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Accounting Chapter 2- Accounting System, Recording Transactions & Financial Statements

by: Katie Mulliken

Accounting Chapter 2- Accounting System, Recording Transactions & Financial Statements ACCT2101

Marketplace > University of Georgia > Accounting > ACCT2101 > Accounting Chapter 2 Accounting System Recording Transactions Financial Statements
Katie Mulliken
GPA 3.91

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Accounting Chapter 2- Accounting System, Recording Transactions & Financial Statements. Accounting users, assets, liability, equity, ledgers, rules of debit & credit, trial balance, classified/unc...
Intro to Accounting 1
Class Notes
Accounting, accounting system, Recording transactions, financial statements
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This 3 page Class Notes was uploaded by Katie Mulliken on Tuesday April 5, 2016. The Class Notes belongs to ACCT2101 at University of Georgia taught by Bhandarkar in Spring 2016. Since its upload, it has received 37 views. For similar materials see Intro to Accounting 1 in Accounting at University of Georgia.


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Date Created: 04/05/16
Chapter 2—Accounting System, Recording Transactions & Financial Statements Financial Statement Analysis— Applying analytical tools to financial statements for making business decisions. Common goal of all users is to evaluate financial position. Used by…  Internal users—use analysis to improve company efficiency & effectiveness in providing products & services.  External users—use analysis for investing, lending & monitoring management Account—a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. Info is analyzed, summarized & presented in financial statement Must record each change in at least one asset account. Types of accounts:  Asset Accounts—resources owned by a company & have expected future benefits o Cash Equipment Account re ceivable(credit sales, sales on account) o Land Supplies Notes receivable o Buildings Prepaid expenses (asset till used,  expense) (insurance: premium)  Liability Accounts—obligations owed by a company (creditors  you owe them) o Accounts payable Notes payable o Unearned revenues/fees Accrued liabilitie~amount u owe to pay still: tax, wage  Equity Account— owners’ interest in assets after paid (–) liabilities, also called stock/ shareholder’s equity. Equity is the owners’ residual interest assets (after – liabilities) o Common stock Revenues Retained earnings o Dividends Expenses  Effects of Equity Accounts Common Stock (+, credit) Dividends (-, debit) Revenues (+) Expenses (-) Double Entry Accounting— requires that for each transaction:  2+ accounts are involved (debit/credit)  Total amount debited MUST EQUAL total credited (total debited = total credited)  Left side is the normal balance side for assets  Right side is the normal balance side for liabilities & equity Analyzing & Recording Process:  Analyze each transaction or event from source documents (invoice, bill, check, receipt)  Record relevant transactions & events in a journal  Post journal information to ledger accounts  Prepare and analyze the trial balance Ledger (general)— record holding all accounts (complete collection)of company at any time  Company size & diversity affects # of accounts needed  Compared to a notebook or a table of contents – May include an explanation Chart of Accounts—list of all accounts. Includes an identifying number for each account T-Account— Tool used to show effect of transaction & event on individual accounts. Only #s Represents a ledger account. Used to find any missing variable  Format: Top: account title left) debit right) credit  Account Balance— difference between total debits & total credits of an account  Subtract whichever account is smaller from whichever account is larger  When sum of debits = sum of credits, account has zero balance Double Entry Accounting— requires that for each transaction:  2+ accounts are involved (debit/credit)  Total amount debited MUST EQUAL total credited (total debited = total credited)  Left side is the normal balance side for assets  Right side is the normal balance side for liabilities & equity Rules of Credits & Debits Account Increase Decrease Asset Debit Credit Liability Credit Debit Common stock Credit Debit Dividend Debit Credit Revenue Credit Debit Expense Debit Credit  NOTE * post reference number in journal refers to the account number in ledger Normal Balance — whatever causes a particular account to increase (debit or credit)  Normal Debit Balances: Assets, Expenses, Dividends  Normal Credit Balances: Liabilities, Owners Equity, Revenues o DEAD COLOR  DEAD (debit = dividends, expenses, assets)  COL (oR (credit = owners equity, liabilities revenues) Unclassified Balance Sheet—asset, liability & equity accounts reported in a balance sheet  Broadly groups accounts into assets, liabilities and equity Classified Balance Sheet—organizes assets & liabilities into subgroups with similar attributes  Key to classify current & noncurrent items for both assets & liabilities (current = within 1 yr) Trial Balance—after processing all its transactions for the period, you prepare a trial balance  Lists all account balances in general ledger. If books balanced: total debits = total credits  Information from the trial balance is used to prepare financial statements  Order: Assets  Liability  Equity  Revenues  Expenses  If there is an error in the trial balance, trace your steps backwards as following: o Re-add up the columns of the trial balance o Ensure that postings from ledger are accurate o Re-compute balances in ledger o Ensure postings from journal to ledger are accurate (ensure accuracy of journals)  IRS require companies keep records that can be audited  IFRS requires companies to create and report 4 basic financial reports: o Balance Sheet o Statement of Changes in Equity o Income Statement o Statement of Cash Flows Journal – also called book of original entry Ledger—also called book of final entry


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