accounting_chapter2notes - Chapter 2 Establishing a...

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Chapter 2: Establishing a Business and the Balance Sheet Determine the Effects of Business Activities Nature of Business Transactions Transactions – business activities that affect the accounting equation External events – measurable exchanges between the business and others —exchanges of assets and services from one entity for other assets or promises to pay from another entity o Ex. Receiving cash investments, borrowing cash from banks, acquiring equipment and supplies Internal events – certain events that are not exchanges between the business and others but nevertheless have a direct and measurable effect on the entity o Ex. the use of supplies and the use of a building over time Balance Sheet Accounts Account – an individual record of both increases and decreases in a specific asset, liability, owner’s equity, revenue, or expense chart of accounts – list of all account titles and their numbers that are unique to each company o usually organized by financial statement element with asset accounts listed first (the 100 series in the exhibit) followed by liabilities (the 200 series) and owner’s equity (the 300 series) Accounts with receivable in the title are always assets ; they represent amounts owed to the business by (receivable from) customers and others. Page | 1
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Accounts with payable in the title are always liabilities ; they represent amounts owed by the company to others to be paid in the future. Any account with prepaid in the title is an asset because it represents amounts paid to others for future benefits, such as insurance coverage and property rentals. Accounts with unearned in the title are always liabilities that represent amounts paid to the company in the past by others who expect to receive goods or services from the company in the future. Transaction Analysis transaction analysis – the process of studying a transaction and its related documents to determine their effect on the business in terms of the accounting equation Documents (also called source documents) are the sources of evidence that a business activity has occurred o include sales receipts, checks, invoices (bills) from suppliers, cash register tapes, and employee time cards There are two rules to follow in performing transaction analysis: 1. Dual effects: Every transaction affects at least two accounts. It is critical that you correctly identify those accounts and the direction of the effect (whether an
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This note was uploaded on 03/26/2011 for the course ACC 160 taught by Professor Logorda during the Spring '11 term at Lehigh Carbon CC.

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accounting_chapter2notes - Chapter 2 Establishing a...

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