Chapter03 UML 2007

Chapter03 UML 2007 - Ch. 3: Entries, Posting, Ledger, Trial...

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Unformatted text preview: Ch. 3: Entries, Posting, Ledger, Trial Balance 1 Chapter 3 Journal Entries, Posting, General Ledger, and Trial Balance In this chapter you will see how accounting systems are organized to process large volumes of data while constantly maintaining the equality of the accounting equation. As you proceed through this chapter, first concentrate on learning how business events affect resources and then learn how to process the events in the financial accounting system. The Accounting Equation, Debits, and Credits Resources and where they come from are at the heart of modern financial accounting systems. The relationship between resources and their sources is represented by the accounting equation: Assets = Liabilities + Stockholders' Equity The accounting equation shows a company's resources (assets) come from borrowing (liabilities), from owners' investments (stockholders' equity), or are generated by management and retained in the company (stockholders' equity). The accounting equation must always be in balance in order for the accounting system to provide useful information. The double-entry system (debits = credits) was developed to easily maintain the equality of the accounting equation (assets = liabilities + stockholders' equity). The double-entry system is based on the idea that each business event has two parts. One part results in a change in one asset, liability, or stockholders' equity account and the other part results in an equal change in another asset, liability, or stockholders' equity account. It is impossible for an event to result in an increase or decrease in only one account. The basic element of the double-entry system is the T account. T accounts are used to record the two parts of each business event. The left side of a T account is the debit side and the right side is the credit side. The process of converting each event into equal dollar amounts of debits and credits guarantees that the accounting equation always balances. The debits equal credits process converts each event into debits and credits as follows: Account Debits Credits Assets Increases Decreases Liabilities Decreases Increases Stockholders' equity Decreases Increases Revenues Decreases Increases Expenses Increases Decreases Dividends Increases Decreases In accounting for most business events, all you need to remember about debits and credits are the following: Point 1. Assets increase with debits Point 2. Debits = credits The two above points, when combined with an understanding of business and a little basic logic, will enable you to convert most business events into debits and credits and, in so doing, constantly maintain the equality of the 2 Ch. 3: Entries, Posting, Ledger, Trial Balance accounting equation. Ch. 3: Entries, Posting, Ledger, Trial Balance 3 Difficulties Created by Today's Companies AT&T, like thousands of other companies, conducts business on a global scale. In fact, AT&T has employees in over 200 different countries. Consider the difficulties they face in trying to account for such wide-spread...
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Chapter03 UML 2007 - Ch. 3: Entries, Posting, Ledger, Trial...

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