Chapter 2 331

Chapter 2 331 - Lecture Notes for Chapter 2 (ACCT 331)...

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Lecture Notes for Chapter 2 (ACCT 331) Review of the Accounting Process The accounting process starts with identifying economic events. Economic events cause changes in the financial position of a company. These can be classified into two types: External events involve an exchange between the company and another entity. o Example: Purchase of property. Internal events do not involve an exchange transaction but do affect the company’s financial position. o Example: Depreciation of property. The Basic Model – Accounting Equation: Each transaction has a dual effect on the accounting equation ( duality of effects ) . The double-entry system is used to process transactions ( debit-credit framework ). Elements of the accounting equation are represented by accounts in a general ledger. 1 Assets = Liabilities + Stockholders’ Equity = Contributed Capital + Retained Earnings = RE(beg) + NI - Div. = Rev. - exp. + gains - losses
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In the double-entry system, debit means left side of an account, and credit means right side of an account. Rules of Debit and Credit Assets = Liabilities + Stockholders’ Equity Dr Cr Dr Cr Dr Cr + - - + - + Contributed Capital + Retained Earnings Dr Cr Dr Cr - + - + Revenues - Expenses - Dividends Dr Cr Dr Cr Dr Cr - + + - + - All accounts on the balance sheet are considered Real or Permanent accounts Revenue, Expense (Gain, Loss)and Dividend are called Temporary or Nominal accounts. Accounting Cycle Start Analyze transactions Journalize Post Prepare unadjusted trial balance Adjust Prepare adjusted trial balance Prepare statements Close Prepare post-closing trial balance
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Example 1 (Pioneer Ad Agency): On July 1, 2006, two owners each invest $50,000 in a new business called Pioneer Ad Agency. Step1: Obtain transaction information from source documents Step 2: Analyze the transaction Step 3: Record the transaction in a journal Journal – a book that provides a chronological record of all economic events affecting a firm. We will be making entries, as they would appear in a General Journal. Special journals are used to record a repetitive type of transactions such as sales, purchase, cash disbursement, cash receipts, etc. Journal entries – an accounting method for expressing the effects of a transaction on accounts in a debits-equal-credits format. Step 4: Post from the journal to the general ledger: Ledger – a book that maintains balances in all accounts with separate pages assigned to different accounts. Account – a standardized format used by companies to accumulate the dollar effects of transactions on each financial statement item.
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Chapter 2 331 - Lecture Notes for Chapter 2 (ACCT 331)...

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