Module 2 Notes.docx - Recording transactions 1.1 Journal...

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Recording transactions 1.1. Journal Entries and T-Accounts 1.1.1.Financial Statement Accounts The Recording Process All accounting transactions, no matter how big or small they are, have an impact on the financial position of a business. Each transaction is recorded in the company’s financial records in what is known as the recording process, outlined in this diagram: The process of recording transactions has six steps: Identify Transaction, Understand Transaction, Create Journal Entry, Post to T-Accounts, Create Trial Balance, and Create Financial Statements. We already looked at the first two steps—identifying and understanding transactions and how they impact the accounting equation. In this module, we will cover the next three steps in the recording process—creating journal entries, posting to T-accounts, and creating a trial balance. These steps will help us to gain a better understanding of how transactions are ultimately used to create financial statements, covered in future modules. When a business chooses what accounts to include in its chart of accounts , the concept of materiality is an important consideration. Remember that something is considered to be material if it is reasonably likely to impact the decision-making of those who are using the financial statements. Most companies have accounts such as “Other Expenses” or “Miscellaneous Expenses” to record small amounts that do not fall into any of their established accounts, such as Rent Expense or Interest Expense. It is important to make sure that management will have enough detailed information to allow them to manage the business. However, there is a point at which the details are insignificant and the cost of recording them is not worth the information that they provide. Identifying Accounts Look at this list to familiarize yourself with some common accounts:
As you proceed through the course materials and become familiar with looking at financial statements outside of this course, you will most likely encounter numerous accounts, some of which you may not have seen before. However, there are some key words and guidelines that can help you identify specific account types. Let’s look at some examples: Accounts including the words “asset”, “receivable”, or “prepaid” in their name are usually asset accounts. Accounts with the words “liability”, “debt”, “payable”, or “accrued” in their name usually point to a liability account. Accounts containing the word “stock” in their name are generally owners’ equity accounts. Accounts with the words “sales” or “revenue” are usually revenue accounts Accounts with the words “cost” or “expense” are usually expense accounts. But remember these are just general guidelines, and there are some exceptions. For instance, you have already learned that the account “Prepaid Expense” is an asset, even though it has the word “expense” in the name—here the word “prepaid” carries all the weight. You also know that “Deferred Revenue” is a

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