Week 2 acounting - Chapter 2: The Accounting Information...

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Chapter 2: The Accounting Information System Accounting Transactions and Events Not all transactions and events are recorded in the financial statement. A transaction is an external change of something between two or more entities. Events include price increases in business assets during an accounting period or the allocation of the cost of the long-lived assets of a business to different accounting periods. Accounting transactions and events are those occurrences that must be recorded because they have an effect on the assets, liabilities or equity items of a business. Transaction analysis is the process of identifying the specific effects of transactions and events on the accounting equitation. The accounting equation must always be in balance. Each transaction has a dual effect on the equation. Assets = Liabilities + Equity Eg. The receipt of cash in advance from customer. In this transaction Cash (asset) is received for services that are expected to be completed in the future. These businesses have a liability to the customer until the services are provided. As soon as the product is provided, revenue can be recorded. Eg. Renders services for cash – service revenue and cash increase. Revenue increases equity. The Account An account is an individual accounting record of increases and decreases in a specific asset, liability or equity item. Eg there are separate accounts for Cash, Accounts Receivable, Service Revenue etc. Accounts consist of three parts (1) Title of account (2) Left or Debit Side and (3) Credit side. It is also referred to as a T account. The T account is used to explain basic accounting relationships. Debits and Credits Debit is left hand side and Credit is right hand side, when recording accounting transactions and events. Dr for debit and Cr for credit. The terms are used to describe where entries are made, they don’t mean increase or decrease. Eg the act of entering an amount on the left hand side is debiting. In the T account form, having increases on one side and decreases on the other side reduces recording errors and helps in determining the totals of each side of the account as well as the balance in the account. Debit and Credit Procedures Each transaction must affect two or more accounts to keep the basic accounting equation in balance. In other words, for each transaction, debits must be equal to credit.
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Week 2 acounting - Chapter 2: The Accounting Information...

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