2.1 Journal Entries.docx - 2.1 Journal Entries 2.1.1 u2013...

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2.1 Journal Entries2.1.1 – Financial statement accountThe Recording ProcessAll accounting transactions, no matter how big or small they are, have an impact on the financial position of a business. Each transaction is recorded in the company’s financial records in what is known as the recording process, outlined in this diagram:The first two steps—identifying and understanding transactions and how they impact the accounting equation –looked at in module 1. In this module - next three steps in the recording process—creating journal entries, posting to T-accounts, and creating a trial balance. These steps will help us to gain a better understanding of how transactions are ultimately used to create financial statements, covered in future modules.Materiality and the Chart of AccountsWhen a business chooses what accounts to include in its chart of accounts, the concept of materiality is an important consideration. Remember that something is considered to be material if it is reasonably likely to impact the decision-making of those who are using the financial statements. Most companies have accounts such as “Other Expenses” or “Miscellaneous Expenses” to record small amountsthat do not fall into any of their established accounts, such as Rent Expense or Interest Expense. It is important to make sure that management will have enough detailed information to allow them to manage the business. However, there is a point at which the details are insignificant and the cost of recording them is not worth the information that they provide. -This is part of the overall recording process that shows how transactions are ultimately used to create financial statements. Even a small business can have thousands of transactions-- larger businesses, millions. It isn't practical to analyze the business simply in the context of the accounting equations.-Instead, it makes sense to create accounts which are groupings of similar transactions.-Assets, for example, include accounts such as cash, accounts receivable, inventory, and fixed assets.-Liability accounts include accounts payable, interest payable, and notes payable.-Equity accounts include common stock, paid-in capital, and retained earnings.-The accounts and naming can vary from business to business.-In fact, each business is free to determine what accounts would be needed to best capture the activitiesof their business.-The list of all these accounts is called their chart of accounts.-For instance, the chart of accounts for Cardullo's includes Deli Inventory, Accrued Payroll, and BottleDeposit expense.-Too many accounts for a given business can create information that is too complicated, but too few could overly summarize important details. When a transaction occurs, it must be determined which specific accounts will be impacted and by how much.

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