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The Learning Method - Step by Step

Objective 7 From this point onwards your knowledge and skills in financial accounting will be developed through "managing" a simulated firm, BIS Ltd., during four years and seven accounting periods. You will operate cash flows, perform typical transactions, and prepare and interpret financial statements.

 

The Process of Preparing the Financial Statements of BIS Ltd.

By learning the operations of a simulated firm, BIS Ltd., and the preparation of its financial statements you will acquire knowledge and skils in financial accounting and financial management in an "as close to real" simulated environment through the four initial fiscal years of the operations of the firm.

The purpose of this section is to provide an overall view of the learning methodology. All aspects of it as described are expanded in sufficient detail further along the eLearning System.

The process of preparing financial statements on the operation of BIS Ltd. is as follows:

a) Chart of Accounts

For every typical transaction taken from the Cash Flow, whether a provision of capital, sales or payment for expenses there is a double entry which uses the debit and credit codes listed in the index of the Chart of Accounts. These codes are used when entering the transaction in the Journal.

b) Cash Flows

The financial statements of BIS Ltd. are prepared by carrying out transactions that occur when the projected amounts in the cash flows for year one through year four are "activated" and become the "simulated" transactions of the firm.

Each sum in the cash flow that represents a business transaction, will be activated as the "actual" operation of our simulated firm, as if it were the real transaction taking place. All transactions appear as capital, revenue and expenditure for each reporting period during the first four fiscal years.

Each amount in the cash flow is entered in the journal or "book of primary entry", as these transactions occur in the respective period, in line with the double entry principle of debit and credit.

c) Journal

Each amount in the cash flow is entered in the journal or "book of primary entry", as these transactions occur in the respective period, in line with the double entry principle of debit and credit.

d) Worksheets

We then proceed to "post" each transaction to the ledgers, represented by columns in the Accounting Equation or Balance Sheet in the worksheets in the Accounting System.

E.A.SY. Entrepreneurial Accounting utilises worksheets in the Accounting System to describe how transaction data affects the preparation of the four financial statements - Balance Sheet, Income Statement, Statement of Cash flows and Statement of Changes of Equity.

Each column in the balance sheet in the worksheets are the ledgers or items of the accounting equation: Cash at Bank, Debtors and Prepayments, Inventory, Fixed Assets, Creditors, Loans and Credits and Equity.

It also utilises the concept of "typical transactions" which are those transactions that have unique debit and credit entries, as is explained below. The unique debit and credit entries repeat during the trading activities of the firm.

By learning these unique or "typical" transactions, which few in any accounting process, the learning of financial accounting is greatly simplified.

In this way, you will learn the principles of the accounting equation: assets equal total liabilities plus equity, which increases or decreases subject to whether the firm makes profits or losses.

The accounting equation is the ruling guide of the accounting system and serves as a control mechanism throughout the preparation of financial statements.

e) Unadjusted Balances

The two sides of the equation in the Balance Sheet, before adjustments, must equal after every entry. This is verified by adding the balances for each column on each side of the accounting equation. The sums of each side of the equation should equal, namely, assets = claims.

At the end of the period the balances adding the debit entries and the balances adding the credit entries are obtained. These balances are unadjusted balances.

f) Adjusted Balances

Adjustments for prepayments, accruals, etc. are entered into the Balance Sheet worksheet to arrive at the final Balance Sheet. The final balances are posted to the Trial Balance. The two sides of the equation in the Balance Sheet, before adjustments, shall also equal.

g) The Trial Balance

The Trial Balance for each fiscal period is prepared by posting the balances of assets, liabilities and equity before adjustments from the Balance Sheet worksheet to its corresponding position in the Trial Balance worksheet. If the accounting equation has been kept in balance at all times then the Trial Balance before adjustments should have equal debit and credit balances.

h) Final Financial Statements

These statements are prepared from, by transferring to the Income Statement and the Balance Sheet every item of the Trial Balance, row by row.

A detailed description of the transfer process from the Trial Balance to the Income Statement and the Balance Sheet is provided later in the eLearning System.

The Statement of Cash flows and Statement of Changes of Equity are prepared by posting entries in these statements, transaction by transaction, in the Worksheets.They do not form part of the Trial Balance.

The step by step sequence of operating the accounting function that will be followed to record transactions and prepare financial statements, as commercial operations occur in the cash flows, is described in the graphic below:



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