Chapter 3 Lecture - CH AP TER 3 CLA SS NO TES PR OCES SIN G...

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CHAPTER 3 CLASS NOTES PROCESSING ACCOUNTING INFORMATION 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 While the accounting equation (assets= liabilities + equity) is important, it is important to identify and understand the types of assets, liabilities and equity. Therefore, we establish accounts and account names for each type of asset, liability, and equity. For example, if we want to know more about the assets, we would have different accounts for cash, accounts receivable, inventories, property and equipment, etc. The sum of all these assets
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This note was uploaded on 09/23/2008 for the course ACCT 151 taught by Professor Largay during the Fall '07 term at Lehigh University .

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Chapter 3 Lecture - CH AP TER 3 CLA SS NO TES PR OCES SIN G...

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