accounting principles and how the Codification is organized; GAAP definitions; qualitative characteristics used to judge whether reported information is useful.
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How to interpret reported financial information using the statements, notes, and other relevant context in a company's public filings; AI segment #1.
Unit 1 review assignment (extended deadline) due Wed 9/16, 11:59 PM
Reading and review
Follow the assigned chapters in the course reading. The lessons below are optional. Complete as many as you find useful, including none. Choose one when you want a refresher, another explanation, or a more detailed example.
After the reading, choose a chapter from the grouped practice pages.
Chapter 1: From transaction to trial balance
Refreshers come first. The other lessons remain in their instructional order.
- Intro-course refresher How debits and credits change account balances
Use this lesson when: You want to review which account types increase with a debit, which increase with a credit, and how each type decreases.
- Concept explanation Why the accounting equation always balances
Use this lesson when: Cash and equity seem interchangeable, or a balanced equation seems to prove that the accounting is correct.
- Classification review Why equity changed
Use this lesson when: You need to distinguish revenue, borrowing, owner investment, expense, and distribution from the direction cash moved.
- Timing walkthrough Which date belongs in the journal?
Use this lesson when: The document date, cash date, and date of the economic event do not agree.
- Procedure walkthrough How to build a journal entry
Use this lesson when: You can classify an event but need help turning the analysis into a journal entry.
- Procedure walkthrough How an entry reaches the trial balance
Use this lesson when: You need to follow journal-entry lines into ledger accounts and then into a trial balance.
Chapter 2: Adjusting the records at period end
Refreshers come first. The other lessons remain in their instructional order.
- Intro-course refresher Straight-line depreciation refresher
Use this lesson when: You want to review a basic straight-line calculation and the related period-end adjustment.
- Accrual walkthrough Why an equal trial balance still needs adjustments
Use this lesson when: Revenue or expense belongs in the period before the related cash receipt or payment.
- Deferral walkthrough Cash first: prepayments and customer advances
Use this lesson when: Cash moves before Beacon earns revenue or uses the related resource.
Chapter 3: Statements and closing entries
Refreshers come first. The other lessons remain in their instructional order.
- Closing walkthrough Close the period without deleting its history
Use this lesson when: You need to decide which accounts reset, prepare closing entries, or build a post-closing trial balance.
- Statement walkthrough Trace net income into ending equity
Use this lesson when: You need to carry net income and owner distributions into ending retained earnings and total equity.
- Connection check Find why a set of statements does not agree
Use this lesson when: The statements balance separately but their shared net-income or ending-equity amounts do not agree.
Chapter 4: Understanding GAAP in the US
Refreshers come first. The other lessons remain in their instructional order.
- Research procedure Who has authority, and where do you research it?
Use this lesson when: You need to distinguish authority from explanation or follow an ASC locator to the governing guidance.
Chapter 4: Understanding GAAP in the US
Refreshers come first. The other lessons remain in their instructional order.
- Research procedure Who has authority, and where do you research it?
Use this lesson when: You need to distinguish authority from explanation or follow an ASC locator to the governing guidance.
Chapter 4: Understanding GAAP in the US
Refreshers come first. The other lessons remain in their instructional order.
- Reporting context What and whom is the report for?
Use this lesson when: You need to identify the reporting entity, period, units, user, or decision before analyzing a number.
- Framework analysis When is information useful enough to report?
Use this lesson when: You need to apply relevance, faithful representation, the enhancing qualities, materiality, or cost.
- Framework deeper dive How does the FASB use the Conceptual Framework?
Use this lesson when: You want to see how the Framework supports FASB standard setting without becoming authoritative GAAP.
Worked examples
Each example shows the facts, method, calculation, and conclusion.
- Owner investment followed by an equipment purchase
Trace an owner contribution and a cash equipment purchase through the accounting equation.
- Supplies purchased on credit and partially paid
Trace an order, delivery on credit, and partial settlement from economic events to elements and accounts.
- Debit and credit effects for 7 events
Prepare entries for an owner investment, an equipment purchase, borrowing, revenue, expense, principal repayment, and an owner's draw.
- Prepare journal entries for routine transactions
Record a delivery, supplier payment, customer service, collection, cash expense, customer advance, and bank loan in journal entries and a trial balance.
- Posting five entries into a trial balance
Post journal entry lines, calculate ending account balances, and explain what equal trial balance totals can show.
- A prepayment and customer advance through month-end
Record two cash first transactions, adjust for one month of consumption and one completed milestone, and reconcile the remaining asset and liability.
- Two adjustments from an equal unadjusted trial balance
Record earned but unbilled service and incurred but unpaid wages, then reconcile unadjusted and adjusted trial balances.
