Ch2 - Chapter 2 - Recording business transactions CHAPTER...

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Chapter 2 - Recording business transactions CHAPTER OVERVIEW Chapter 2 uses the foundation established in Chapter 1 and expands the discussion of recording business transactions. A thorough understanding of this process is vital to your success in mastering topics in future chapters. The words, ideas and processes established in this chapter are assumed knowledge in the rest of the textbook. The learning objectives for this chapter are to: 1. Use accounting terms. 2. Apply the rules of debit and credit. 3. Record transactions in the journal. 4. Post from the journal to the ledger. 5. Prepare and use a trial balance. 6. Set up a chart of accounts for a business. 7. Analyse transactions without a journal. CHAPTER REVIEW Objective 1 - Use accounting terms. The terms used in accounting sometimes have meanings that differ from ordinary usage. You must learn the accounting meaning of terms now. Key terms to remember are: account, ledger, assets, liabilities, owner’s equity, capital, drawings, revenues, expenses, double-entry bookkeeping, T- account, debit, and credit. An account is the basic summary device used to record changes that occur in a particular asset, liability, or owner’s equity. All accounts grouped together form the ledger . The order of the accounts in the ledger is assets first, then liabilities, and finally owner’s equity (i.e., the order in which the accounts are listed in the accounting equation). Assets are those economic resources that will benefit the business in the future. Examples of asset accounts are Cash, Bills Receivable, Accounts Receivable, Prepaid Expenses, Land, Buildings, Equipment, Furniture and Fixtures. Liabilities are obligations that the business owes. Examples of liability accounts include Bills Payable, Accrued Liabilities and Accounts Payable. Owner’s equity is the claim that the owner has on the assets of the business. Examples of owner’s equity accounts are capital , which is the owner’s claim on the assets; drawings , which are assets that the owner removes for personal use; revenues , such as Service Revenue; and expenses such as Rent Expense. Accounting is based on double-entry bookkeeping. Each transaction affects two accounts. T- accounts illustrate the dual effects of a transaction. The left side of the T-account is the debit side. The right side is the credit side. Remember: debit = left side and credit = right side. Recording business transactions 1
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Objective 2 - Apply the rules of debit and credit. The account type determines how debits and credits are recorded. A debit increases the balance of an asset and a credit decreases the balance. A credit increases the balance of a liability or owner’s equity, and a debit decreases the balance. Assets
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Ch2 - Chapter 2 - Recording business transactions CHAPTER...

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