Computer systems can be programmed to record the impact of these events automatically allowing the accountant to focus on analyzing more complex transactions. Regardless of the time or place, a cash purchase of equipment increases the balance reported for equipment while decreasing cash. A sale on credit always increases both accounts receivable and revenues. Fortunately, a vast majority of any company’s transactions are repetitive so that many of the effects can be easily anticipated. In simplest terms, accounting systems are all created to follow four sequential steps:Īs explained previously, financial accounting starts by analyzing each transaction-every event that has a monetary impact on the organization-to ascertain the changes created in accounts such as rent expense, cash, inventory, and dividends paid. How can a five-hundred-year– old bookkeeping system possibly be usable by today’s modern businesses?Īnswer: State-of-the-art computers and other electronic devices are designed to refine and accelerate the financial accounting process but the same basic organizing procedures have been utilized now for hundreds of years. It hardly seems believable that Xerox keeps up with over $9.8 billion in revenue (approximately $27 million per day) using the same methods that Venetian merchants applied to their transactions during the Renaissance. Question: This assertion sounds like science fiction. Organizations, both small and large, use the fundamentals of double-entry bookkeeping to collect the information needed to produce financial statements that are fairly presented according to the rules of U.S. However, the double-entry bookkeeping procedures that were first documented in 1494 by Fra Luca Bartolomeo de Pacioli (a friend of Leonardo da Vinci) remain virtually unchanged by time. Today, when every aspect of modern society seems to be in a constant state of flux, a process that has remained in use for over five centuries is almost impossible to comprehend. How can any organization possibly amass and maintain such an enormous volume of data so that financial statements can be produced with no material misstatements?Īnswer: Over five hundred years ago, Venetian merchants in Italy developed a system that continues to serve in the twenty-first century as the basis for accumulating financial data throughout much of the world. At the end of 2018, the Kellogg Company reported holding $1.3 billion in inventory-which is a lot of cereal-and indicated that its operating activities that year generated a net cash inflow of nearly $1.5 billion. As an example, for 2018, Xerox Corporation disclosed revenues of over $9.8 billion and operating expenses and other costs of $9.5 billion. The accountant for a business of any significant size faces a daunting challenge in creating financial statements: gathering, measuring, and reporting the impact of the many varied events that occur virtually every day. The amount of financial data that is readily available is impressive. Notes offer pages of additional explanatory information. Changes in cash are separated into operating activities, investing activities, and financing activities and disclosed on a statement of cash flows. Assets, liabilities, capital stock, and retained earnings are all displayed on a balance sheet. Total income earned and dividends paid by the company over its entire life are netted to compute the current retained earnings balance.

Revenues, expenses, gains, and losses are presented on an income statement where they are combined to arrive at reported net income for the period.

Financial statements provide a formal structure to communicate the resulting balances periodically to an array of interested parties. Question: Transaction analysis determines the changes in account balances as the events of each day take place.

Understand the reason that debits and credits are always equal.

List the rules for using debits and credits.

List the four steps followed in the accounting process.

Explain the history of double-entry bookkeeping.

At the end of this section, students should be able to meet the following objectives:

Double entry bookkeeping renaissance