Accounting 211 Exam 1 Fundamental Accounting Principles Wild Shaw Chiapetta Ch2

Front 1

Account types

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assets
liabilities
equity
revenue
expense

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assets
examples and normal balance

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cash
land, building, equipment, unused supplies, automobiles, accounts receivables

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liabilities
examples and normal balance

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aa

Front 4

equity
examples and normal balance

Back 4

aa

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revenue
examples and normal balance

Back 5

aa

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expense
examples and normal balance

Back 6

aa

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Normal balance

Back 7

how to increase an account

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Journal entries

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double entry accounting

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T-account / ledger card posting

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qq

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Trial Balance

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qq

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T Accounts

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(1) ACCOUNT TITLE
Left Side Right Side
called called
(2) DEBIT (3) CREDIT

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Rules for using accounts

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Accounts are assigned balance (normal balance) sides (Debit or Credit).
To increase any account, use the normal balance side.
To decrease any account, use the side opposite the balance.

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Finding account balances

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If total debits = total credits, the account balance is zero.
If total debits are greater than total credits, the account has a debit balance equal to the difference of the two totals.
If total credits are greater than total debits, the account has a credit balance equal to the difference of the two totals.

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REAL ACCOUNTS

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ALL ACCOUNTS ARE ASSIGNED NORMAL BALANCE SIDES

BALANCE SIDES FOR ASSETS, LIABILITIES, AND
EQUITY ACCOUNTS ARE ASSIGNED BASED ON
SIDE OF EQUATION THEY ARE ON.

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ASSETS =

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are on the
left side of the equation therefore they are Normal DEBIT BALANCE

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LIABILITIES + EQUITY

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are on the
right side of the equation
therefore they are Normal CREDIT BALANCE

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*In a sole proprietorship, there is only one equity account, which is called capital.

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For that reason, the terms equity and capital are often used interchangeably. (When corporations are discussed in detail, you will learn many stockholders’ equity accounts.) Equity is an account classification like assets. Owner’s Name, Capital, is the account title.

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All Asset Accts

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All Asset Accts
Normal
Debit Credit
Balance
+ side - side

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All Liability Accts

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All Liability Accts

Debit Normal
Credit
Balance
- side + side

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All Equity Accts

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All Equity Accts

Debit Normal
Credit
Balance
- side + side

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Temporary accounts

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are established to facilitate efficient accumulation of data for statements. Temporary accounts are established for withdrawals, each revenue, and each expense. Temporary accounts are assigned normal balances based on how they affect equity.

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I.Analyzing and Recording Process—steps include:

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A. Analyzing each transaction and event from source documents. Source documents statements.
B. Record relevant transactions and events in a journal.
C. Post journal information to ledger accounts.
D. Prepare and analyze the trial balance.

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Source documents

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are business papers that identify and describe economic events and transactions. Examples: sales tickets, checks, purchase orders, bills, and bank statements. They provide objective and reliable evidence about transactions and events.

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An account

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is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item.

Accounts are arranged into three basic categories based on the accounting equation.

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What are they?
Accounts are arranged into three basic categories based on the accounting equation.

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Assets
Liabilities
Equity

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Assets

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resources owned or controlled by a company that have future economic benefit. Examples include Cash, Accounts Receivable, Note Receivable, Prepaid Expenses, Prepaid Insurance, Office Supplies, Store Supplies, Equipment, Buildings, and Land.

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Liabilities

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claims (by creditors) against assets, which means they are obligations to transfer assets or provide products or services to other entities. Examples include Accounts Payable, Note Payable, Unearned Revenues, and Accrued Liabilities.

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Equity

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owner’s claim on company’s assets is called equity or owner’s equity. Examples include Owner’s Capital, Owner’s Withdrawals (decreases in equity), and different kinds of revenue (increases in equity) and expense (decreases in equity) accounts reflecting their own important activities.

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Unearned revenue

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revenue collected before it is earned; before services or goods are provided.

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Accrued liabilities

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amounts owed that are not yet paid.

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Analyzing and Processing Transactions

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1. The general ledger or ledger (referred to as the books)

2. The chart of accounts
3. T‑account

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The general ledger or ledger (referred to as the books)

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is a record containing all the accounts a company uses.

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The chart of accounts

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is a list of all the accounts in the ledger with their identification numbers.

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A T‑account

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represents a ledger account and is a tool used to understand the effects of one or more transactions. Has shape like the letter T with account title on top.

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The left side of an account

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is called the debit side. A debit is an entry on the left side of an account.

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A debit

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an entry on the left side of an account.

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The right side of an account

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is called the credit side. A credit is an entry on the right side of an account.

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A credit

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an entry on the right side of an account.

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Accounts are assigned balance sides based on their classification or type.

To increase an account

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an amount is placed on the balance side

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to decrease an account

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the amount is placed on the side opposite its assigned balance side.

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The account balance

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is the difference between the total debits and the total credits recorded in that account. When total debits exceed total credits the account has a debit balance. When total credits exceed total debits the account has a credit balance. When two sides are equal the account has a zero balance.

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When total debits exceed total credits the account has a

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debit balance.

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When total credits exceed total debits the account has a

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credit balance.

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When two sides are equal the account has a

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zero balance.

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Double-Entry Accounting

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requires that each transaction affect, and be recorded in, at least two accounts. The total debits must equal total credits for each transaction.

