Accounting Transactions

Accounting Transactions - Accounting Transactions To use an...

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Accounting Transactions To use an accounting information system, you need to know which economic events to recognize (record). Not all events are recorded and reported in the financial statements. For example, suppose General Motors hired a new employee or purchased a new computer. Are these events entered in its accounting records? The first event would not be recorded, but the second event would. We call economic events that require recording in the financial statements accounting transactions . An accounting transaction occurs when assets, liabilities, or stockholders' equity items change as a result of some economic event. The purchase of a computer by General Motors, the payment of rent by Microsoft, and the sale of advertising space by Sierra Corporation are examples of events that change a company's assets, liabilities, or stockholders' equity. Illustration 3-1 summarizes the decision process companies use to decide whether or not to record economic events. Illustration 3-1 Transaction identification process Event (1). Investment of Cash by Stockholders. On October 1 cash of $10,000 is invested in the business by investors in exchange for $10,000 of common stock. This event is an accounting transaction because it results in an increase in both assets and stockholders' equity. There is an
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increase of $10,000 in the asset Cash and an increase of $10,000 in Common Stock on the books of Sierra Corporation. The effect of this transaction on the accounting equation is: The equation is in balance after the issuance of common stock. Keeping track of the source of each change in stockholders' equity is essential for later accounting activities. In particular, items recorded in the revenue and expense columns are used for the calculation of net income. Event (2). Note Issued in Exchange for Cash. On October 1 Sierra borrowed $5,000 from Castle Bank by signing a 3-month, 12%, $5,000 note payable. This transaction results in an equal increase in assets and liabilities: Cash (an asset) increases $5,000, and Notes Payable (a liability) increases $5,000. The specific effect of this transaction and the cumulative effect of the first two transactions are:
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Accounting Transactions - Accounting Transactions To use an...

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