Chapter 2 Analyzing and Recording Process Analyze each transaction and event from source documents record relevant transactions and events in a journal post journal information to ledger accounts prepare and analyze the trial balance Source documents source of information for accounting entries that can be in either paper or electronic form aka business papers identify and describe transactions and events entering the accounting process examples checks sales tickets purchase orders bills bank statements Account is a record within an accounting system of increases or decreases in a specific asset liability equity revenue or expense item General ledger is a record containing all accounts used by a company 3 general account categories asset accounts liability accounts equity Assets accounts resources owned or controlled by a company have accounts expected future benefits o Cash account reflects a company s cash balance includes the exchange of cash coins checks money orders checking account balances o Accounts receivables are held by a seller and refer to promises of payment from customers to sellers aka credit sales or sales on credit account o Note receivable aka promissory note is a written promise of another entity to pay a definite sum of money on a specified future date to the holder of the note o Prepaid accounts aka prepaid expenses assets that represent prepayments of future expenses o Supplies are assets until they are used o Equipment when it is used and gets worn down its cost is gradually reported as an expense called depreciation o Building provide expected future benefits to those who control own them o Land Liability accounts creditors individuals or organizations entitled to receive payments o Accounts payable refer to oral or implied promises to pay later o Note payable refers to a formal promise usually denoted by the signing of a promissory note to pay a future amount o Unearned revenue liability created when customers pay in advance for products or services earned when the products or services are later delivered o Accrued liabilities are amounts owed that are not yet paid wages payable taxes payable interest payable Equity accounts o Common Stock corporation s basic ownership share what the owner invests o Dividends corporation s distribution of assets to its owners stockholders when a company pays out cash dividends then the assets and total equity decrease o Revenues increase equity o Expenses decrease equity Analyzing and Processing Transactions Ledger the collection of all assets and their balances Chart of accounts list of accounts used by a company includes an identification number for each account example 101 199 asset account T account tool used to show the effects of transactions and events on individual accounts o Debit left side an entry that increases asset and expense accounts decreases liability revenue and most equity accounts o Credit right side an entry that decreases asset and expense accounts increases liability revenue and most equity accounts o Account balance difference between total debits and total credits including the beginning balance for an account o When the sum of debits exceeds the sum of credits the account has a debit balance vice versa and when they equal the account has a zero balance Double entry accounting accounting system in which each transaction affects at least 2 accounts and has at least 1 debit and 1 credit Journal a record in which transactions are posted before they are transferred to a ledger aka book of original entry Journalizing process of recording transactions in a journal Posting process of transferring journal entry info to the ledger General journal all purpose journal for recording debits and credits of transactions and events includes the date of transaction titles of affected accounts dollar amount of each debit and credit and explanation of the transaction IFRS requires that companies report a balance sheet income statement statement of changes in equity statement of cash flows Posting reference column a column in journals in which individual ledger account numbers are entered when entries are posted to those ledger accounts Balance column accounts account with debit and credit columns for recording entries and another column for showing the balance of the account after each entry same purpose as a simple t chart but more info o On top of having columns for debits and credits it has columns with transaction date explanation balance of account after each entry Four steps to post a journal entry o 1 Identify the ledger account that is debited in the entry in the ledger enter the entry date journal and page in its PR column debit amount new balance of the ledger account o 2 Enter the ledger account number in the PR column of the journal o 3 and 4 repeat the first two steps but for credit Analysis of transactions o 1 Identify the transaction and any source documents o 2 Analyze the transaction using the accounting equation o 3 Record the transaction in journal entry form applying double entry accounting o 4 Post the entry Trial Balance Compound journal entry journal entry that affects 3 or more accounts Trial balance list of accounts and their balances at a point in time total debit balances equal total credit balances The ordering of accounts in a trial balance typically follows their identification number from the chart of accounts Preparing a trial balance o 1 List each account title and its amount o 2 Compute the total of debit balances and the total of credit balances o 3 Verify total debit balances equal total credit balances An efficient way to search for an error is to check the journalizing posting and trial balance preparation in reverse order Balance sheet reports at a specific point in time while income statements statement of retained earnings and statement of cash flows report over a period of time A statement s heading lists the 3 W s Who name of organization What name of statement and When statement s point in time period of time Accounting or fiscal year one year reporting period Calendar year companies businesses whose accounting year begins on Jan 1st and ends on Dec 31st Income statement reports the revenues earned minus the expenses incurred net income at the bottom Statement of retained earnings reports info about how the retained earnings changed use the net income from the income statement Balance sheet reports the financial position of a company at a point in time use the retain
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