The recording process Let s review Financial events called transactions occur We analyze these transactions to determine their affect on the accounting equation Remember as we record each transaction the accounting equation must remain in balance Periodically we communicate information about the business by preparing financial statements The income statement shows the results of operations for a period of time by reporting revenues and expenses the statement of retained earnings shows changes in earned capital over a period of time and the balance sheet shows financial position as of a point in time by reporting on assets resources liabilities debts and equity The accounting equation Each transaction must keep the accounting equation in balance In other words after each transaction Assets Liabilities Stockholders Equity OR Assets Liabilities Common stock Retained earnings Transactions analysis We can use the accounting equation to records transactions For example we might have the following transactions recorded Assets Cash Owners invest 100 in exchange for stock in the new company Liabilities Equipment 100 Cash purchase of equipment 45 45 Received cash from customers for services performed 12 12 AP Stockholders Equity Common stock Retained earnings 100 45 Rev 12 But as companies have more and more accounts and transactions this method becomes impractical and unwieldy The accounting system Accounting systems are designed to show increases and decreases in each element of the financial statements as a separate record This record is called an account The T account Left side is Account Title Right side is the debit the credit side side Double entry accounting Businesses use a double entry accounting system This system is based on the accounting equation Using this system the accounting equation will automatically be in balance if for each transaction the dollar amount of debits equals the dollar amount of credits Rules of debit and credit Type of account Asset debit Liability credit credit debit Stock RE credit debit Revenue credit debit Expense debit credit Dividends debit credit Increase Decrease Rules of Debit Credit The recording process Transactions are recorded first in the journal The journal is a chronological record of each complete transaction and shows the accounts and amounts affected by each event Each journal entry is then transferred or posted to the general ledger The ledger is the collection of all of the accounts of a firm The journal and ledger contain the same information but organized differently The journal is organized by transaction the ledger is organized by account