ACC255 Chapter 3 notes
ACC255 Chapter 3 notes ACC 255
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This 7 page Class Notes was uploaded by Haley Morse on Saturday September 10, 2016. The Class Notes belongs to ACC 255 at Northern Arizona University taught by Craig Bain in Fall 2016 2016. Since its upload, it has received 28 views. For similar materials see Principles of Accounting: Financial in Accounting at Northern Arizona University.
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Date Created: 09/10/16
ACC 255 Chapter 3 Learning Objective 1: Analyze the effect of business transactions on the basic accounting equation Accounting information system: System of Collecting and Processiong transaction data and communicating financial information to decision-makers Rely on a process reffered to as the accounting cycle 1. Analyze business transaction 2. Journalize 3. Post 4. Trial balance 5. Adjusting entries 6. Adjusted trial balance 7. Financial statements 8. Closing entries 9. Post closing trail balance Most businesses use computerized accounting systems Journalize: To record transactions Transactions: Economic events that require recording in the financial statements Not all activities represent transactions Ex: hiring mew employee Assets, liabilities, or stockholders’ equity items change as a result of some economic event Dual effect on the accounting equation Basic Accounting Equation Assets=Liabilities+ stockholders’ Equity Stockholders’ Equity is split into 2 parts 1. Common Stock 2. Retained earnings Revenues-Expenses-Dividends Analyzing Transactions 1. October 1 : Cash of $10,000 is invested in company by investors in exchange fst $10,000 common stock 2. October 1 : Company borrowed $5,000 from bank by signing a 3- month, 12%, $5,000 note payable 3. October 2 : Company purchased equipment by paying $5,000 cash to equipment company 4. On October 2, Sierra received a $1,200 cash advance from R. Knox, a client. 5. On October 3, Sierra received $10,000 in cash from Copa Company for guide services performed. 6. On October 3, Sierra received $10,000 in cash from Copa Company for guide services performed. 7. On October 4, Sierra paid $600 for a one-year insurance policy that will expire next year on September 30. 8. On October 5, Sierra purchased an estimated three months of supplies on account from Aero Supply for $2,500. 9. On October 9, Sierra hired four new employees to begin work on October 15. ***No accounting transaction occurred here!***** 10. On October 20, Sierra paid a $500 dividend 11. Employees have worked two weeks, earning $4,000 in salaries, which were paid on October 26. Paid goes down=always a credit to cash Credit balance=not good! Tried to take more cash out than they have=overdraft General journal-shows everything that happened Cash received in advance=liability until service has been provided Don’t have to have cash to record in journal Asset: Economic Benefit Learning Objective 2: Explain how accounts, debits, and credits are used to record business transactions Debit and Credit Procedures: Double entry system Each transaction must affect 2 or more accounts to keep the basic accounting equation in balance Recording done by debiting at least one account and crediting another DEBITS MUST EQUAL CREDITS If Debits Are greater than Credits, the account will have a Debit Balance Debits will be on the Left Credits on the right ****Know this for the exam!! Assets: Debits should exceed credits Liabilities: Credits should exceed debits Stockholders’ Equity: Credits should exceed debits (Same as Liabilities) Investments by stockholders and revenues increase stockholders’ equity (Credit) Dividends and expenses decrease stockholders’ equity (Debit) Revenues increase stockholder’s equity Expenses have the opposite effect: expenses decrease stockholders’ equity The effect of debits and credits on revenue and expense accounts is the Same as their effect on stockholders’ equity The equation must be in balance after every transaction. For every Debit there must be a Credit Learning Objective 3: Indicate how a journal is used in the recording process 1. Analyze each transaction in terms of its effect on the accounts 2. Enter the transaction information in a journal 3. Transfer the journal information to the appropriate accounts in the ledge Transactions recorded in chronological order in a journal before they are transferred to accounts Contributions to the recording process: 1. Discloses the complete effects of a transaction 2. Provides a chronologic record or transactions 3. Helps to prevent or locate errors because the debit and credit can be easily compared Learning objective 4:Explain how a ledger and posting help in the recording process *Ledger accounts: individual accounts-T Charts-For every single item (Asset) The Ledger: Comprised of the entire group of accounts maintained by a company Listing of accounts: used by a company to record transactions *This is a chart of accounts. Red=things that initial transactions are included in Black= adjusting transactions Posting: The process of transferring journal entry amounts to ledger accounts Steps to Recording Process 1. Determine what type of account is involved 2. Determine what items increased or decrease and by how much 3. Translate the increases and decreases into debits and credits Liability: Obligation to do something in the future ***Page 105 in the textbook goes into detail as to where to put debits and credits Cash received in advance= Liability-either perform the service or give back to money Aspect of cruel accounting Supplies: 2500 @ beginning of month End of month 500 in supplies-need to make an adjustment When supplies are used up and need more adjust the credits and get a debit balance of what you need Cruel adjusting journal entry to include interest at end of fiscal year 10/31interest expense 50 income statement interest payable 50 balance sheet account (amount* percentage* time period) Rules for adjusting journal entries: 1. You’ll Never see cash 2. They always impact an income statement and a balance sheet account Learning objective 5: Prepare a Trial balance A list of accounts and their balances at any given time Accounts listed in orders they appear in ledger Purpose is prove that debits equal credits May also uncover errors in journalizing and posting Useful in preparation of financial statements **Always in this order 1. Assets 2. Liabilities 3. Stockholders’ equity 4. Revenues 5. Expenses Trial balance always set up 1. Cash 2. Accounts receivable 3. Prepaid insurance 4. Equipment 5. Notes payable 6. Accounts payable 7. Salaries and wages payable 8. Common stock 9. Dividends 10. Service revenues 11. Utilities expense 12. Salaries and wages expense Purchase supplies=asset Didn’t pay for it=account payable- credit Notes Payable and Accounts Payable are BOTH Liabilities Limitations of a Trial Balance The trial balance may balance even when: 1. A transaction is not journalized 2. A correct journal entry is not posted 3. A journal entry is posted twice 4. Incorrect accounts are used in journalizing or posting or 5. Offsetting errors are made in recording the amount of a transaction *Ethics Note: An Error is the result of an unintentional mistake. It is neither ethical nor unethical. An Irregularity is an intentional misstatement, which is viewed as unethical
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