ch. 3 - Financial Accounting - Chapter 3 1 Chapter 3 -...

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Unformatted text preview: Financial Accounting - Chapter 3 1 Chapter 3 - Study Objectives After studying this chapter, you should be able to: 1. Analyze the effect of business transactions on the basic accounting equation. 1. Explain what an account is and how it helps in the recording process. 1. Define debits and credits and explain how they are used to record business transactions. 1. Identify the basic steps in the recording process. 1. Explain what a journal is and how it helps in the recording process. 1. Explain what a ledger is and how it helps in the recording process. 1. Explain what posting is and how it helps in the recording process. 1. Explain the purpose of a trial balance. Financial Accounting - Chapter 3 2 Functions of the Accounting System The primary functions of the accounting system are: Recording Classifying Summarizing Interpreting the financial transactions of an economic entity. Financial Accounting - Chapter 3 3 The Accounting Information System The accounting information system is the system of collecting and processing transaction data and communicating the results to interested parties. To record these transactions, accountants and business people need to be able to recognize economic events that require recording in the financial statements. Recording economic events is called transaction analysis and it is the result of: External events – occur between the company and an outside party and it involves an exchange of assets, liabilities, or stockholders’ equity (e.g., purchase of equipment, payment of salaries and wages, etc.). Internal events – occur entirely within the company and they are considered transactions if the event can be measured with reasonable accuracy (e.g., cost of supplies used, cost of buildings and equipment used or depreciated). Financial Accounting - Chapter 3 4 The Account Account - the basic record summarizing all transactions affecting a particular item of financial activity; e.g., cash, inventory, accounts payable, sales, rent expense, etc. An account consists of the following three parts: Title of Account Left or Right or Debit Side Credit Side Because the account resembles the letter T, is often referred to as a T account. Financial Accounting - Chapter 3 5 T Accounts in the Accounting Equation T accounts are also used to record increases/decreases in each account. However, not all accounts are similarly affected by an entry on its debit (left) or credit (right) side. It is dependent on what type of account is involved that determines how a debit or a credit entry will affect the specific account. This is the result ofa credit entry will affect the specific account....
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This note was uploaded on 04/14/2008 for the course ACCT 201 taught by Professor Romney during the Fall '06 term at San Diego.

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ch. 3 - Financial Accounting - Chapter 3 1 Chapter 3 -...

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