Front 46

Account types

Back 46

assets
liabilities
equity
revenue
expense

Front 47

assets
examples and normal balance

Back 47

cash
land, building, equipment, unused supplies, automobiles, accounts receivables

Front 48

liabilities
examples and normal balance

Back 48

aa

Front 49

equity
examples and normal balance

Back 49

aa

Front 50

revenue
examples and normal balance

Back 50

aa

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Double-Entry Accounting

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requires that each transaction affect, and be recorded in, at least two accounts. The total debits must equal total credits for each transaction.

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The assignment of balance sides (debit or credit) follows

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the accounting equation:

Assets = Liabilities + Equity

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Assets

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Assets are on the left side of the equation; therefore, the left, or debit, side is the normal balance for assets.

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Liabilities and equities

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Liabilities and equities are on the right side; therefore, the right, or credit, side is the normal balance for liabilities and equity.

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Withdrawals, revenues, and expenses

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Withdrawals, revenues, and expenses really are changes in equity, but it is necessary to set up temporary accounts for each of these items to accumulate data for statements. Withdrawals and expense accounts really represent decreases in equity; therefore, they are assigned debit balances.

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Revenue accounts

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really represent increases in equity; therefore, they are assigned credit balances.

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Three important rules for recording transactions in a double-entry accounting system are:

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1. Increases to assets and Decreases to assets
2. Increases to liabilities and Decreases to liabilities

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Increases to assets

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are debits to the asset accounts.

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Decreases to assets

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are credits to the asset accounts.

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Increases to liabilities

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are credits to the liability accounts.

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Revenue accounts

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really represent increases in equity; therefore, they are assigned credit balances.

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Three important rules for recording transactions in a double-entry accounting system are:

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1. Increases to assets and Decreases to assets
2. Increases to liabilities and Decreases to liabilities
3. Increases to Equity and Decreases to Equity

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Increases to assets

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are debits to the asset accounts.

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Decreases to assets

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are credits to the asset accounts.

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Increases to liabilities

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are credits to the liability accounts.

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Decreases to liabilities

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are debits to the liability accounts.

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Increases to equity

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are credits to the equity accounts.

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Decreases to equity

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are debits to the equity accounts.

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Four steps in processing transactions or journalizing are as follows:

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1. Analyze
2. Apply double-entry accounting
3. Journalize
4. Posting

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Analyze

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Analyze transaction and source documents.

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Apply double-entry accounting

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(Determine account to be debited and credited.)

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Journalize

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record each transaction in a journal. (A journal gives us a complete record of each transaction in one place.)

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A General Journal

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is the most flexible type of journal because it can be used to record any type of transaction.

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Journalizing

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The process of recording each transaction in a journal.

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journal entry

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When a transaction is recorded in the General Journal

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compound journal entry.

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A journal entry that affects more than two accounts

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Each journal entry must contain

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equal debits and credits.

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4. Posting

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transfer (or post) each entry from journal to ledger.
a. Debits are posted as debit, and credits as credits to the accounts identified in the journal entry.
b. Actual accounting systems use balance column accounts rather than T‑accounts in the ledger.
c. A balance column account has debit and credit columns for recording entries and a third column for showing the balance of the account after each entry is posted.

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A balance column account

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has debit and credit columns for recording entries and a third column for showing the balance of the account after each entry is posted.

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A trial balance

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is a list of accounts and their balances at a point in time.

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The purpose of the trial balance

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is to summarize the ledger accounts to simplify the task of preparing the financial statements. It also tests for the equality of the debit and credit account balances as required by double-entry accounting.

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Three steps to prepare a trial balance are as follows:

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1. List each account and its amount (from the ledger).
2. Compute the total debit balances and the total credit balances.
3. Verify (prove) total debit balances equal total credit balances.

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When a trial balance does not balance (the columns are not equal), an error has occurred in one of the following steps:

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1. Preparing the journal entries.
2. Posting the journal entries to the ledger.
3. Calculating account balances.
4. Copying account balances to the trial balance.
5. Totaling the trial balance columns.

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unadjusted statements.

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Financial Statements prepared from the trial balance are actually

(Note: Any errors must be located and corrected before preparing the financial statements.the purpose, content and format for each statement was presented in Chapter 1.)
__________ _______________.

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Correcting Errors

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1. Approach to correcting errors depends on the kind of error and when it is discovered.
2. Correcting entries may be necessary.

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Presentation Issues

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1. Dollar signs are not used in journals and ledgers but do appear in financial statements.
2. Common practice on statements is to put dollar signs before the first number in each column and before any number after a ruled line.

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Decision Analysis—Debt Ratio:

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A. Companies finance their assets with either liabilities or equity.
B. A company that finances a relatively large portion of its assets with liabilities has a high degree of financial leverage.(greater risk)
C. The debt ratio describes the relationship between a company's liabilities and assets. It is calculated as total liabilities divided by total assets.
D. The debt ratio tells us how much (what percentage) of the assets are financed by creditors (non-owners), or liability financing. The higher this ratio, the more risk a company faces, because liabilities must be repaid and often require regular interest payments.

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A. Companies finance their assets with

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either liabilities or equity.

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A company that finances a relatively large portion of its assets with liabilities

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has a high degree of financial leverage.(greater risk)

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The debt ratio describes

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the relationship between a company's liabilities and assets. It is calculated as total liabilities divided by total assets.

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The debt ratio

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tells us how much (what percentage) of the assets are financed by creditors (non-owners), or liability financing. The higher this ratio, the more risk a company faces, because liabilities must be repaid and often require regular interest payments.