Chapter 3 Accounting

Limitation Of Trial Balance

-A trial balance is limited in that it will balance and therefore not uncover errors when: 1) A transaction is not journalized 2) a correct journal entry is not posted 3) a journal entry is posted twice 4) incorrect accounts are used in journalizing and posting 5) offsetting errors are made in recording the amount of a transaction.

Normal Balance

-Every account classification has a normal balance, whether it is a debit or credit. -For that particular account, the opposite side entries should never exceed the normal balance.

Chart of accounts

Accounts in the general ledger are listed in the chart of accounts. *Assets- cash, account receivable, advertising supplies, prepaid insurance, office equipment, accounted depreciation- office equipments *Liabilities- Notes payable, Accounts payable, Interest Payable, Unlearned servies revenue, Salaries payable * Stockholders Equity- Common stock, retained earning, dividends, income summary *Revenues- Service Revenue *Expense- Salaries Expense, supplies expense, rent expense, insurance expense, interest expense, depreciation expense

General Ledger (Individual Assets)

Equipment, land, supplies, cash

Transactions

Events that must be recorded in the financial statements

Accounting transactions

Events that require recording in the financial statements because they affect assets, liabilities, or stockholders' equity.

Basic form of account

In its simples form, an account consists of 1) the title of the account 2) left or a debit side 3) right or a credit side

Purpose of a Ledger

Information in the Ledger provides management with the balances in various accounts.

General Ledger (Individual Liabilities)

Interest payable, salaries payable, accounts payable, Notes payable

General Ledger (Individual Stockholders equity)

Salaries Expense, servies revenue, common stock, retained earnings

T account

The basic form of an account. The alignment of these parts in an form of account resembles the letter T and therefore the account form is called a T Account.

Ledger

The group of accounts maintained by a company. -The entire group of accounts maintained by a company is called ledger.

Basic Steps in the recording process

1)Analyze each transactions for its effect on the accounts 2) Enter transaction in information in a Journal 3) Transfer journal information to the appropriate accounts in the ledger

Journal

An accounting record in which transactions are initially recorded in chronological order. -Transactions are initially recorded in chronological order in a journal before being transferred to the accounts. -The journal shows the debit and credit effects on a specific accounts for each transaction. -The journal makes several significant contributions to the recoding process: 1) It disclose in one place the complete effect of a transaction. 2) It provides a chronological record of transactions. 3) It helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared.

Account

An individual accounting record of increases and decreases in specific asset, liability, stockholders' equity, revenue or expense items. -An account is an individual accounting record of increase and decrease in a specific asset, liability or stockholders equity item. -A company will have separate accounts for such items as cash, salaries expense, account payable and so on.

Normal balance for each of the following Items

Common Stock- Credit Revenues- Credit Assets- Debit Dividends- Debit Expenses- Debit Liabilities- Credit

Debit

The left side of an account. The act of entering an amount on the left side of the account is called debiting the account. When the debit amounts exceed the credits, an account has a debit balance. -Increased assets -decreased liabilities

General journal

The most basic form of journal. - The journal shows the debit and credit effects on a specific accounts for each transaction. Every company has a general journal.

Journalizing

The procedure of entering transaction data in the journal. -Entering transaction data in the journal is known as journalizing. - Separate journal entries are made each transaction. -A complete entry consists of: 1) the date of the transaction 2) the accounts and amounts to be debited and credited, and a brief explanation of the transaction.

Accounting information system

The system of collecting and processing transaction data and communicating financial information to decision makers. -Collects and processes transaction data -Communicates financial information to decision makers

General ledger

A ledger that contains all asset, liability, stockholders' equity, revenue, and expense accounts. -A general ledger contains all the assets, liabilities, and stockholders' equity accounts.

Chart of accounts

A list of a company's accounts.

Trial balance

A list of accounts and their balances at a given time. -A trial balance is a list of accounts and their balances at a given time. -The primary purpose of the trial balance is to prove the mathematical equality of debits and credits after posting. -A trial balance may uncover errors in journalizing and posting. -A trial balance is useful in the preparation of financial statements.

Double-entry system

A system that records the two-sided effect of each transaction in appropriate accounts. -In a double entry system, equal debits and credits are made in the account for each transaction. -Thus, the total debits will always equal the total credits and the accounting equation will always stay in balance.

Expanded accounting equation

Assets= Liabilities + Stockholders Equity ->(Common Stock)+(Retained earnings)-> (Revenues)-(Expenses)-(Dividends)

Posting

The procedure of transferring journal entry amounts to the ledger accounts. -Transferring journal entries to the ledger accounts is called posting -Posting accumulates the effects of journalized transactions into individual accounts.

Transaction Analysis

The process of considering the transaction or event that has taken place and identify how transaction is going to impact the accounting equation.

Credit

The right side of an account. The act of entering an amount on the right side of the account is called crediting the account. When the credit amounts exceed the debit, an account has a credit balance. -Decreased assets -Increased Liabilities