Will probably be used for several years applying

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will probably be used for several yearsApplying “materiality” requires judgment, and not everyone judges things similarly. These can lead to lawsuits when accounting firms define materially too liberallyHere is a good working definition: If the accounting treatment of a transaction has an impact on a user's economic decision, then it is material
142-27How to determine when a transaction is “Material”The size of the item is one consideration. But a material transaction in a small company may be immaterial in a larger companyThe nature of the item is also important. A small adjustment to inventory or receivables may be more significant than an adjustment to goodwillAlso, consider the effect of the item on net income or sales. A transaction that allows a company to meet or beat its earnings forecast could be materialAlso, consider the user of the financial statements. Credible definitions of materiality differ across different users2-28BOOKKEEPINGPart 2
152-29Development of Double-Entry BookkeepingHistorical evidence suggests that double-entry bookkeeping (using debits and credits) was first developed in Italy (and possibly the Muslim world) during the 13th century. Luca Pacioli, an Italian monk and mathematician, published the first elements of double-entry bookkeeping as part of a mathematical treatise in 1494. His work was based on the Venetion system of double-entry bookkeeping.2-30Applying the Fundamental Accounting Equation to Transaction AnalysisThe Fundamental Accounting EquationAssets = Liabilities + Stockholders’ Equity (A = L + SE)In other words, total assets must always equal the claims on those assetsSome claims are liabilities; the remaining claims are by the ownersThis equation must always hold in an accounting systemAfter every transaction, the fundamental accounting equation must balanceConsequently, every transaction will have at least two effectson the accounting systemIf only one effect is recorded, the fundamental accounting equation will be out of balance
162-31Libby Exercise 2-4 (Pages 83)The following events occurred for Johnson Corporation: a.Received $17,000 cash investment from the business owners and distributed 1,000 shares of common stock to them with a market price of $17 per share. b.Purchased $15,000 of equipment, paying $3,000 in cash and owing the rest on accounts payable to the manufacturer.c.Borrowed $10,000 cash from a bank. d.Loaned $800 to an employee who signed a note. Required: For each of the events (a) through (e), perform transaction analysis and indicate the account, amount, and direction of the effect (+ for increase and − for decrease) on the accounting equation. Check that the accounting equation remains in balance after each transaction. Use the following headings:Event Assets = Liabilities + Stockholders’ Equity2-32What Types of Transactions are considered “Accounting Transactions”A transaction is an accounting transactiononly if it meets two conditions:The transaction must be objectively measurable in monetary termsThe transaction must be relevant to the currentfinancial condition of the companyExample:

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