Question

In Unit 1 we covered the entire accounting cycle and the foundation of accounting in:

• Chapter 1 - The Role of Accounting in Society
• Chapter 2 - Introduction to Financial Statements
• Chapter 3 - Analyzing and Recording Transactions
• Chapter 4 - The Adjustment Process
• Chapter 5 - Completing the Accounting Cycle
• Chapter 7 - Accounting Information Systems

Specifically in Chapter 3 - Analyzing and Recording Transactions we learned about the principles, assumptions, and concepts of accounting. Also, in Chapter 5 - Completing the Accounting Cycle we learned about all of the steps in the accounting cycle.

Prompt:

There are two (2) options for the Unit 1 Project:

1. Choose one (1) of the principles, assumptions, or concepts described in chapter 3 and determine which one is important for generally accepted accounting principles (GAAP). OR
2. Choose one (1) of the steps of the accounting cycle in chapter 5 and determine which one has the greatest effect on our financial statements.

Answer 1

Step of the accounting cycle which has the greatest effect on our financial statements:

Without any doubt it is the Adjustment entries.Without passing the adjustmengt entries the Financial Statements will never show correct position.Imagine an Income statement without carrying impact of Depreciation Expenses.Similarly expenses may accrue but not paid.The accrual method expects these to be charged to the Income statement.For instance Salaries / Wages might be paid in next month doesnot mean these will not be charged to the month to which it belongs.Consumption expenses get determined when we create closing inventory.

Similary there are lot of expenses that are paid in advance say - Insurance premium paid for full year.In this case repective month's share has to be charged to Income Statment for getting a correct picture.

Similary there could be Revenue recognition required to come in to Income statement from Amounts received in Advance.

In nutshell Financial Statements - Income Statement showing Profit and Loss for a period and Balance Shett showing the details of Assets and Liabilities both get impacted by Adjustment Entries.Hence Adjustment entries are the most important step in Accounting Cycle for its proper closure in form of creation of Financial statements.