Chapter 2: Analyzing Transactions

Usefulness of an Account

·  Account – shows the increases and decreases of a financial statement item

·  Ledger – a group of accounts for a business entity

·  Chart of accounts – list of the accounts in the ledger

o  Listed in order of assets, liabilities, stockholder’s equity, revenue and expenses

o  Can change at any time

American Company

Chart of Accounts

Assets

Cash

Accounts receivable

Prepaid insurance

Supplies

Equipment

Liabilities

Accounts payable

Notes payable

Stockholder’s equity

Capital stock

Retained earnings

Dividends

Revenue

Fees Earned

Expenses

Rent expense

Salaries expense

Characteristics of an Account

  1. Each account has a title which is the name of the item recorded in the account
  2. Each account has a space for recording increases in the amount of the item
  3. Each account has a space for recording decreases in the amount of the item
T Account

Debit Credit

DR CR

Balance of the account:

The side with the larger amount

DEBIT: Assets, Dividends, Expenses

CREDIT: Liabilities, Stockholder’s Equity, Revenue

Journal: the first book in which a transaction is recorded.

Information recorded in the chronological order

Journalizing – the process of recording transactions

Journal entry – for of recording a transactions

Double entry accounting – debits always equal credits

Account / Increase / Decrease
Asset / Debit / Credit
Liabilities / Credit / Debit
Stockholder’s equity:
Capital stock / Credit / Debit
Retained earnings / Credit / Debit
Dividends / Debit / Credit
Revenues / Credit / Debit
Expenses / Debit / Credit

How to record journal entries:

Rules:

1.  Chronological order

2.  Debit before credit

3.  Indent credit information

4.  Each entry -à Debit = Credit

Mar 1: American Company received cash for the company’s capital stock $20,000.

Date
/ Account / PR / Debit / Credit
Mar 1 / Cash / $20,000
Capital stock / $20,000

Mar 5: Paid rent of $500.

Date
/ Account / PR / Debit / Credit
Mar 5 / Rent expense / $500
Cash / $500

Mar 10: Purchased supplies for cash $1,000.

Date
/ Account / PR / Debit / Credit
Mar 10 / Supplies / $1,000
Cash / $1,000

Mar 12: Received cash from customers for services rendered $2,500.

Date
/ Account / PR / Debit / Credit
Mar 12 / Cash / $2,500
Fees earned / $2,500

Mar 15: Purchased equipment on account $5,000.

Date
/ Account / PR / Debit / Credit
Mar 15 / Equipment / $5,000
Accounts payable / $5,000

Mar 20: Billed customers for services rendered $3,000.

Date
/ Account / PR / Debit / Credit
Mar 20 / Accounts receivable / $3,000
Fees earned / $3,000

Mar 25: Paid amount due on account $400.

Date
/ Account / PR / Debit / Credit
Mar 25 / Accounts payable / $400
Cash / $400

Mar 26: Paid dividends $1,000.

Date
/ Account / PR / Debit / Credit
Mar 26 / Dividends / $1,000
Cash / $1,000

Mar 31: Received cash from customers billed $900

Date
/ Account / PR / Debit / Credit
Mar 31 / Cash / $900
Accounts receivable / $900

Once you finished the journal, the transactions are then posted to the LEDGER.

After the ledger is completed, a TRIAL BALANCE is prepared.

A trial balance proves the accuracy of the posting

American Company

Trial Balance

March 31, 2000

Cash / $20,500
Accounts receivable / 2,100
Supplies / 1,000
Equipment / 5,000
Accounts payable / $ 4,600
Capital stock / 20,000
Dividends / 1,000
Fees earned / 5,500
Rent expense / 500
TOTALS / 30,100 / 30,100

Prepared by: Maria Mari

Fall, 2007

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