Chapter 2—Processing Accounting Information
Chapter Two uses the foundation established in the previous chapter and introduces you to the recording
process for business transactions. A thorough understanding of this process is vital to your success in
mastering topics in future chapters. The specific learning objectives for this chapter are to
Define and use key accounting terms:
account, asset, liability, stockholders’ equity, revenue
Use the accounting equation to analyze business transactions.
Understand how double-entry accounting works.
Record transactions in the journal and post from the journal to the ledger.
Prepare a trial balance.
Set up a chart of accounts for a business.
Analyze transactions without a journal.
Objective 1 - Define and use key accounting terms:
account, asset, liability,
stockholders’ equity, revenue
The terms used in accounting sometimes have meanings that differ from ordinary usage. Therefore, you
must learn the accounting meaning of terms. Key terms to remember are: account, assets, liabilities,
stockholders’ equity, common stock, retained earnings, dividends, revenues, expenses, double-entry
bookkeeping, T-account, debit, and credit.
is the basic summary device used to record changes that occur in a particular asset, liability,
or stockholders’ equity.
are those economic resources that will benefit the business in the future. Examples of asset
accounts are Cash, Notes Receivable, Accounts Receivable, Prepaid Expenses, Land, Buildings,
Equipment, Furniture, and Fixtures.
are obligations that a business owes. Examples of liability accounts include Notes Payable,
Accounts Payable, and Accrued Liabilities.
is the claim that the stockholders have on the assets of the business. Examples of
stockholders’ equity accounts are common stock, retained earnings, and dividends; revenues, such as
Service Revenue; and expenses such as Rent Expense.
Objective 2 - Use the accounting equation to analyze business transactions.
Every transaction will have a dual effect on the accounting equation. Therefore, the equation always
remains in balance. Study carefully the eleven business transactions analyzed in the text, and reinforce
your understanding by following the demonstration problems and explanations in this chapter of the
Study Guide. You must have a thorough knowledge of how transactions affect the accounting equation in
order to proceed further in this course.