Accounting: Chapter 2

ledger.

A group of accounts for a business entity is called a

chart of accounts.

A list of the accounts in the ledger is called a

account

Accounting systems are designed to show the increases and decreases in each accounting equation element as a separate record

Double-entry accounting system.

All businesses use what is called the -This system is based on the accounting equation and requires: Every business transaction to be recorded in at least two accounts. The total debits recorded for each transaction to be equal to the total credits recorded. -The double-entry accounting system has specific rules of debit and credit for recording transactions in the accounts.

Dividends

Redistribution of earnings to stockholders

common stock and retained earnings accounts

Stockholders' equity is represented by the balance of the

trial balance.

The equality of debits and credits in the ledger should be proven at the end of each accounting period by preparing a

Trial Balance: steps

The steps in preparing a trial balance are as follows: Step 1. List the name of the company, the title of the trial balance, and the date the trial balance is prepared. Step 2. List the accounts from the ledger, and enter their debit or credit balance in the Debit or Credit column of the trial balance. Step 3. Total the Debit and Credit columns of the trial balance. Step 4. Verify that the total of the Debit column equals the total of the Credit column.

Rules of Debit and Credit, Normal Balances of Accounts

The sum of the increases in an account is usually equal to or greater than the sum of the decreases in the account. Thus, the normal balance of an account is either a debit or credit depending on whether increases in the account are recorded as debits or credits.

unearned revenues

These future service commitments are called unearned revenues. Examples of unearned revenues include magazine subscriptions received by a publisher and tuition received at the beginning of a term by a college.

Journalizing

Transactions are recorded in the journal using the following steps: Step 1. The date of the transaction is entered in the Date column. Step 2. The title of the account to be debited is recorded in the left-hand margin under the Description column, and the amount to be debited is entered in the Debit column. Step 3. The title of the account to be credited is listed below and to the right of the debited account title, and the amount to be credited is entered in the Credit column. Step 4. A brief description may be entered below the credited account. Step 5. The Post. Ref. (Posting Reference) column is left blank when the journal entry is initially recorded. This column is used later when the journal entry amounts are transferred to the accounts in the ledger.

Liabilities

Liabilities are debts owed to outsiders (creditors). Liabilities are often identified on the balance sheet by titles that include payable. Examples of liabilities include accounts payable, notes payable, and wages payable. Cash received before services are delivered creates a liability to perform the services. These future service commitments are called unearned revenues. Examples of unearned revenues include magazine subscriptions received by a publisher and tuition received at the beginning of a term by a college.

Revenues

are increases in assets and stockholders' equity as a result of selling services or products to customers.

Assets

are resources owned by the business entity. These resources can be physical items, such as cash and supplies, or intangibles that have value. Examples of intangible assets include patent rights, copyrights, and trademarks. Assets also include accounts receivable, prepaid expenses (such as insurance), buildings, equipment, and land.

The T Account

is a visual representation of an account. -The left side of the account is called the debit side of the account. Increases in assets are recorded on the debit side. The right side of the account is called the credit side of the account. Decreases in assets are recorded on the credit side.

unadjusted trial balance

is distinguished from an adjusted trial balance and a post-closing trial balance. (The latter two are prepared in later chapters and include additional information.)

Stockholders' equity

is the stockholders' right to the assets of the business. -Stockholders' equity is represented by the balance of the common stock and retained earnings accounts.

Expenses

result from using up assets or consuming services in the process of generating revenues.

horizontal analysis

the amount of each item on a current financial statement is compared with the same item on an earlier statement.

Stockholders' equity is

the stockholders' right to the assets of the business.