Accounting chap 3 part 2

Most companies complete the following three basic steps as part of their recording process (an integral part of the accounting cycle)

• Analyze each transaction in terms of its effect on accounts.

• Record the transaction information in the general journal.

• Transfer (or post) the information in the general journal to the appropriate accounts in the general ledger.

What are source documents?

Source documents are documents that provide evidence of a transaction.

Examples include sales receipts, cheques, electronic deposits, invoices, and cash register reports.

What happens after a transaction is analyzed?

The journal entry for the transaction is recorded in the general journal.

What happens after a transaction is recorded in the general journal?

The journal entry is transferred, or posted, to the appropriate accounts in the general ledger.

general journal vs general ledger

The general journal is the chronological book of original entry where business transactions are first recorded, while the general ledger is the master book of final entry that organizes those transactions by specific accounts.

What must be true about total debits and total credits in every journal entry?

The total debits must equal the total credits.

Because this ensures that the accounting equation remains in balance.

What are the four steps used to analyze a transaction before preparing a journal entry?

• Basic analysis = identifies which accounts are affected by a transaction and whether each account increases or decreases.

• Equation analysis = Equation analysis shows how a transaction affects the accounting equation: Assets = Liabilities + Shareholders' Equity

• Debit-credit analysis = Debit-credit analysis determines whether the affected accounts should be debited or credited.

• Journal entry

Why should the same account title be used consistently?

To ensure that financial information is comparable from one period to another.

What is the main difference between a journal and a ledger?

The main physical difference is that a journal organizes transactions chronologically (by date of occurrence), while a ledger organizes them by individual account (categorized by assets, liabilities, etc.)

What does posting mean?

Posting means transferring transaction information from the general journal to the appropriate accounts in the general ledger.

Computerized accounting is the digital recording, processing, and reporting of business financial transactions using specialized software instead of paper ledgers.

What is the most important rule when preparing a journal entry?

Total debits must equal total credits

Where are journal entries posted?

Journal entries are posted to the appropriate accounts in the general ledger.

What information is transferred when posting a journal entry to the ledger?

The date, amount, and debit or credit effect of the transaction are transferred to the appropriate ledger account.

How is the $5,000 bank loan posted?

Cash is debited $5,000 and Bank Loan Payable is credited $5,000.

How is Cash ending balance determined?

The total debits to Cash are compared with the total credits to Cash. The difference gives the ending balance.

The ending balances are used to prepare the trial balance and eventually the financial statements.

If an account has more debits than credits, what type of balance does it have?

It has a debit balance.

What is a trial balance?

it is a summary report listing the ending balances of general ledger accounts at a specific time

When is a trial balance usually prepared? and How often can a trial balance be prepared?

A trial balance is usually prepared at the end of an accounting period and It can be prepared monthly, quarterly, or annually.

In what order are accounts listed on a trial balance?

Accounts are listed in the same order in which they appear in the general ledger.

What does a trial balance prove?

It proves that the sum of the debit balances equals the sum of the credit balances after posting.

Limitations of a Trial Balance

A trial balance may not prove that all transactions have been recorded or that the general ledger is correct. Errors may exist even though the trial balance column totals agree.

For example, the trial balance may balance even when:

• A transaction has not been recorded.

• A journal entry has not been posted.

• A journal entry is posted more than once.

• Incorrect accounts are used in journalizing or posting.

• A journal entry was prepared using incorrect amounts.

In other words, as long as equal debits and credits are posted, even to the wrong account or in the wrong amount, the total debits will equal the total credits. As a result, the trial balance will be in balance even though errors exist in account balances. Nevertheless, despite its limitations, the trial balance is a useful screen for finding many errors