accting 301 ch2 min shen - CH2 Transaction Analysis...

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1 CH2 – Transaction Analysis Business Transactions and Accounts Events that have an economic effect on an entity (create a business transaction) must be measured and recorded. Events that are recorded: affect at least one element of F/S Events that are not recorded: signing a contract, exchanges of the owners Account – a standardized format used by companies to accumulate the dollar effects of transactions on each financial statement item. A separate account is maintained for each financial statement item Accounts maintain a history of the transactions (financial events) a company undertakes. The ending balances in accounts are reported in the financial statements. Ledger accounts vs. T accounts Transaction analysis: A = L + SE 1. Every transaction affects at least two accounts (duality of effects). Something is given up only if something is received in return – double entry accounting system 2. The accounting equation must remain in balance after each transaction.
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2 3. The steps in transaction analyses: a) Identify the accounts affected, classifying each as an asset, liability, SE b) Determine the direction of the effect (increase or decrease) on assets, liabilities, or stockholders’ equity c) Check that the accounting equation remains in balance . Simple Examples for balance sheet accounts: 1/1 Owners contribute $20,000 cash to start the business Assets Liabilities Equity Cash Contributed Capital 1/5 A building, costing $25,000, is purchased by paying $5,000 cash and signing a promissory note for $20,000. Assets Liabilities Equity Cash Building Accounts/Notes Payable Contributed Capital +20,000 +20,000 1/17 Inventory is purchased ‘on account’ for $1,000. Assets Liabilities Equity Cash Building Inventory Accounts/Notes Payable Contributed Capital +20,000 +20,000 -5,000 +25,000 +20,000
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3 1/24 Paid the $1,000 for the inventory previously purchased on account. Assets Liabilities Equity Cash Building Inventory Accounts/Notes Payable Contributed Capital +20,000 +20,000 - 5,000 +25,000 +20,000 +1,000 +1,000 The direction rule (the debit-credit framework) To have a ready balance for each Asset, Liability, Stockholders’ Equity account, the accounting system must evolve to summarize the results of the transactions quicker. Thus the accounting system requires that increases and decreases to each account are maintained in a Ledger . A “T” account (representative of the results from a Ledger page) and the debit-credit framework Account Name Account Name debit credit debit credit Debit is left side of an account Credit is right side of an account ( Please attach no other meaning to these terms or you will become confused.) Assets are increased with debits and decreased with credits
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