Balance Sheets, Income Statements, General Ledgers

Test Two - make sure practical skills are strong.

Asset

A present economic resource controlled by the entity as a result of past events.

Recognition Criteria

• Relevant Financial information - to make a difference to the decisions made by users

• Accurate representation - data is correct

Liabilities

Present obligation of the entity to transfer an economic resource as a result of past events.

Conceptual Framework For Financial Reporting

Document where important definitions are outlined.

Equity

Residual interest in the assets of the entity after deducing liabilities.

Accounting Equation

Assets = Liabilities + Equity

Balance Sheet is also a…..

Statement of Financial Position

Profit

Greater income than expenses

Loss

Greater expenses than income

Income

Increases in assets or decreases in liabilities that result in increases in equity, other than those relating to the contributions from holders of equity claims.

Expenses

Decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions from holders of equity claims.

Expanded accounting equation

Assets + Expenses = Liabilities + Equity + Income

Accrual Accounting

Transaction is recorded when it occurs, irrespective of when money is received.

Another name for income statements is…..

Performance Reports

Balance of the Ledger account

Difference between sides of ledger account

Posting

The act of recording information into the ledger accounts

Double Entry Principle

In leger accounting, each transaction requires equal credit and debit entries.

Trial Balance layout

Balance of each ledger account recorded, with the totals being equal. It is the Processing step of accounting

Why complete a trial balance?

Check for mistakes, get values for balance sheets or income statements (reporting)

Errors Disclosed by a Trial Balance

• Failing to record part of the transaction

• Making two debit/ credit entries

• Making transposition error (writing numbers wrong)

• incorrectly calculating ledger balance

• leaving a ledger balance out of the trial balance

• recording a ledger account on the wrong side of the trial balance

Errors NOT disclosed by a Trial Balance

• Error of Omission - transaction not recorded at all

• Error of Commission - make entry in wrong ledger account

• Compensating errors - two independent errors of equal amounts

• Making an entry on the wrong sides of ledger accounts

• Error of original entry - recording wrong amount from the beginning.