Chapter 2: Accounting for Business Transactions

process to go from transactions and events to financial statements

(1) identify each transaction and event from source documents

(2) analyze each transaction and event using the accounting equation

(3) record relevant transactions and events in a journal

(4) post journal information to ledger accounts

(5) prepare and analyze the trial balance and financial statements

source documents

sales receipts, checks, purchase orders, bills from suppliers, payroll records, bank statements

general ledger

record of all accounts and their balances (t-accounts)

accrued liabilities

amounts owed that are not yet paid i.e. wages payable, taxes payable, interest payable — these are different than accounts payable bc accrued liabilities are reoccurring

numbering system for accoutns

assets = 1xx, liabilities = 2xx, owner withdrawals/contributions = 3xx, revenue = 4xx, expenses = 6xx

journal

complete record of each transaction in one place

journalizing

recording transactions in a journal

posting

transferring journal entry information to the ledger

trial balance

list of all ledger accounts and their balances at a point in time - NOT a financial statement

steps to prepare a trial balance

(1) list each acct title and its amount in the trial balance

(2) compute the total of debit balances and credit balances

(3) verify total DB = total CR

what are financial statements prepared from?

trial balance

debt ratio

= total liabilities / total assets

important to assess a company’s risk of failing to pay its debts

lower is better