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Transactions Analyzing Chapter 2 1 Accounting systems are designed to show the increases and decreases in each financial statement item in a separate record. This record is called an "Account". Examples: Cash, Accounts Receivable, etc. 2 General Ledger The group of accounts (with transactions and balances) for a business. 3 Chart of Accounts A list of accounts (and their respective numbers) used by a business. Segregated by Assets, Liabilities, Stockholders' Equity, Revenues, and Expenses The numbering system can be very simple or very complex depending on the structure and the size of the business. 4 Assets Resources controlled by the business Represent a probable future economic benefit for the business Examples: Cash, Supplies, Prepaid Expenses Property, Plant & Equipment (Fixed Assets) 5 Liabilities Debts owed to creditors of the business Often include the word "payable" in the title Examples: Accounts Payable Salaries Payable Mortgage Payable Bonds Payable 6 Stockholders' Equity Owners' rights to the assets of a business. Examples: Capital Stock Retained Earnings 7 Basic Accounting Equation Assets = Liabilities + Owner's Equity 8 Revenues Inflow of Assets (most likely Cash or Accounts Receivable) as a result of selling products or providing services Central Operations of a business example Represent a increase in Stockholders' Equity 9 Expenses The using up of assets to produce revenues Represents a decrease in Stockholders' Equity 10 Net Income Net Income = Revenue Expenses A net loss indicates that expenses exceed revenues 11 Transaction An economic event that affects the financial condition or the results of operation of the business Affects at least two accounts of the business Transactions initially are entered in an accounting record know as the "Journal" 12 Debits Amounts entered on the left side of an account Increases the Account Balance of: Assets, and Expenses Decrease the Account Balance of: Liabilities, Stockholders' Equity Revenues 13 Credits Amounts entered on the right side of a account Increases the Account Balance of: Liabilities, Stockholders' Equity Revenues Decreases the Account Balance of: Assets, Expense 14 You must learn the Debit & Credit rules, and the quicker, the better! 15 Dividends Distribution of earnings to Stockholders Usually in the form of cash Represents a reduction of owners equity 16 Major Goal of Chapter: To learn how to journalize transactions of a business: General Suggestions: Learn the Debit / Credit rules Learn and understand the Account Classifications, what they represent, and the most common examples under each classification 17 How to Journalize a Transaction: Read the transaction summary to gain an understanding of what happened. Determine what accounts are affected by reviewing the Chart of Accounts and the summary Determine if the affected accounts are increased or decreased and follow the Debit / Credit rules. Determine the amounts involved. Prepare the Journal Entry Ensure Debits = Credits 18 Posting The process of transferring the journal entries to accounts in the general ledger. Purpose To determine the account balance of each account 19 Trial Balance At the end of an accounting period (usually at month end), a listing of each account with its respective balance (debit or credit). NOTE: The trial balance must balance (debit must equal credits). If not, a mistake has been made and must be corrected. Aids in the preparation of Financial Statements. 20

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