Analyzing Business Transactions
0REVIEWING THE CHAPTER
Objective 1: Explain how the concepts of recognition, valuation, and classification apply to business
transactions and why they are important factors in ethical financial reporting.
Before recording a business transaction, the accountant must determine three things:0
When the transaction should be recorded (the
What value, or dollar amount, to place on the transaction (the
How the components of the transaction should be categorized (the
Normally, a sale is recognized (entered into the accounting records) when title to the merchandise
passes from the supplier to the purchaser, regardless of when payment is made or received. This
point of sale is referred to as the
Some business events, such as the hiring of a new employee, are
Other business events, such as payment to an employee for work performed,
states that business transactions should be recognized at their original cost (also
). In this case,
refers to a transaction’s
measure based on the agreement between the buyer and the seller—at the point of recognition.
Generally, any change in value that occurs after the original transaction is not reflected in the
Ethical financial reporting requires that accountants apply generally accepted accounting principles
when dealing with recognition, valuation, and classification issues. For example, when a company
overstates its revenue, it has violated the guideline of recognition. When an asset is reported at an
inflated dollar amount, for example, the guideline of valuation has been violated. And when
expenses, for example, are treated as assets, the guideline of classification has been violated.
Significant, intentional violations are viewed as fraudulent.
Objective 2: Explain the double-entry system and the usefulness of T accounts in analyzing business
Every business transaction is classified in a filing system consisting of accounts. An
basic storage unit for accounting data. Each asset, liability, and component of owner’s equity,
including revenues and expenses, has a separate account.
of accounting requires that one or more accounts be debited and one or
more accounts be credited for each transaction and that total dollar amounts of debits equal total
dollar amounts of credits.
shows an account in its simplest form. It has three parts:0
A title that expresses the name of the asset, liability, or owner’s equity account
A left side, which is called the
A right side, which is called the