Chapter 3 Study Notes - Mechanics of Accounting

Chapter 3 Study Notes - Mechanics of Accounting - CHAPTER 3...

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CHAPTER 3 STUDYNOTES 1 CHAPTER 3—RECORDING BUSINESS TRANSACTIONS— the mechanics Account —smallest unit of accounting; some typical accounts that are summarized into accounting equation (& balance sheet) ASSETS = LIABILITIES Cash Accounts Payable Accounts Receivable Wages Payable Inventory Accrued Expenses Prepaid Expenses Unearned Revenue Equipment Notes Payable Buildings Bonds Payable Patents, Goodwill & other intangibles + OWNERS’ EQUITY Capital Stock (paid in capital) Retained Earnings Total Assets = Total Liabilities & Owners’ Equity Revenue accounts (e.g. Sales revenue, Service revenue) and Expense accounts (e.g. Wage expense, Rent expense, Accounting & Legal fee expense) are sub-accounts of Retained Earnings (Owners’ Equity). They are kept separate during the year on the income statement and, at the end of the year, when the net profit or loss is determined, the net profit or loss is closed out to Retained Earnings (Owners’ Equity). Profits increase owners’ equity, so if a company experiences a net profit for the year, the net profit amount is credited to Retained Earnings. Conversely, if the company experiences a net loss for the year, the net loss is debited to Retained Earnings, as losses decrease owners’ equity. At the same time the revenue and expense accounts are closed out (zeroed out). ASSET ACCOUNTS Beg. Balance To Increase DEBIT (+) ______________ Ending Balance To Decrease CREDIT (-) To Decrease DEBIT (-) Beg. Balance To Increase CREDIT (+) _______________ Ending Balance Debit & credit are neutral terms (neither good nor bad); they simply mean an adjustment to the left side (debit) of the t-account or the right side (credit) of the t- account.
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CHAPTER 3 STUDYNOTES 2 Abbreviations commonly used—Dr = Debit; Cr = Credit. Every transaction must be recorded in the appropriate accounts. At least two accounts will be adjusted—one will be debited by an amount and another will be credited by that same amount Double Entry Accounting . Recording equal debits and credits when recording transactions will keep the
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This note was uploaded on 04/10/2008 for the course MGA 201 taught by Professor Anderson during the Fall '08 term at SUNY Buffalo.

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Chapter 3 Study Notes - Mechanics of Accounting - CHAPTER 3...

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