Processing Accounting Information
Both external and internal events affect an entity. An external event involves interac-
tion with someone outside of the entity. For example, the purchase of land is an ex-
ternal event. An internal event takes place entirely within the entity, with no interac-
tion with anyone outside of the company. The transfer of raw materials into produc-
tion is an internal event.
Source documents are the basis for recording transactions. They provide the evid-
ence, or documentation, needed to recognize an event for accounting purposes.
Purchase invoices, time cards, and cash register tapes are all examples of source
Cash can take many different forms. One of the most common forms is a checking
account. Other forms include coin and currency on hand, savings accounts, money
orders, certified checks, and cashier’s checks.
An account receivable is an open account with a customer. That is, the customer is
not required to have prior written approval each time a purchase is made, and no in-
terest is charged. Most open accounts must be paid in a short period of time, such
as thirty or sixty days. A note receivable, however, involves a written promise from
the customer to repay a specified amount, with interest, at a specified date. Com-
panies usually require customers to sign promissory notes for relatively large dollar
amounts of purchases.
Assets and liabilities are opposites. An asset represents a future benefit, and a liabil-
ity is an obligation to relinquish benefits in the future. Therefore, an account payable
is the opposite of an account receivable. If Ace Corp. provides a service to Blue
Corp., Ace records an account receivable on its books. Blue will record an account
payable on its books.
The term double-entry system of accounting means that every transaction is entered
in at least two accounts on opposite sides of T accounts. In this system, every trans-
action is recorded in such a way that the equality of debits and credits is maintained,
and in the process the accounting equation is kept in balance.
According to the accounting equation, assets are equal to liabilities plus owners’
equity. Assets are future economic benefits. The right side of the equation is merely
a representation of the claims of various groups on the assets. The claims of the
owners, as represented by owners’ equity, are divided into two types: capital stock