finance and accounting transaction analysis

what’s recorded on balance sheet

only economic resources and obligations from past transactions

external events

Exchanges of assets, goods, or services by one party for assets, services, or promises to pay another

internal events

not exchange between business and other party but have a direct and measurable effect on the entity

why standardised format for account

to accumulate rupee effect of transactions on each financial statement item

why are balances from accounts kept separate

for financial statement purposes

chart of accounts

list of account titles and their unique numbers to facilitate the recording of transactions

order of organisation of accounts

asset accounts, liability, equity, revenue, expense

assets =

liabilities + stockholder’s equity

transaction analysis

process for determining how transactions impact financial statements

principles of transaction analysis

every transaction affects two accounts, accounting equation must remain in balance after each transaction

dual effects concept

double entry system of record keeping (most transactions involve attaining an asset by giving one up)

balancing the account equation (A = L + SE)

for both received and given, identify account affected, classify by asset, liability or shareholder’s equity account, determine whether increase or decrease

t accounts

ledger

why computerised accounting systems

to handle multitude of daily transactions

accounting period chronology

analyse each transaction, record in journal, post effects to ledger

general journal

listing in chronological order of each transaction’s effects

general ledger

record of effects to and balances of each account

stockholder’s equity accounts in transaction analysis model

contributed capital (common stock and additional paid in capital)(credit only), earned capital (retained earnings)

assets increase with

debits

liabilities and stockholder’s equity increase with

credit

how are transactions recorded in journal

chronologically

how are transactions traced between journals and ledgers

reference to journal entry next to each debit or credit in ledger

what does a horizontal line in a ledger mean

that a balance is to be determined

who is trial balance spreadsheet for

internal purposes, to check the equality of debits and credits

trial balance

list of names of ledgers in one column (in financial statement order) with their ending debit and credit balances in the next two columns

classified balance sheet A,L categories

current and concurrent

classified balance sheet equity categories

reserves and surplus

where are currency signs balance sheet

top and bottom of asset section and L, SE section

balance sheet statement includes

comparative data

expanded transaction analysis model

Expand the transaction analysis model from only investing and financing activities to include operating activities that also affect revenues and expenses.

retained earnings

Retained Earnings is the accumulation of all past revenues and expenses minus any income distributed to stockholders as dividends

revenues increases SE through

retained earnings account and therefore have credit balances

expenses decrease stockholder’s equity through

retained earnings account. as expenses increase, net income decreases which affects retained earnings, thus have debit balances