NU ACCT 1201 - Chapter 2: Transactions that Affect the Balance Sheet

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Chapter 2: Transactions that Affect the Balance SheetFaithful representation: requires that the info. be complete, neutral, & free from errorSeparate-entity assumption: states that a business’ activities are accounted separate from ownersContinuity assumption: states that businesses are assumed to continue in the foreseeable futureStable monetary unit assumption: accountants assume that the dollar's purchasing power is stable over timeMixed-attribute measurement model: measures assets, liabilities, revenues, and expenses, as faithfully and relevantly as possible.$Transactions: External VS InternalExternal events: exchanges of assets, goods, services, or promises to pay (liabilities) between parties- Ex: purchase of machine from supplier, sale of merchandise to customer, borrowing cash from bankInternal events: Events do not involve exchange with others outside the company, but rather occur within the company itself.- Ex: using up insurance paid for in advanced, using building & equipment over several yearsAccount: standardized format that organizations use to accumulate the $ effect of transaction on each financial statement item. Transaction analysis: Determines the effect on the accounts and the accounting equationPar value: a legal amount per share established by the board of directors which represents the minimum amount a stockholder must contribute & has no relation to the market price of the stockCommon stock: account equal to the # of shares issued by corporation * par value per shareAdditional paid-in capital: amount of capital contributed by the stockholders less the par valueThe Accounting Cycle: process followed by entities to analyze & record transaction, adjust the records at end of period, prepare financial statements, & prepare records for the next cycle.General journal: listing in chronological order of each transaction’s effectsGeneral ledger: record of effects & balances of each T accountChart of accounts: contains account titles & numbersCompound entry: any journal entry that affects 2+ accountsT account: tool that summarizes transaction effects for each account (represents a ledger account)Debit (dr): left side of T account, always written first Credit (cr): right side of T account, indentedJournal Entry: shows the effects of a transaction on accounts in debits=credits format, skip lines between entriesTrial balance: list of all accounts w/their balance to provide a check on the equality of debits/creditsAssets = Liabilities + Stockholder’sEquityDebit Credit Debit Credit Debit Credit+ - - + - +Current ratio = Current assetsCurrent liabilities *higher ratio is betterBought $5000 of equipment paid in cash.1. Analysis of Transaction2. Journal Entry in General JournalEquipment (+A) 5000Cash (-A) 50003. Posting to T-accounts in the General LedgerAssets = Liabilities + Stockholder’sEquityDebit Credit Debit Credit Debit Credit+ -- + - +CashDebit Credit5000EquipmentDebit


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NU ACCT 1201 - Chapter 2: Transactions that Affect the Balance Sheet

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