Chapter Two accounting Summary

Prepare and explain the use of a trial balance.

A trial balance is a list of accounts from the ledger showing their debit or credit balances in separate columns. The trial balance is a summary of the ledger's contents and is useful in preparing financial statements and in revealing record keeping errors.

Compute the debt ratio and describe its use in analyzing financial condition.

A company's debt ratio is computed as total liabilities divided by total assets. It reveals how much of the assets are financed by creditor (nonowner) financing. The higher this ratio, the more risk a company faces because liabilities must be repaid at specific dates.

Describe an account and its use in recording transactions.

An account is a detailed record of increases and deceases in a specific asset, liability, equity, revenue, or expenses. Information from accounts in analyzed, summarized, and presents in reports and financial statements.

Define debits and credits and explain double-entry accounting.

Debit refers to left, and credit refers to right. Debits increase assets, expenses, and dividends while credits decrease them. Credits increase liabilities, common stock, and revenues; debits decrease them. Double-entry accounting means each transaction affects at least two accounts and has at least one debit and one credit. The system for recording debits and credits follows from the accounting equation. The left side of an account is the normal balance for assets, dividends, and expenses, and the right side is the normal balance for liabilities, common stock, and revenues.

Prepare financial statements from business transactions.

The balance sheet, the statement of retained earnings, the income statement, and the statement of cash flows use data from the trial balance (and other financial statements) for their preparation.

Describe a ledger and a chart of accounts.

The ledger (0r general ledger) is a record containing all accounts used by a company and their balances. It is referred to as the books. The chart of accounts is a list of all accounts and usually includes an identification number assigned to each account.

Explain the steps in processing transactions and the role of source documents

Transactions and events are the starting points in the accounting process. Source documents identify and describe transactions and events and provide objective and reliable evidence. The effects of transactions and events are recorded in journals. Posting along with a trial balance helps summarize and classify these effects.

Record transactions in a journal and post entries to a ledger.

Transactions are recorded in a journal. Each entry in a journal is posted to the accounts in the ledger. This provides information that is used to produce financial statements. Balance column accounts are widely used and include columns for debits, credits, and the account balance.

Analyze the impact of transactions on accounts and financial statements.

We analyze transactions using concepts of double-entry accounting. This analysis is performed by determining a transaction's effects on accounts.