Slide 1Let’s reviewThe accounting equationTransactions analysisThe accounting systemDouble entry accountingRules of Debit/CreditThe recording processThe recording processLet’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 equationEach transaction must keep the accounting equation in balance.In other words, after each transaction:Assets = Liabilities + Stockholders’ EquityORAssets = Liabilities + Common stock + Retained earningsTransactions analysisWe can use the accounting equation to records transactions. For example, we might have the following transactions recorded: •But as companies have more and more accounts and transactions, this method becomes impractical and unwieldy. Assets Liabilities Stockholders' Equity Cash Equipment APCommon stockRetained earningsOwners invest $100 in exchange for stock in the new company+100 +100 Cash purchase of equipment, $45-45 +45 Received cash from customers for services performed, $12+12 Rev +12The accounting systemAccounting 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: Account TitleLeft side is Right side isthe debit the credit side. side.Double entry accountingBusinesses 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 Increase DecreaseAsset debit creditLiability credit debitStock, RE credit debitRevenue credit debitExpense debit creditDividends debit creditRules of Debit/CreditThe recording processTransactions 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