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CHAPTER 3 CLASS NOTES RECORDING TRANSACTIONS There are three types of events/activities that occur in business--- Financing, Investing and Operating. In identifying which category is appropriate always see if the event fits into financing first, then investing, and if not, it will be operating. There are always more operating events that occur than the other two categories. For an event/activity to be a transaction, it must meet three criteria ( all three): 1. Relate to the economic entity, i.e. the business not the owners 2. Measurable in currency, i.e. U.S. dollars 3. Affect financial position (the accounting equation) Accountants do not record events/activities, they record only transactions. For an accountant to record a transaction, they typically need a source document that provides evidence of the transaction. Source documents can be invoices to customers, billing statement from a supplier, check copy for a payment, etc. Remember, each transaction will have a dual effect on the accounting equation (double entry accounting system) . Each transaction must balance in terms of the accounting equation. Once you summarize all the transactions, the total of all the assets will equal the total of the liabilities plus the total of the equity. The accounting equation is still in tact. Accountants balance each transaction and then make sure that the total of all transactions balances. Once this occurs, you can prepare financial information for reporting purposes to the various users. The book that contains all the transactions individually is called a journal. There can be several types of journals that are used only for one purpose. For example, we may record all sales transactions in a sales journal, all purchases in a purchases journal and everything else in a general journal. The books as described in this example, although three in number are all journals. Each entry in the journal is a separate transaction and balances according to the accounting equation. When we total the specific journal for a time period, if each transaction is in balance, then the total of all the transactions in a specific journal must be in balance The book that contains the information about the transactions affecting each individual account for the period is called the general ledger. The ledger basically contains a page for each account in the chart of accounts—its name and code. On this page, the accountant records a total of the transactions affecting this account from a specific journal or the individual transaction itself. All transactions affecting this account will be recorded here, either individually or in summary from a specific journal. In essence all the transactions are transferred from a list format to a series of account pages. The ledger page looks like a “T” and so we use a phrase T-account. One side of the T shows transactions, or summaries thereof, that increase the account, while the other side shows transactions, or summaries thereof, that decrease the account. The net of the increases and decreases yields the account balance at the end of the period.
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This note was uploaded on 04/19/2008 for the course ACCT 151 taught by Professor Largay during the Spring '07 term at Lehigh University .

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