Accounting Chapter 2

• source of information for accounting entries that can be in
• either paper or electronic form

• record of increases and decreases in a specific asset,
• liability, or equity item

• Cash – includes currency, coins, and amounts on
• deposit in bank checking or savings accounts

• Accounts Receivable – amounts due from customers
• for credit sales (backed by the customer’s general credit standing). Customers
• and others who owe a company are called its debtors

• Notes Receivable – a written promise of another
• entity to pay a definite sum of money on a specified future date to the holder
• of the note

• Prepaid Accounts (Prepaid Expenses) – represent
• prepayments of future expenses (not current expenses) by a company; when
• expenses are later incurred, the amounts in Prepaid Accounts are
• transferred to expense accounts

• Supplies – recorded as assets until they are
• used, then amounts used-up are transferred to expense accounts

• Equipment – may be office or store equipment; as
• equipment wears-out, its cost is gradually transferred to expense accounts (called
• depreciation)

• Buildings – stores, offices, warehouses, and
• factories; also depreciated

• Land – not depreciated because land does not
• generally wear-out (lose its value)

• Accounts Payable – created by buying goods or
• services on credit (backed by the buyer’s general credit standing)

• Note Payable – a written promise to pay a
• definite sum of money on a specified future date to the holder of the note

• Unearned Revenues – represent receipts of future
• revenues (not current revenues) from customers (when customers pay in advance
• for products or services); when revenues are later earned, the amounts
• in Unearned Revenues are transferred to revenue accounts

• Accrued Liabilities – amounts owed that are not
• yet paid (e.g. wages, taxes, interest, etc., that do not relate to the purchase
• of goods or services)

• Owner, Capital – all investments by owner are
• recorded here

• Owner, Withdrawals – all distributions to the
• owner for personal use
• Revenues – variety of accounts depending on the
• type of revenue earned

• Expenses – variety of accounts depending on the
• type of expenses incurred

• a list of all accounts used by a company and includes an
• identification number assigned to each account; usually in the following order:
• Assets, Liabilities, Capital, Withdrawals, Revenues, and Expenses.

• T-accounts are used for two purposes:
• 1.To quickly see how a transaction affects one or more
• accounts (real business world use)

• 2.To serve as a representation of an account for
• beginning Accounting students. T-accounts can be quickly drawn on the board or
• on a piece of paper (drawing a regular account is more awkward and time
• consuming). Also T-accounts are used to explain the concept of Debits and
• Credits.

• T-accounts show increases and decreases in an
• account. A Debit can be either an increase or a decrease, depending on the
• account (same is true with Credits).

• Each transaction affects at least two accounts
• and has at least one debit and one credit (transaction level)

• The total debits and total credits of a
• transaction must be equal (transaction level)

• The sum of all debit balance accounts must equal
• the sum of all credit balance accounts (ledger level)

• the side of a T-account that makes the account
• increase (the expected balance that an account will have due to its type, e.g.
• Asset, Liability, etc.)

• a complete record of each transaction in one place
• (all transactions are recorded here), including debits and credits; can be a
• book or a computerized Accounting System

• a type of journal that can be used to record any type of
• transaction; although companies may have different types of journals, all
• of them will have, at a minimum, a General Journal.

• v
• Date of transaction

• v
• Titles of affected accounts (note that debits
• are flush with the left column and credits are indented)

• v
• Dollar amount of each debit and credit

• v
• Explanation of the transaction

• a journal entry that affects more than two accounts (note
• that one journal entry can affect many accounts – most seen in class will
• affect only two)

• – a collection of all accounts of a
• company listed in order; can be a book or a computerized Accounting System

• Periodically (daily, weekly), transactions recorded in the
• General Journal are transferred to the General Ledger

• a list of accounts and their balances at the end of a month
• (prepared from the General Ledger)

• v
• Purpose: used to identify errors that
• have been made in the Accounting Process

• o
• Determine that total debits equals total credits

• o
• Determine that each account has the correct Normal balance

• o
• Perform an analytical review to identify any unusual
• balances

• Note: errors can still exist
• even if the three bullet points above look ok

• A Trial Balance is not a Financial Statement but an internal
• document – Financial Statements do not have debit and credit columns.

Covers a period of time


1


Income Statement















Covers a period of time


2


Statement of Owner’s Equity















A snapshot at end of month


3


Balance Sheet

• v
• Debt ratio – solvency ratio that
• determines the degree of financial leverage (higher financial leverage involves
• greater risk since a company has financed more of its assets with debt.

debt ratio= total liabilities/total assets