Accounting Chapter 2

General Ledger

- A single location that provides a list of transactions affecting each account and the account's balance - Must have an account title, transaction date, transaction description, columns for debits, credits, and the cumulative account balance

To see the effect of a transaction ask three questions

1. What is one account in the accounting equation (assets = liabilities + Stockholders' Equity) that is being affected by the transaction? Does that account increase or decrease? 2. What is a second account that is being affected by the transaction? Does that account increase or decrease? 3. Do assets equal liabilities + stockholders' equity/ is the equation balanced?

Journal

A chronological record of all transactions affecting a firm

The distribution of net income to stockholders of a company is called

A dividend

Deferred Revenue

A liability created when a business collects cash from customers in advance of completing a service or delivering a product.

Accounts Receivable

A record of specific people and companies whom we expect to receive cash in the future

Internal Transactions

Events that affect the financial position of the company but do not include an exchange with a separate company/ individual ex) using already purchased supplies, earning revenues after having received cash in advance from a customer

Accounting Cycle

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

Revenue Recognition Principle

Record revenue in the period in which it's earned

Prepaid rent

Rent paid for occupying a space in the future, it is an asset representing a resource of a company

What effect does revenue have on retained earnings?

Revenue increases retained earnings

Three components of retained earnings

Revenues, expenses, dividends

6 steps in measuring External Transactions

Step 1: Use source documentation to identify accounts affected by an external transaction Step 2: Analyze impact of transaction on the accounting equation Step 3: Assess if the transaction results in a debit or credit to account balances Step 4: Record transaction in a journal using debits and credits Step 5: Post transaction in the general ledger Step 6: Prepare a trial balance

A journal entry

The format used for recording business transactions. - Total debits must always equal total credits

External Transactions

Transactions the firms conducts with a separate company/individual. ex) sell product to customer, borrowing money from bank

An increase in dividends results in...

a decrease in Retained Earnings (fewer resources/cash)

Chart of accounts

a list of all accounts used to record transactions of a company

Account

a summary of the effects of all transactions related to a particular item over a period of time

The two components of stockholders' equity are

common stock and retained earnings

Posting

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