chapter 2- accounting for business transactions

equity

- an owner's claim on a company's assets is called equity or owner's equity. - Examples include Common stock, Dividends (decreases equity), Revenues from providing goods or services; i.e., Sales, Fees Earned, (increases equity), and Expenses from assets or services used in operation; i.e., Supplies Expense, (decreases equity).

liabilities

- claims (by creditors) against assets, which means they are obligations to transfer assets or provide products or services to others. - Examples include Accounts Payable, Note Payable, Unearned Revenues, and Accrued Liabilities.

double-entry accounting

- demands the accounting equation remain in balance. - This means that for each transaction: - (1) at least two accounts are involved with at least one debit and one credit - (2) total amount debited must equal the total amount credited.

trial balance

- is a list of all ledger accounts and their balances (either debit or credit) at a point in time. - Account balances are reported in their appropriate debit or credit columns of the trial balance.

assets

- resources owned or controlled by a company that have future economic benefit. - Examples include Cash, Accounts Receivable, Note Receivable, Prepaid Expenses, Prepaid Insurance, Supplies, Store Supplies, Equipment, Buildings, and Land.

process to go from transactions and events to financial statements:

1. Identify each transaction and event from source documents, which identify and describe transactions and events entering the accounting process. 2. Analyze each transaction and event using the accounting equation. 3. Record relevant transactions and events in a journal. 4. Post journal information to ledger accounts. 5. Prepare and analyze the trial balance and financial statements.

source documents

identify and describe transactions and events entering the accounting system

account

is a record of increases and decrease in a specific asset, liability, equity, revenue, or expense.

account balance

is the difference between the total debits and the total credits recorded in that account.

assets go on the _____ side of the equation

left therefore, the left, or debit, side is the normal balance for assets

accounts receivable (asset)

promises a payment from customers

accounts payable (liability)

promises to pay later, usually arising from purchase of inventory or other assets.

dividends, revenues, and expenses

really are changes in equity, but it is necessary to set up temporary accounts for each of these items to accumulate data for statements.

t-account

represents a ledger account and is used to understand the effects of one or more transactions. It is shaped like the letter T with the account title on top.

double entry system

requires that each transaction affect, and be recorded in, at least two accounts. The total debits must equal the total credits for each transaction.

___________ accounts really represent increases in equity; therefore, they are assigned credit balances.

revenue

unearned revenue (liability)

revenue collected before it is earned/ before services or goods are provided.

liabilities and equities are on the _________ side of the equation

right therefore, the right, or credit, side is normal balance for liabilities and equity

what does the trial balance test for?

the equality of the debit and credit account balances as required by double-entry accounting.

notes payable (liability)

written promissory note to pay a future amount.

When total debits equal total credits, the account has a

zero balance

four steps in processing transactions are as follows:

1. Identify transactions and source documents. 2. Analyze transactions using the accounting equation. Apply double-entry accounting to determine account to be debited and credited. 3. Record journal entry—recorded chronologically. (A journal gives us a complete record of each transaction in one place.) - a. A General Journal is the most flexible type of journal because it can be used to record any type of transaction. - b. When a transaction is recorded in the General Journal, it is called a journal entry. A journal entry that affects more than two accounts is called a compound journal entry. - c. Each journal entry must contain equal debits and credits. 4. Post entry to ledger—process of transferring entries from the journal to the ledger. - a. Debits are posted as debit, and credits as credits to the accounts identified in the journal entry. - b. Actual accounting systems use balance column accounts rather than T-accounts in the ledger. - c. A balance column account has debit and credit columns for recording entries and a third column for showing the balance of the account after each entry is posted.

preparing a trial balance

1. List each account and its amount (from the ledger). 2. Compute the total of debit balances and the total of credit balances. 3. Verify (prove) total debit balances equal total credit balances.

Searching for Errors: when a trial balance does not balance, an error has occurred and must be corrected. Follow these steps:

1. Verify that the trial balance columns are correctly added. 2. Verify that account balances are accurately entered from the ledger. 3. See whether a debit (or credit) balance is mistakenly listed in the trial balance as a credit (or debit). 4. Recompute each account balance in the ledger. 5. Verify that each journal entry is properly posted. 6. Verify that the original journal entry has equal debits and credits.

account categories include:

1. assets 2. liability 3. equity

__________ and __________ accounts really represent decreases in equity; therefore, they are assigned debit balances.

Withdrawals and expense

general ledger or ledger

a collection of all accounts and their balances for an accounting system.

chart of accounts

a list of all accounts in the ledger with their identification numbers.

accrued liabilities

amounts owed that are not yet paid.

prepaid accounts (asset)

assets from prepayments of future expenses expected to be incurred in future accounting periods.

When total credits exceed total debits, the account has a

credit balance

when total debits exceed total credits, the account has a

debit balance

the right side

entry on an account for credit

the left side

entry on an account for debit

assigned balance sides

given to accounts based on their classification or type