Chapter 2 - The Accounting Cycle: During the Period
Account
a record summarizing all the information pertaining to a single item in the accounting equation
General Ledger
each account with it's individual transactions and resulting account balance
Journal Entry
Debits = Credits
Liability Accounts
accounts payable, notes payable, accrued liabilities, unearned revenue
Expenses
- Decrease Retained Earnings - Debit Account - Increase with a debit
Revenues
- Increase Retained Earnings - Credit Account - Increase with a credit
Posting
transferring information from a journal entry to a general ledger
Provide Services on Account
- Asset (accounts receivable) increases - Stockholders Equity (service revenue) increases
Pay Salaries to Employees
- Asset (cash) decreases - Stockholder's Equity decreases
Pay Cash Dividends
- Asset (cash) decreases - Stockholder's Equity decreases - Dividends increase
Provide Services for Cash
- Asset (cash) increases - Stockholder's Equity (service revenue) increases
Receive Cash in Advance
- Asset (cash) increases - Liability (deferred revenue) increases
Pay Rent in Advance
- Asset (prepaid rent) increases - Asset (cash) decreases
Purchase Supplies on Account
- Asset (supplies) increases - Liability (accounts payable) increases
Purchase of Equipment
- Assets (equipment) increases - Cash decreases These cancel out in accounting equation
Issue Common Stock
- Cash increases - Common stock increases
Borrowing Cash from Bank
- Cash increases -Notes Payable/Liabilities increases
- Increase in Liabilities and Stockholder's Equity - Decrease in Libilities and Stockholder's Equity
- Credit - Debit
- Increases in Assets (left-hand side accounts) - Decrease in Assets
- Debit - Credit
Issue Common Stock DC
- Debit Cash +A - Credit Common Stock +SE
Receive Cash in Advance DC
- Debit Cash +A - Credit Deferred Revenue +L
Provide Services for Cash DC
- Debit Cash +A - Credit Service Revenue +R, +SE
Provide Services on Account DC
- Debit Cash +A - Credit Service Revenue +R, +SE
Pay Cash Dividends to Stockholders
- Debit Dividends +D, -SE - Credit Cash -A
Purchase Equipment DC
- Debit Equipment +A - Credit Cash -A
Pay for Rent in Advance DC
- Debit Prepaid Rent +A - Credit Cash -A
Pay Salaries to employees DC
- Debit Salaries Expense +E, -SE - Credit Cash -A
Purchase Supplies on Account
- Debit Supplies +A - Credit Accounts Payable +L
Borrow Cash from Bank DC
- Debit cash +A - Credit Notes Payable +L
Dividends
- Decrease Retained Earnings - Debit Account - Increase with a debit
steps to measuring external transactions
1. identify accounts affected 2. how does it impact the accounting equation 3. debit or credit? 4. record in journal 5. post to general ledger 6. trial balance
Journal
A form for recording transactions in chronological order
T-Account
An accounting device used to analyze transactions
Revenue Recognition Principle
Companies recognize revenue at the tie they provide goods and services to customers.
How do dividends affect retained earnings?
Dividends reduce retained earnings, but they are not an expense.
how do expenses affect retained earnings?
Expenses reduce net income and therefore reduce the amount of retained earnings
Accounting Cycle
The series of accounting activities - Measuring Business activities - Communicating those measurements to external parties
External Transactions
Transaction between a company and separate economic entity
Asset Accounts
cash, accounts receivable, notes receivable, prepaid accounts, supplies, equipment, buildings, land
Stockholders' Equity Accounts
common stock and retained earnings
Trial Balance
list of all accounts and their balances at a PARTICULAR date, showing that total debits = total credits