ACC 101 Ch 2 Notes
ACC 101 Ch 2 Notes acc 101
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This 3 page Class Notes was uploaded by Ashley Notetaker on Sunday January 31, 2016. The Class Notes belongs to acc 101 at DePaul University taught by joanna dabrowski in Summer 2015. Since its upload, it has received 26 views. For similar materials see Intro to Accounting 1 in Accounting at DePaul University.
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Date Created: 01/31/16
ACC 101 Chapter 2 Business transactions – economic events that should be recorded in accounting records Economic eventRecognitionValuationClassification Recognition – decision as to when to record transaction Recognize revenue when good/service is provided to customer, doesn’t necessarily have to be paid for yet Date on which transaction is recorded affects amounts in financial statements Recognition point predetermined time at which transaction should be recorded Events NOT recorded: customer inquires about product availability company hires new employee company signs contract to provide future service company places order Events recorded: customer buys product company pays employee for work performed company performs service Valuation –assigning monetary amount to business transactions and resulting assets & liabilities Fair value – exchange price of business transaction between market participants. GAAP states all transactions should be valued at fair value Cost principle – recording transactions at exchange price at point of recognition Classification – assigning all transactions to appropriate categories, or accounts Three levels of classification… 1. Asset, liability, or Stockholder’s equity? 2. Retained earnings Common stock 3. Revenue Expense Dividend Accounts – basic storage units for accounting data and are used to accumulate amounts from similar transactions Accounting system has separate account for each asset, liability, and each component of SE Account title should describe what’s recorded in account General ledger – group of accounts (sometimes just ledger) Chart of accounts – table of contents for ledger; lists account titles & #’s Account #’s starting with 1 = asset Account #’s starting with 2 = liability Account #’s starting with 3 = SE ACC 101 Chapter 2 T Account – tool used to analyze transactions. Three parts… 1. Title, which identifies asset, liability, or SE account 2. Left side, called debit side 3. Right side, called credit side In doubleentry system, each transaction must be recorded with at least one debit and one credit. Based on principle of duality, which means every economic event has two aspects that offset or balance each other Rules: 1. Every transaction affects at least two accounts, and must have at least one debit and one credit 2. Total debits must equal total credits Increasing on debit side Increasing on credit side Assets Liabilities Dividends Common stock Expenses Retained earnings Revenue Normal balance – usual balance of account and is the side (debit or credit) that increases Accounting cycle – series of steps that measure and communicate useful information to decision makers: 1. Analyze transactions from source documents 2. Record transactions in general journal 3. Post journal entries to ledger, prepare trial balance (a tool, not a statement) 4. Adjust accounts, prepare adjusted trial balance 5. Prepare financial statements 6. Close the accounts, prepare postclosing trial balance Business Transactions Analysis Details of transactions are supported by source documents – invoices, receipts, checks, contracts Journal entry – notation that records a single transaction. Each entry must be in proper journal form Rules for journal entries: 1. List all debits first 2. List all credits next 3. Debits are aligned with left margin ACC 101 Chapter 2 4. Credits are indented General Journal Transactions are recorded chronologically and then debit & credit portions of each are transferred to appropriate accounts in ledger Each entry includes date, accounts, amounts, explanation A space should be skipped between journal entries Compound entry – entry with more than one debit or credit General Ledger While journal is used to record details, the ledger is used to update each account Ledger account form – form that contains four columns for dollar amounts - Always shows current balance of account - Item column is rarely used because explanations already appear in journal - Post. Ref. column is used to note journal page on which original entry for transaction is found Preparation and Use of Trial Balance Trial balance – device used to ensure that total debits and credits are equal Steps: 1. List each account that has a balance in the order: assets, liabilities, SE, dividends, revenues, expenses 2. Add each column 3. Compare totals of each column Trial balance proves whether accounts are in balance, does not detect all errors! If trial balance is not equal… - Debit was entered in account as credit, or vice versa - Balance of account was computed incorrectly - Error was made in carrying account balance to the trial balance - Trial balance was summed incorrectly Errors in records that does not cause trial to be out of balance… - Transaction was omitted or entered twice - Both debit and credit amounts are incorrect but equal - Wrong account was debited or credited Trial balance does NOT prove… - If all transactions were recorded (recognition) - If amount recorded was correct (valuation) - If transactions were analyzed correctly and recorded in proper accounts (classification)
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