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Unformatted text preview: Ch. 2: T Accounts, Debits, Credits 1 Chapter 2 T Accounts, Debits, and Credits In this chapter you will continue learning about the process of accounting. You will see how the accounting system maintains the equality of the accounting equation. The Accounting Equation As discussed in Chapter 1, resources and where they come from are at the heart of modern financial accounting systems. In business terminology, resources are called assets. Sources of borrowed resources are called liabilities. Sources of resources invested by owners and generated by management and retained in the company are called stockholders' equity. The relationship between resources and their sources is represented by the accounting equation : Assets = Liabilities + Stockholders' Equity Remember, stockholders' equity includes both the dollar amount of resources invested by owners and the dollar amount of resources generated through management operations and retained in the company because owners have a right to the amount of resources they invest and the amount of resources generated by management. The correct use of the accounting equation guarantees logical financial statements even if events are incorrectly analyzed. That is, as long as the equality of assets to liabilities plus stockholders' equity is maintained, the income statement will properly relate to the statement of retained earnings, the statement of retained earnings will properly relate to the balance sheet, and the balance sheet will balance. If the accounting equation does not balance, the balance sheet will not balance. If the financial statements are not logical, they cannot be relied upon for information about a company's resources. Logical financial statements do not automatically contain useful information, however. Maintaining the equality of the accounting equation is necessary for useful financial statements, but it is not the only requirement. This and the following chapters will examine the requirements of accounting systems that produce useful information. ** You now have the background to do exercise 2.1. Maintaining the Equality of the Accounting Equation In order for the accounting system to provide useful information, one important requirement is that the accounting equation must always balance. Thus, it is imperative we have a system that will constantly maintain the accounting equation's equality. Remember the system examined in Chapter 1. In that system we analyzed events of the Parks Computer Service Corporation, determined the effects of the events on specific resources, such as cash and supplies, and sources of resources, such as accounts payable and retained earnings. We used a plus (+) sign to show an increase in an account or a minus (-) sign to show a decrease....
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