Accounting Chapter 3

Adjusted Trial Balance

-Trial Balance- to test whether debits equal credits in the general ledger, accountants regularly prepare an internal accounting schedule called a trial balance. lists every ledger account and its balance Debit balances are listed in one column and credit balances are listed in an adjacent column The totaled and the totals are compared If the debit total does not equal the credit total( the accountant knows to search for an error)

General Ledger

General Ledger- the collection of all the accounts used by a particular bushiness called general ledger.

Return on Equity Ratio -Owners are interested in this ratio to determine their return on their investment in the company. - A larger ratio indicates that the owners have a higher return on their investment.

Net Income /Stockholders' Equity Return On Equity Ratio- Net Income/ stockholders equity The relationship between net income & stockholders equity

Return on Assets Ratio - Evaluating performance requires considering the size of the investment base used to produce the income. - This ratio measures the relationship between the level of income and the size of the investment. A larger ratio means the company did a better job of managing its assets.

Net Income/Total Assets Return On Assets Ratio- the relationships between the level of income and the size of the investment can be expressed as the return on assets ration—- Net income/ total assets Ratio permits meaningful comparisons between different size companies Ex- compare dollar tree, inc a retailer that prices all of its merchandise at 1.00 to Walmar stores Inc. In there 2013 years fiscal years, Dollar tree reported net income of 596.7 million, while Walmart reported net income of 17.8 billion Walmart earnings were almost 30 times the earnings of Dollar Tree However the return on asset ratios for the two companies reveal that Dollar Tree produced higher earnings relative to the assets invested Walmarts ratio was 8.7 percent, while Dollar trees was 21.6 percent Event though Dollar tree earned fewer dollars of net income, the companies used its assets more efficiently than Walmart

Stockholders vs. Creditors

Stockholders like a lot of debt if the company can take advantage of positive financial leverage Creditors prefer less debt and more equity because equity represents a buffer of protection.

Debt to Assets Ratio -Barowiwing money is risky business. This ratio helps evaluate the level of debt risk. - A smaller ratio indicates that there is less debt risk for the company.

Total Debt/Total Assets Debt to Assets ratio - Total debt/ total assets Examples- Eastern company debt to assets ratio is 20 percent( $20 / $100) while Western Company's is 80 percent ($80 / $100)

The General Journal

general Journal- and a fourth to record cash payments( Transactions that did not fall into any of the categories are recorded in the general Journal. Although specials journals are useful, companies can keep records without them by recording all transaction in the general journal. At minimum general journal shows dates, account titles, and amounts of each transaction Date recorded in first column/ followed by the title of the account to be debited Title of the account to be credit is dented and writing on line directly below the account to be debited The dollar amount of the transaction is recorded in the Debit/ credit columns