Financial Accounting Chapter 2

Debit and credit rules for balance sheet accounts are:

assets accounts: debit - increases credit - decreases liabilities accounts: debit - decreases credit - increases stockholders' equity accounts: debit - decreases credit - increases

Horizontal analysis

amount of each item on a current financial statement is compared with the same item on an earlier statement Increase or decrease in the amount of the item is computed together with the percent of increase or decrease When 2 statement are being compared, the earlier statement is used as the base for computing the amount and the percent of change

Ledger

group of accounts for a business

Accounts are listed ...

in the order in which they appear in the financial statements: Balance sheet accounts are listed first, in the order of assets, liabilities, and stockholders' equity Income statement accounts are then listed in the order of revenues and expenses

Chart of accounts

list of the accounts in the ledger

Balance of the account

The amount of the difference between the debits and the credits that have been entered into an account

journal

The initial record in which the effects of a transaction are recorded, transactions are first recorded in a journal

Normal balance of an account

The side of an account (debit or credit) in which the balance normally appears based on the type of account and whether it is increased by debits or credits

Standard four-column account

A form of account that has Debit and Credit columns for recording transactions as well as Balance (Debit and Credit) columns for indicating the account balance after each transaction

Debit and credit rules for recording dividends are:

dividends account: debit - increases credit - decreases

Trial balance

report that lists the balances in each of the ledger accounts, one way to detect errors that may occur in posting debits and credits from the journal to the ledger, doesn't provide complete proof of the accuracy of the ledger Steps in preparing a trial balance: 1. List the name of the company, title of the trial balance, and the date the trial balance is posted 2. List the accounts from the ledger, and enter their debit or credit balance in the Debit or Credit column of the trial balance 3. Total the Debit and Credit columns of the trial balance 4. Verify that the total of the Debit column equals the total of the Credit column

Debit and credit rules for income statement accounts are:

revenue accounts: debit - decreases credit - increases expense accounts: debit - increases credit - decreases

T account

shows the effects of transactions on accounts and financial statements, Left side - debit side Right side - credit side

Posting

transferring the debits and credits from the journal entries to the account, Journal entries are transferred to the accounts in the ledger periodically

unadjusted trial balance

trial balance prepared at the end of an accounting period before adjusting entries are made

Accounts within the chart of accounts are numbered for ..

use as references 1st digit - account group of the ledger in which the account is located: 1 = assets; 2 = liabilities; 3 = stockholders' equity; 4 = revenue; 5 =expenses 2nd digit - location of the account within its group

account

used to record the increases and decreases in each financial statement item Has 3 parts: 1. Title - name of the accounting equation element recorded in the account 2. Space for recording increases in the amount of the element 3. Space for recording decreases in the amount of the element

Useful method for analyzing and journalizing transactions:

1. Read the description of the transaction to determine which account is affected 2. For each account affected by the transaction, determine whether the account increases or decreases 3. Determine whether each increase or decrease should be recorded as a debit or a credit, following the rules of debit and credit 4. Record the transaction using a journal entry

Method useful in discovering errors:

1. difference in totals is 10, 100, or 1,000, = an error in addition 2. difference in totals is evenly divisible by 2 = error in entering a debit balance as a credit balance, or vice versa 3. difference in totals is evenly divisible by 9 = an account balance was incorrectly copied from the ledger. 2 common types of copying errors are transpositions and slides: Transpositions: error in which the order of the digit is changed, such as writing $542 as $452 Slide: entire number is copied incorrectly one or more spaces to the right or the left, such as writing $542 as $54.20

Two-column journal

A form of journal in which there are only two amount columns, one for debits and one for credits

correcting journal entry

An entry that is prepared to correct an error to an entry that has already been journalized and posted

Double-entry Accounting System

Used by all businesses Based on the accounting equation and requires: 1. Every business transaction to be recorded in at least 2 accounts 2. Total debits recorded for each transaction must equal the total credits recorded Has specific rules of debit and credit for recording transactions in the accounts, debits = credits