Accounting Ch.2

External transactions

transactions the firm conducts with a separate economic entity

Journal

A chronological record of all transactions affecting a firm

General ledger

A collection of each account with its individual transactions and resulting account balance

Chart of Accounts

A list of all account names used to record transactions of a company.

Account

A record of the business activities related to a particular item

Accounting cycle

Full sets of procedures used to accomplish the measurement/communication process of financial accounting.

Identify the basic steps in measuring external transactions

LO2-1 External transactions are transactions between the company or individual. internal transactions do not include an exchange with a seperate economic entity. The six step measurement process is the foundation of financial accounting. To understand this process, it is important to realize in step 2 that we analyze the effects of business on the accounting equation. Then, in step 3 we begin the process of translating those effects into the accounting records.

Analyze the impact of external transactions on the accounting equation.

LO2-2 After each transaction, the accounting equation must always remain in balance. In other words, assets always must equal liabilities plus stockholders equity. The expanded accounting equation demonstrates that the revenues increase retained earnings while expenses and dividends decrease retained earnings. Retained earnings is a component of stockholders equity.

Assess whether the impact of external transactions results in a debit or credit to an account balance.

LO2-3 For the basic accounting equation (assests = liabilities + Stockholders equity), assets (left side) increase with debits. Liabilities and stockholders equity (right side) increase with credits. The opposite is true to decrease any of these accounts. The retained earnings account is a stockholders equity account that normally has a credit balance. The Retained Earnings account has three components- revenues, expenses, and dividends. The difference between revenues (increased by credits) and expenses (increased by debits) equals net income. Net income increases the balance of Retained Earnings. Dividends (increased by debits) decrease the balance of Retained Earnings.

Record transactions in a journal using debits and credits

LO2-4 For each transaction, total debits must equal total credits

Post transactions to the general ledger

LO2-5 Posting is the process of transferring the debit and credit information from transactions recorded in the journal to individual accounts in the general ledger.

Prepare a trial balance

LO2-6 A trial balance is a list of all accounts and their balances at a particular date. Debits must equal credits, but that doesn't necessarily mean that all account balances are correct.

Debit

Left side of an account. Indicates an increase to asset, expense, or dividend accounts, and a decrease to liability, stockholders' equity, or revenue accounts.

Revenue Recognition Principle

Record revenue in the period in which we provide goods or services to customers for the amount the company is entitled to receive.

Credit

Right side of an account. Indicates a decrease to asset, expense, or dividend accounts, and an increase to liability, stockholders' equity, or revenue accounts.

Journal entry

The format used for recording business transactions

Posting

The process of transferring the debit and credit information from the journal to individual accounts in the general ledger.

Trial Balance

a list of all accounts with their balances at a particular date, showing that total debits equal total credits.

T-account

a simplified form of a general ledger account with space at the top for the account title and two sides for recording debits and credits