Financial Accounting Chapter 2

Source Documents

Identify and describe transactions and events entering the accounting system.

Ex: sales receipts, checks, purchase orders, payroll records and bank statements
Account

A record of increases and decreases in a specific asset, liability, equity, revenue or expense.
General ledger

A record of all accounts used by a company.
Cash Account

Shows a company cash balance. Includes all increases and decreases in cash, any funds that a bank accepts for deposit.
Accounts Receivable

Held by a seller and are promises of payment from customers to sellers. On credit.
Note Receivable

A written promises of another entity to pay a specific sum of money on a specified future date to the holder of the note.
Prepaid Accounts

Assets from prepayments of future expenses.

Ex:prepaid insurance, prepaid rent and prepaid services.
Supplies Accounts

Assets until they are used. once used their costs are reported as expenses.

Ex:Office supplies
Equipment Account

Asset. When equipment is used and wears down, its cost is gradually reported as an expense. (Depreciation)

Ex: Office Equipment (Computers and desks)

Store Equipment (Counters and cash registers)
Buildings Accounts

Assets. Buildings provide expected future benefits. Once a building is used and wears down, its reported as an expense.
Land Accounts

Land is recorded separately from building accounts
Liability Accounts

Obligations to transfer assets or provide products or services to others.
Creditors

Individuals and organizations that have rights to receive payments from a company.
Accounts Payable

Promises to pay later.
Unearned Revenue

A liability that is settled in the future when a company delivers its products or services.

Customers pay in advance for products or services.

Ex: subscription collected in advance, rent collected for the month, season ticket sales.
Accrued Liabilities

Amounts owed that are not yet paid.

Ex:wages payable, taxes payable and interest payable.
Equity

Owners claim on a company's assets. The owners residual interest in the assets of a business after subtracting liabilities.
Common Stock

When an owner invests in a company, it increases both assets and equity. the increase to equity is recorded here.
Dividends

When a corporation distributes assets to its owners, it decreases both company assets and total equity. the decrease to equity is recorded here.
Revenue Accounts

Amounts received from sales of products and services to customers are recorded here. increases equity.
Expense Accounts

Amounts used for costs of providing products and services are recorded here. Expenses always decrease equity.
Ledger

Collection of all accounts and their balances.
Chart of accounts

A list of all ledger accounts
T-Account

Represents a ledger account and is used to show the effects of transactions.
Credits ans Debits

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 total debits equal total credits, the account has a zero balance.
Double Entry Accounting

The accounting equation must remain in balance. With each transactions, there must be at least two accounts with one debit and one credit. The total amount debited must equal total amount credited.
Journal

A complete record of each transaction in one place.
Posting

Transferring journal entry information to the ledger.
Steps in recording in a general journal

Date the transaction
Enter titles of accounts debited and then amounts in the same line
Enter titles of accounts credited and then amount on the same line.
Ente a brief explanation of the transaction on the line below the entry.
Four parts of posting a journal entry

Identify the ledger account
Enter the ledger account number in the PR column
Repeat the first two steps for credit entries and amount.
Trial Balance

A list of all ledger accounts and their balance at a point in time
Steps in preparing a trial balance

List each account title and its amount in the trial balance
Compute the total of debit balance and the total of credit balances
Verify total debit balances equal total credit balances
Debt Ratio equation

Total Liabilities/Total Assets=Debt ratio