- Record depreciation without erasing equipment cost
Post one year of depreciation to expense and a credit normal contra asset, then reconcile the adjusted trial balance and carrying amount.
- Direct close and post-closing trial balance
Prepare Maple Studio's closing entries from a complete adjusted trial balance and check the balances that carry forward.
- Three statements that articulate
Prepare Maple Studio's income statement, statement of changes in equity, and balance sheet from its adjusted balances.
Concepts
Each page defines one term and links to related lessons and objectives.
- Accounting equation
- Asset
- Liability
- Equity
- Revenue
- Expense
- Debit
- Credit
- T-account
- General ledger
- Trial balance
- Adjusting entry
- Accrual-basis accounting
- Closing entry
- Permanent account
- Retained earnings
- FASB Accounting Standards Codification
- Materiality
- Professional judgment
- Authoritative accounting guidance
- Decision usefulness
- Relevance
- Faithful representation
Common mistakes
Review common errors and the concepts needed to correct them.
- Mistaken idea: An adjusting entry requires cash to move
Correction: An adjusting entry can record revenue earned or an expense incurred before cash moves. Record the related receivable or payable at period end, then record the later cash settlement separately.
- Mistaken idea: A balanced trial balance proves the records are correct
Correction: Equal trial-balance totals show that the recorded debit balances equal the recorded credit balances. They do not show that every transaction was recorded once, in the correct account, for the correct amount, or in the correct period.
- Mistaken idea: Every cash receipt is revenue
Correction: Record revenue when the company earns it under the applicable guidance, not merely when cash arrives. Collecting an existing receivable does not create revenue again; borrowing and owner investments are not revenue either.
- Mistaken idea: Closing deletes the prior period's activity
Correction: Closing resets temporary account balances to zero. It does not erase the original transactions from the journal or ledger.
- Mistaken idea: Debit always means decrease and credit always means increase
Correction: Debit means the left side of an account, and credit means the right side. Whether either side increases or decreases an account depends on the account type, not on the word alone.
- Mistaken idea: Credit is good and debit is bad
Correction: Debit and credit are neutral accounting directions. Debit means left, and credit means right. Neither word says whether a transaction helps or hurts the company.
- Mistaken idea: Equity is the cash a company has
Correction: Equity equals total assets minus total liabilities. Cash is only one asset, so its balance does not measure the company's equity.
Where the rules came from
Review the institutions and laws that shaped the reporting system. You are not tested on dates.
- Publication of Pacioli's Summa
- Securities Act of 1933
- Securities Exchange Act of 1934
- Creation of the SEC
- The Committee on Accounting Procedure begins issuing bulletins
- Formation of the Accounting Principles Board
- The Financial Accounting Standards Board begins work
- The Accounting Standards Codification becomes authoritative
- U.S. Securities and Exchange Commission
- Financial Accounting Standards Board
- Public Company Accounting Oversight Board
- American Institute of Certified Public Accountants
See how transactions move through the accounting system
Each figure includes a text description.
- Different account names, equal transaction effects
Two companies use different account names for the same purchase and record equal increases in assets and liabilities.
- Event, element, account
Three nested layers separating what happened from the reporting class it belongs to and the account that preserves the detail.
- Three dates, two entries
A timeline separating the signing of a purchase order from the delivery and the partial payment that follow it.
- The same equity with different assets and debt
A comparison of two companies with the same equity but different cash, equipment, and debt.
- What changes equity
Owner transactions and business performance change equity; borrowing does not.
- From an event to the affected accounts
Four questions used to identify the accounts before recording a journal entry.
- Which invoice date belongs in the journal?
An annotated vendor invoice that distinguishes the delivery, invoice, and payment dates.
- Debit and credit effects by account type
A comparison of debit, credit, and normal balance effects for standard and contra accounts.
- Accrual recognition and cash settlement occupy different clocks
Compare accrued revenue and accrued expense with the later cash transactions that settle them.
Choose practice by chapter
These optional pages group questions by topic, with answers and explanations. The framework page separates introductory questions from extensions.
Optional research extension
Critique a proposed conclusion using supplied facts. The separate live-research extension is for additional practice or assigned research.
- Repair Linden Peak's year-end reporting memo
Critique a year end equipment entry, distinguish evidence from assumptions, and explain what must be resolved before accepting the accounting.
How Unit 1 is tested
The Unit 1 review assignment is due Wednesday, September 16 at 11:59 PM (extended deadline), after the lecture on September 15. It is worth 15 points. Seven unit reviews are offered, and the best five count. AI use is optional; disclosure is required.
Exam 1 covers Units 1 and 2. Important Unit 1 calculations include omitted-adjustment effects, deferrals by month, net income from an adjusted trial balance, and ending retained earnings.