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Accounting 2101 Chapter 2 notes.

by: Jennifer Veliz

Accounting 2101 Chapter 2 notes. ACCT 2101

Marketplace > University of Georgia > Accounting > ACCT 2101 > Accounting 2101 Chapter 2 notes
Jennifer Veliz

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These notes are on chapter 2.
Principles of Accounting 1
Swati Bhandakar
Class Notes
ACCT 2101, week two
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This 4 page Class Notes was uploaded by Jennifer Veliz on Wednesday January 20, 2016. The Class Notes belongs to ACCT 2101 at University of Georgia taught by Swati Bhandakar in Summer 2015. Since its upload, it has received 21 views. For similar materials see Principles of Accounting 1 in Accounting at University of Georgia.


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Date Created: 01/20/16
Chapter  2 Analyzing and Recording Transactions   Using financial statements Financial statement analysis refers to applying logical tools to financial statements in order to make business decisions. • Internal users use the financial statement analysis to improve the company’s effectiveness and efficiencies. • External users use the analysis to decide whether to invest, lend and how to monitor management. • The goal of the analysis is to evaluate how effective the company is and its financial condition. • There are standards when interpreting the results of the analysis, which are: 1. Intracompany- comparing the results with two or more time periods. Ex: comparing this month’s results with last two months. 2. Intercompany- comparing the results with the company’s competitors. Ex: comparing North Face with Colombia? 3. Industry- comparing the results to industry norms. 4. Guidelines- comparing the results to standards based on experience Using ratios to analyze financial statements • Most used to analyze financial statements • Expresses  mathematical  relation  between  2  quantities   • Can  be  expressed  as  a  percent,  rate,  or  proportion   •   Building  Blocks  of  Analysis   Focus  on  the  company’s  financial  condition  or  performance.   Four  Basic:   1. Liquidity-­‐   • Company’s  ability  to  meet  short-­‐term  requirements.     • If  a  company  can’t  meet  a  short-­‐term  obligation,  it’s  doubtful  it  can   continue  to  operate.   • Assessed  by  current  ratio  (Current  assets  ÷  current  liabilities).   2. Solvency-­‐     • Company’s  ability  to  meet  long-­‐term  requirements.     • It  also  means  their  ability  to  protect  its  creditors  through  out  their   business.     • Assessed  by  its  debt  ratio  (Total  liabilities  ÷  total  assets).   3. Profitability-­‐     • Company’s  ability  to  use  its  assets  to  produce  profit.     • Assessed  by  its  profit  margin  (Net  income  ÷  net  sales).   4. Market  prospects-­‐     • Reflects  the  company’s  public  expectations  for  the  business  (return   and  risk).   • One  way  to  analyze  this  is  by  the  price-­‐to-­‐earnings  operation:  Price   per  share  ÷  earnings  per  share   •   Analyzing and reporting accounts   Account- record of increases and decreases in an area, such as assets, liabilities, equities, revenues and expense items. Asset Accounts examples: Cash Land Accounts receivable Notes receivable Supplies Buildings Equipment Prepaid expenses (expenses you pay for ahead of time, therefor you have the right to use in the future) Liability Accounts examples: Accounts payable Notes payable Accrued liabilities Unearned revenues (amounts you owe but (revenues earned haven’t paid yet, such before providing the as wages payable and product or services) taxes payable), Equity Accounts Common stock Revenues Dividends Expenses Retained Earnings Ledger- record of all accounts used by the company and their standing. Chart of accounts- List of all accounts with their identifying number for each. The accounts appear in order of: Assets, Liabilities, and Equity The process: 1. Analyze each transaction and events from source documents (documents that give any type of evidence of a transaction and/or event) 2. Record relevant information in a journal (can be a physical notebook or computerized) 3. Post the information from the journal to ledger accounts 4. Prepare and analyze the trial balance (list of account’s and their balance at a point in time)   Analyzing and processing transactions T-account-tool used to understand one or more transactions. Informal way of a ledger account. Name of account Left  side  isRight  side   always  the   if  always   debit   the  credit   (DR)  side   (CR)  side   • If debit (left side) increases, credit (right side) decreases and vice versa. • Debit doesn’t always mean decrease and Credit doesn’t always mean increase. • Debit account- debit’s sum exceeds credit’s sum. • Credit balance- credit’s sum exceeds debits’ sum. • Zero balance- if neither sum exceeds. • If two or more accounts are used, it is called double entry accounting. • There are rules of debit and credit for the accounts, which are: 1. If an asset, expense, and/or dividend increases, the transaction is recorded as a debit. If these accounts decrease, the transaction is recorded as a credit. • These accounts have a “normal balance” of debit. 2. If the liability, common stock (owner’s equity), and/or revenue account increases, the transaction is recorded as credit. If these accounts decrease, the transaction is recorded as debit. • These accounts have a “normal balance” of credit. Journalizing and posting transactions Journal- complete record of each transaction. Journalizing- process of recording transactions in a journal Posting- process of transferring journal information to the ledger. The process: 1. Identify transactions 2. Analyze transactions 3. Record journal entry 4. Post journal information to ledger General journal includes: 1. Date of transaction 2. Tittles of affected accounts (the debited account goes first) For example cash and revenue increase: if cash (an asset) increases it is recorded (as Debit) before revenues (equity) increases, since that would be recorded as credit. 3. Dollar amount of credit and debit 4. Explanation of transaction • After posting journal information into ledger, you make a trial balance sheet. -This is a list of all account balances recorded in the ledger. -(This is NOT a financial statement and would not be given to external users). -If everything is correct, the total debits will equal the total credits. All accounts are assumed to have a normal balance unless told otherwise. • If there is an error, and the debit doesn’t equal the credit (although it doesn’t always show the error there), you can trace your steps backwards. 1. Add the columns of the trial balance again 2. Make sure that the information recorded on the ledger is correct 3. Re-calculate the balances recorded in the ledger 4. Make sure the information passed form the journal to the ledger is correct 5. Make sure journal recordings are correct. Note: If you forget to record an amount, record the amounts in the wrong column of Dr or Cr, or post an entry twice, the debits and credits might still be equal so make sure this doesn’t happen or your total will be wrong!  


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