Chapter 2 Transactions that Affect the Balance Sheet Faithful representation requires that the info be complete neutral free from error Separate entity assumption states that a business activities are accounted separate from owners Continuity assumption states that businesses are assumed to continue in the foreseeable future Stable monetary unit assumption accountants assume that the dollar s purchasing power is stable over time Mixed attribute measurement model measures assets liabilities revenues and expenses as faithfully and relevantly as possible Transactions External VS Internal External 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 bank Internal 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 years Account 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 equation Par 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 stock Common stock account equal to the of shares issued by corporation par value per share Additional paid in capital amount of capital contributed by the stockholders less the par value The 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 effects General ledger record of effects balances of each T account Chart of accounts contains account titles numbers Compound entry any journal entry that affects 2 accounts T 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 indented Assets Liabilities Stockholder s Equity Debit Credit Debit Credit Debit Credit Journal Entry shows the effects of a transaction on accounts in debits credits format skip lines between entries Trial balance list of all accounts w their balance to provide a check on the equality of debits credits Current ratio Current assets Current liabilities higher ratio is better Bought 5000 of equipment paid in cash 1 Analysis of Transaction Assets Liabilities Debit Credit Debit Credit Debit Credit Stockholder s Equity 2 Journal Entry in General Journal Equipment A Cash A 5000 5000 3 Posting to T accounts in the General Ledger Equipment Cash Credit Debit Debit 5000 Credit 5000
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