Financial Accounting Chapter 2
Financial Accounting Chapter 2 BA 210
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This 12 page Class Notes was uploaded by Amelia Cassidy on Tuesday March 1, 2016. The Class Notes belongs to BA 210 at Embry-Riddle Aeronautical University - Daytona Beach taught by Dr. Greenman in Spring 2016. Since its upload, it has received 47 views. For similar materials see Financial Accounting in Business at Embry-Riddle Aeronautical University - Daytona Beach.
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Date Created: 03/01/16
Chapter 2 The Recording Process ● The Account ○ Account Definition ■ A record of increases/decreases in specific asset, liability, or stockholders’ equity items ○ TAccount Definition ■ Basic form of an account ● Title ● Left/Debit side ● Right/Credit side ○ Debits and Credits ■ Debit Definition ● Left side of account (Dr.) ■ Credit Definition ● Right side of account (Cr.) ■ Used to describe where entries are made in accounts ■ Debit Balance ● When debit exceeds credit ■ Credit ● When credit amounts exceed debit ■ In account form, increases in cash = debits, decreases in cash = credits ■ Debit and Credit Procedure ● DoubleEntry System Definition ○ System that records in appropriate accounts, the dia; effect of each transaction ○ Helps ensure accuracy of recorded amounts/detect errors ■ Dr./Cr. Procedures For Assets and Liabilities ● Assets show debit balances ● Liabilities show credit balances ● Normal Balance Definition ○ Account balance on the side where an increase in account is recorded ■ Stockholders’ Equity ● Common Stock ○ Common Stock Definition ■ Issues in exchange for owners’ investment paid in to the corporation ● Retained Earnings ○ Retained Earnings Definition ■ Net income that is kept (retained) in business ○ Portion of stockholders’ equity that company has accumulated through profitable operation of business ● Dividends ○ Dividends Definition ■ Distribution by a corporation to its stockholders on a pro rata basis ○ Cash dividend is most common form ○ Reduce stockholders claims on retained earnings ■ Revenues and Expenses ● Revenue ○ Benefit stockholders of business ○ Credit increases revenue ○ Debit decreases revenue ● Expenses ○ Decrease stockholders’ equity ○ Stockholders’ Equity Relationships ■ Balance sheet reports dividends on retained earnings statement ■ Revenues/Expenses on income statement ○ Summary of Debit/Credit Rules ● Steps in the Recording Process ○ Three steps ■ Analyze each transaction for effects on accounts ■ Enter transaction info in journal ■ Transfer journal info to appropriate accounts in ledger ○ Business documents ■ Evidence of transaction ■ Sales slip, check, bill, cash register tape ○ The Journal ■ Journal Definition ● Accounting record in which transactions are initially recorded in chronological order ■ Shows debit/credit effects on specific accounts ■ General Journal Definition ● Most basic form of journal ■ Recording Process ● Discloses complete effects of transaction ● Provides chronological record of transactions ● Prevent/Locate errors ○ Debit/credit can be easily compared ■ Journalizing ● Journalizing Definition ○ The entering of transaction data in journal ● Always consists of: ○ Date of transaction ○ Accounts/Amounts to be debited/credited ○ Brief explanation of transaction ● Use correct and specific account titles! ■ Simple and Compound Entries ● Simply Entry Definition ○ Journal entry that involves only two accounts ● Compound Entry Definition ○ Journal entry that involves three or more accounts ○ The Ledger ■ Ledger Definition ● Entire group of accounts maintained by a company ■ General Ledger Definition ● Ledger that contains all asset, liability, and stockholders’ equity accounts ■ Each account is numbered ■ Provides balance in each account and keeps track of changes in balances ■ Standard Form of Account ● ThreeColumn Form of Account Definition ○ Form w/columns for debit, credit, and balance amounts in account ● Balance in account determined after each transaction ○ Posting ■ Posting Definition ● Procedure of transferring journal entries to ledger accounts ■ Accumulates effects of journalized transactions in individual accounts ■ Steps ● In ledger, enter in appropriate columns of account debited, date, journal page, and debit amount shown in journal ● In reference column of journal, write account number to which debit amount was posted ● In ledger, enter in appropriate columns of account credited, date, journal page, and credit amount shown in journal ● In reference column of journal, write account number to which credit amount was posted ■ Reference column of ledger account indicates journal page from which transaction was posted ■ Chart of Accounts ● Chart of Accounts Definition ○ List of accounts/account numbers that identify location in ledger ● Number/Type of accounts differ for each company ● The Recording Process Illustrated ○ Purpose of transaction is to identify type of account involved, then determine whether to make a debit/credit to the account ● The Trial Balance ○ Trial Balance Definition ■ List of accounts & balances at a given time ○ Prepared at end of accounting period ○ Proves mathematical equality of debits and credits after posting ■ Double Entry System: occurs when sum of debit account balances = sum of credit account balances ○ May uncover errors in journalizing and posting ○ Useful in preparation of financial statements ○ Steps for preparing trial balance: ■ List account titles/balances ■ Total debit/credit columns ■ Prove equality of debit/credit columns ○ Limitations of a Trial Balance ■ Does not guarantee freedom from recording errors ■ May still balance even when: ● Transaction not journalized ● Correct journal entry not posted ● Entry posted twice ● Incorrect amounts used in journalizing or posting ● Offsetting errors made in recording amount of transaction ■ Trial Balance does not prove that company has recorded all transaction or that ledger is correct ○ Locating Errors ■ Errors result from mathematical mistakes, incorrect postings, incorrect data transcribing ■ Steps when facing unbalanced trial balance ● First, determine amount of difference between columns ● Readd columns/recompute account balances ● Scan trial balance to see whether balance equal to half error has been entered in wrong column ● Retrace account balances to see if incorrectly copied from ledger ○ Transposition Error Definition ■ Reversing the order of numbers ● Scan ledger to see if account balance in amount of error has been omitted from trial balance, scan journal to see is posting of that amount has been omitted ○ Use of Dollar Signs ■ $ does not appear in ledger or journal ■ Used only in trial balance/financial statements ● Shown for first item and total of column ■ Total amounts double underlined
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