Chapter 2 Notes
Chapter 2 Notes Financial Accounting
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Popular in Accounting
This 3 page Class Notes was uploaded by Jayne Johnston on Sunday February 7, 2016. The Class Notes belongs to Financial Accounting at a university taught by Raqule Crawley in Spring 2016. Since its upload, it has received 12 views.
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Date Created: 02/07/16
Chapter 2 - Transactions The Account and Its Analysis An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. Asset Accounts Cash Accounts Receivable Notes Receivable Prepaid Accounts (Prepaid Expense – ex. Magazine subscription) Supplies Equipment Buildings Land Liability Accounts Notes Payable Unearned Revenue Accrued Liabilities Accounts Payable Equity Accounts Dividends Expenses Retained Earnings on Balance Sheet Revenues Common Stock Revenues and owner’s contributions increases equity. Expenses and owner’s withdrawals decreases equity. Analyzing and Posting Process The accounting process identifies business transactions and events, analyzes, and records their effects, and summarizes and presents info in reports and financial statements. These reports and statements are used for making investment lending, and other business decisions. Analyze each transaction and event from source documents Record relevant transactions and events in a journal Post journal information to ledger accounts Prepare and analyze the trail balance Source Documents Employee Earnings Records Checks Bills from Supplies Purchase Orders Bank Statements Sales Tickets Need-To-Know Prepaid rent A Chapter 2 - Transactions Common Stock EQ Note Receivable A Accounts Payable L Accounts Receivable A Equipment A Interest Payable L Unearned Revenue L Land A Prepaid Insurance A Ledger and Chart of Accounts The ledger is a collection of all accounts for an information system. A company’ size and diversity of operations affect the number of accounts needed. The chart of accounts is a list of all accounts and includes an identifying number for each account. Debits and Credits * T-account 2 ndmost important accounting aspects. A T-account represents a ledger account and is a tool used to understand the effects of one or more transaction. Account Title (left) (right) Debit Credit Dr. Cr. Balance Double-Entry Accounting An account balance is the difference between the increases and decreases in an account. Notice the T-Account. Rules At least two accounts involved in every transaction – with at least one debit and one credit. Total debit = Total credit The balance will go on the normal side of the account. Need-To-Know (Debit or Credit) Prepaid Rent D Common Stock C Note Receivable D Accounts Payable C Accounts Receivable D Equipment D Interest Payable C Unearned Revenue C Land D Prepaid Insurance D Journalizing Transactions Chapter 2 - Transactions 4 components Transaction Date Titles of Affected Accounts Dollar amount of debits and credits (debit always comes first) Transaction explanation – No negative signs or parentheses in journal entries, just need to know the increase or decrease with each account Balance Account Column T-accounts are useful illustrations, but balance column ledger accounts are used in practice. Preparing the Trial Balance … Searching for and Correcting Errors If the trial balance does not balance, the error(s) must be found and corrected. Make sure the trial balance columns are correctly added. Make sure account balances are correctly entered from the ledger. See if the debit or credit accounts are mistakenly placed on the trial balance. Re-compute each account balance in the ledger. Verify that each journal entry is posted correctly. Verify that each original journal entry has equal debits and credits. - If the CEO asks to see accounting info, which would be the best to provide? Trial Balance. Debt Ratio Evaluates the level of debt risk. A higher ratio indicates that there is a greater probability that a company will not be able to pay its debt in the future. Debt Ratio = Total Liabilities / Total Assets
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