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OU ACCT 2113 - Chapter 2: Debits and Credits

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ACCT 2113 1st Edition Lecture 2 Outline of Last Lecture II. Accounting as a measurement/communication processA. Definition of Accounting- managerial and financialB. Investors and creditorsIII. 3 Business activities to measureA. Financial, Investing, OperatingB. How to measure the activitiesC. Defining assets, liabilities, stockholders’ equityD. Accounting EquationE. Defining revenues, expenses, net income, dividendsIV. Forms of Business OrganizationsA. Defining sole proprietorship, partnership, corporationV. Communicating through financial statementsA. Four Primary Financial StatementsVI. Financial Accounting Information and rulesA. DefinitionsB. Role of the AuditorVII. Objectives of Financial AccountingA. 3 objectivesB. Roles of the auditorVIII. Careers in AccountingA. Defining Public and privateIX. Conceptual FrameworkA. Defining decision usefulnessB. Qualitative characteristicsC. Assumptions that underlie the GAAPOutline of Current Lecture II. The Accounting Information SystemA. RolesIII. Measuring External TransactionsA. ClassificationB. Six Steps in measuringThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.C. Ask three questionsIV. 10 Transaction ExamplesV. Debits and CreditsA. Ask three questionsVI. Recording TransactionsA. Define general ledger, posting, and T-accountVII. Prepare a Trial Balance A. Define and preparationCurrent LectureChapter 2: The Accounting Information SystemRoles: measure business activities of the company and communicate those measurements to external parties for decision-making purposes.Measuring External Transactions- Most business enterprises use a computerized accounting system due to the sheer volume of data they must process- Computerized data processing is fast, accurate, and affordable- Knowledge of manual accounting information system will provide an essential understanding of the basic model that underlies the computerized programsClassification of business activities: Transactions  external transactions are with a separate economic entity. Internal transactions do not include a separate economic entity.Page 55- Six Steps in Measuring:1. Use source documents to identify accounts affected by an external transaction2. Analyze the impact of the transaction on the accounting equation3. Assess whether the transaction results in a debit or credit to the account balance4. Record the transaction5. Post the transaction to the T-account in the general ledger6. Prepare the trial balanceEach transaction will have a dual effect. If an economic event increases one side of the equation, then it also increases the other side of the equation by the same amount. Assets = Liabilities + Stockholders’ equityPage 56- Ask yourself these questions:1. “What is one account in the accounting equation affected by the transaction? Does that account increase or decrease?”2. “What is a second account in the accounting equation affected by the transaction? Did that account increase or decrease?”3. ”Do assets still equal liabilities plus stockholders’ equity?” Transaction 1: Issue Common StockTo generate cash from external sources, Eagle (example in book) sells shares of common stock for $25,000. It’s time to ask the three questions we asked earlier:- What is one account in the accounting equation affected by the transaction? Does that account increase or decrease?Answer: Cash. Cash is a resource owned by the company, which makes it an asset. The company receivescash from you, so cash and total assets increase by $25,000.- What is a second account in the accounting equation affected by the transaction? Does that account increase or decrease?Answer: Common stock. Common stock is a stockholders’ equity account. Issuing common stock to you in exchange for your $25,000 increases the amount of common stock owned by stockholders, so common stock and total stockholders’ equity both increase.Assets = Liabilities + Stockholders’ EquityCash +$25,000 + _____ + Common stock +$25,000Do assets equal liabilities plus stockholders’ equity?Answer: Yes. *The accounting equation balances.Transaction 2: Borrow from the BankSeeking cash from another external source, Eagle borrows $10,000 from the bank and signs a note for it. Assets = Liabilities + stockholders’ equityCash +$10,000 = Notes Payable +$10,000 + _______Transaction 3: Purchase EquipmentPurchase Equipment with cash, $24,000.Assets = Liabilities + stockholders’ equityEquipment +$24,000Cash -$24,000Transactions 4 and 5: Incur Costs for Rent and SuppliesPay one year of rent in advance, $6,000.Assets = Liabilities + stockholders’ equityPrepaid rent +$6,000Cash -$6,000Purchase of supplies on account, $2,300.Assets = Liabilities + stockholders’ equitySupplies +$2,300 = Accounts payable +$2,300 + ________Transactions 6 and 7: Provide services to customersProviding service to customers for cash causes both assets and stockholders’ equity to increase. (revenue, net income, retained earnings, stockholders’ equity)Similarly, providing service to customers on account causes both assets and stockholders’ equity to increase.Transaction 8: Receive cash in advance from customerTransaction 9: Incur cost for salariesPay salaries to workers (expenses goes up while net income, retained earnings, and stockholders’ equity goes down)Transaction 10: Pay DividendsPay dividends to stockholders. (dividends go up while retained earnings and stockholders’ equity goes down)Page 65- See summary of transactions below:Debits and CreditsDebit and Credit Effects on Accounts in the Accounting Equation Page 67Ask yourself these 3 questions:1. “Is there an increase or decrease in the first account involved in the transaction? Should I record that increase or decrease with a debit or a credit?”2. “Is there an increase or decrease in the second account involved in the transaction? Should I record that increase or decrease with a debit or a credit?”3. “Do total debits equal total credits?”Recall the examples in the transaction processes, here is the debit and credit affects on accounts in the expanded accounting equation Page 70Recording TransactionsA journal provides a chronological record of all transactions affecting a firm.Posting transactions to T-accounts in the General Ledgero The process of transferring the debit and credit information from the journal to individual accounts in the


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