ACCT 200 Chapter 3
Double-entry system
-Each transaction must affect two or more accounts to keep the basic accounting equation in balance. -Recording is done by debiting at least one account and crediting at least one account. -The total $ amount of DEBITS must equal the total $ amount of CREDITS.
Benefits of Using the T-Account Form
-Reduces recording errors by having increases on one side and decrease on the other -Helps determine the totals of each side of the account as well as the account balance
Purpose of the trial balance
-to prove that debits equal credits. -to uncover errors in journalizing and posting. -to aid in the preparation of financial statements.
Analyzing Transactions
1) Transactions that affect revenues or expenses affect the Income Statement, the Statement of RE and the Balance Sheet. (2) Transactions that affect Dividends affect the Statement of RE and the Balance Sheet. (3) Transactions that only affect Assets, Liabilities, or Stockholder's Equity only affect the Balance Sheet.
Debit/Credit Rules Example 1. Accounts Payable 2. Salaries Expense 3. Service Revenue 4. Equipment 5. Common Stock 6. Accounts Receivable
1. Accounts Payable Normal Balance: Credit Debit Effect: Decrease 2. Salaries Expense Normal Balance: Debit Debit Effect: Increase 3. Service Revenue Normal Balance: Credit Debit Effect: Decrease 4. Equipment Normal Balance: Debit Debit Effect: Increase 5. Common Stock Normal Balance: Credit Debit Effect: Decrease 6. Accounts Receivable Normal Balance: Debit Debit Effect: Increase
The Recording Process
1. Analyze each transaction in terms of its effect on the accounts. (Which accounts are affected & what direction is each moving?) 2. Journalize each transaction (i.e., create a journal entry that discloses the effect of each transaction in chronological order). 3. Post each journal entry to the appropriate T-account and ledger.
Two steps of posting
1. Enter in the appropriate columns of the debited account(s) the date and the debit amount shown in the journal. 2. In the ledger, enter in the appropriate columns of the credited account(s) the date and the credit amount shown in the journal.
EX: Describe the effect of each transaction on assets, liabilities, and stockholder 1. Issued common stock to investors in exchange for cash recieved from investors 2. Paid monthy rent 3. Received cash from cstomers when service was performed 4. Billed customers when service was preformed 5. Paid dividend to stockholders 6. Incurred advertising expense on account 7. Recieved cash from customers billed in #4 8. Purchased addition equiment for cash 9. Purchased equipment on account
1. Issued common stock to investors in exchange for cash recieved from investors = increase in assets and increase in stockholders equity 2. Paid monthy rent = decrease in assets and decrease in stockholders equity 3. Received cash from cstomers when service was performed = increase in assets and increase in stockholders equity 4. Billed customers when service was preformed = increase in assets and increase in stockholders equity 5. Paid dividend to stockholders = decrease in assets and decrease in stockholders equity 6. Incurred advertising expense on account = increase in liabilities and decrease in stockholders equity 7. Recieved cash from customers billed in #4 = increase in assets and decrease in assets 8. Purchased addition equiment for cash = increase in assets and decrease in assets 9. Purchased equipment on account = increase in assets and increase in liabilities
Debit/Credit Rules Example 1. Liability 2. Expense 3. Revenue 4. Asset 5. Common Stock 6. Retained Earnings
1. Liability Normal Balance: Credit Debit Effect: Decrease 2. Expense Normal Balance: Debit Debit Effect: Increase 3. Revenue Normal Balance: Credit Debit Effect: Decrease 4. Asset Normal Balance: Debit Debit Effect: Increase 5. Common Stock Normal Balance: Credit Debit Effect: Decrease 6. Retained Earnings Normal Balance: Credit Debit Effect: Decrease
Trial Balance
A trial balance is a list of accounts and their balances prepared at the end of the accounting period.
T-Accounts
Accounts: Records of increases and decreases in a specific asset, liability, equity, revenue, or expense item. Debit = Left side of a T-account Credit = Right side of a T-account
Accounting Transactions
Are economic events that require recording in the financial statements. -Assets, liabilties, and/or stockholders' equity items change as a result or transactions -Each transactions has a dual effect on the accounting equation
Accounting transactions
Are economic events that require recordning in the financial statements. -Assets, liabilities, and/or stockholder's equity items change as a result of transactions -Each transaction has a dual effect on the accounting equation
C.L.E.R.
Credits increase Liabilities Equity (CS & RE) Revenue -Therefore, Debits decrease: liabilities, common stock, retained earnings, revenues
Which of the following will cause a trial balance to be out of balance? A. A correct journal entry is not posted. B. A journal entry is posted twice. C. Incorrect accounts are used in journalizing or posting. D. A debit posting for an entry is omitted.
D. A debit posting for an entry is omitted.
D.E.A.D.
Debits increase Expenses Assets Dividends -Therefore, Credits decrease: expenses, assets, dividends
Analyzing Transactions (expanded accounting equation)
If Revenues increase, then: Net Income increases, Ending R/E increases, and Stockholders' Equity increases. If Expenses increase, then: Net Income decreases, Ending R/E decreases, and Stockholders' Equity decreases. If Dividends increase, then: Ending R/E decreases and Stockholders' Equity decreases.
Accounting Information System
Is a system of -collecting transaction data -processing transation data -communicating financial information to decision-makers
The Accounting Cycle
Is the basis of an accounting information system
Posting
Posting is the procedure of transferring journal entry amounts to ledger accounts. It accumulates the effects of journalized transactions in the individual accounts
The Ledger
The ledger is comprised of the entire group of accounts maintained by a company. The listing of all accounts by a company to record transactions is called the Chart of Accounts
Normal Balance
The normal balance of an account is the side on which increases in the account are recorded
Analyzing Transactions
The process of identifying the specific effects of economic events on the accounting equation. Assets = Liabilities + Stockholders' Equity
Limitations of the trial balance
The trial balance may balance even when: -a transaction is not journalized, -a correct journal entry is not posted, -a journal entry is posted twice, -incorrect accounts are used in journalizing or posting, or -offsetting errors are made in recording the amount of a transaction.
The Journal
Transactions are recorded in chronological order in a journal before they are transferred to the accounts. 1.Disclosing the complete effects of a transaction. 2.Providing a chronological record of transactions. Helping to prevent or locate errors because the debit and credit amounts can be easily compared
Features of Journal Entries
•Date is entered in the Date column •Account to be debited is entered first at the left •Account to be credited is entered on the next line, indented •Amounts for the debits are recorded in the Debit column •Amounts for the credits are recorded in the Credit column •Brief explanation of the transaction is given