Chapter 2 Financial Accounting

Posting

The process of transferring the debit and credit information from the general journal to the general ledger is called posting.

Normal Balance

The normal balance of an account is the side on which increases to the account are recorded. This is because increases in an account are usually greater than, or equal to, decreases in an account. Asset accounts normally have debit balances while liability and stockholders' equity accounts normally have credit balances.

Compound Journal Entry

A journal entry that involves more than two accounts is called a compound journal entry. (As shown below, the journal entry for Transaction 8 is an example of a com-pound journal entry involving three accounts.) Any number of accounts can appear in a compound entry; but, regardless of how many accounts are used, the sum of the debit amounts always equals the sum of the credit amounts.

Source Document

An initial step in the analysis and recording process is to identify evidence of a busi-ness transaction. This usually comes in the form of a source document. Source docu-ments are printed forms or computer records that are generated when a firm engages in a business transaction.

Expanded Accounting Equation

Assets = Liabilities + Common Stock + Revenues - Expenses - Dividends

Account

The basic component of an accounting system is the account, which is an individual record of the increases and decreases in a specific asset, liability, or stockholders' equity item.

General Journal

The general journal is a record with enough flexibility that any type of business transaction can be recorded in it. Like all journals in an accounting system, the general journal is a book of original entry in which accounting data are entered into a company's accounting system.

T-Account

The method of recording data en-tries in the accounts is a matter of convention; that is, a simple set of rules is followed, which involves debits and credits.A T-account is a simplified form of an account which is used to capture these effects.

Debit & Credit

The terms debit and credit refer to the left side and the right side, respectively, of an account. Regardless of what amount is recorded in an account, any entry made on the left side is a debit to the account while any entry recorded on the right side is a credit to the account.

Journalize / Journal Entry

The word journalize means to record a transaction in a journal. An entry in a journal is called a journal entry.

Chart of Accounts

A chart of accounts is a list of the titles of all accounts in a business's account-ing system. Account titles are grouped by, and in the order of, the five major components of the expanded accounting equation: assets, liabilities, stockholders' equity, revenues, and expenses.

General Ledger

A general ledger is a listing of each account of a company and the amounts making up each account.

Trial Balance

A trial balance is a listing of all accounts from the general ledger with their respective debit or credit balance. A trial balance is prepared at the end of an accounting period after all transactions have been recorded.

Journal / Book of Original Entry

All accounting transactions are initially recorded in a journal. A journal, or book of original entry, is a tabular record in which a business's activities are reflected in terms of debits and credits and recorded in chronological order.

Posting Reference

The posting reference of the general journal indicates the account to which the related debit or credit has been posted.

Steps in the Recording Process

we (1) analyze the transaction using the accounting equation, (2) journalize the transaction, and (3) post journal entries to the general ledger (for simplicity, we use the T-account structure for each ledger account).