2-Analyzing

Accounting Cycle

steps in preparing the financial statements

Account

detailed record of increases/decreases if specific asset, liability, equity, revenue, or expense

Debit

left side (increase: asset, expense, withdrawals; decrease: liability and revenue)

Credit

right side (increase: liability, income, capital; decrease: assets, expenses)

Account Balance

difference between total debits and total credits for an account

Ledger

record containing all accounts used by a company; also known as books

T-Account

tool used in analyzing the effects of transactions and events on individual accounts

Normal Balance (of an account)

expected balance of an account (side of T-account where increases are recorded)

Double-entry Accounting

one transaction affects at least two accounts; debit should always be equal to credit

Assets = Liabilities + Owner’s Investments - Owner’s Withdrawals + Revenue - Expenses

accounting equation

Assets

resources owned by the company that with future benefits

Liabilities

what the company owes its creditors

Equity

claims of owners to the assets of the company

cash, accounts receivable, equipment, land, prepaid accounts, notes receivable, supplies, buildings

asset accounts

accounts payable, notes payable, unearned revenue, accrued liabilities

liability accounts

revenues, expenses, owner’s withdrawal, owner’s capital

equity accounts

asset accounts, owner’s withdrawals, expenses

left side normal balances

liability accounts, owner’s capital, revenues

right side normal balances

steps in journalizing and posting transactions

analyze transactions and source documents → apply double-entry accounting → record journal entry → post entry to ledger

transaction date, titles of accounts affected, amount of debits and credits, transaction explanation

components of general journal

Trial Balance

lists all account balances in the general ledger. If the books are in balance, the total debits will equal the total credits.

Steps for Searching for and Correcting Errors

• Make sure the trial balance columns are correctly added.

• Recompute each account balance in the ledger.

• Make sure account balances are correctly entered from the ledger.

• Verify that each journal entry is posted correctly.

• See if debit or credit accounts are mistakenly placed on the trial balance.

• Verify that each original journal entry has equal debits and credits.