Accounting Process and Key Concepts: Transactions, Accounts, and Journals

5 steps in the process from transactions to financial statements

Identify, Analyze, Record (journalize), Post (to ledger), Prepare/Analyze (trial balance & financial statements)

Source documents

Papers that identify and describe transactions/events entering the accounting process (e.g., invoices, checks, receipts)

Account

A record of increases and decreases in a specific asset, liability, equity, revenue, or expense

Examples of asset accounts

Cash, Accounts Receivable, Notes Receivable, Supplies, Prepaid Insurance, Equipment, Buildings, Land

Accounts receivable

Promises of payment from customers

Prepaid accounts

Assets that represent prepayments of future expenses

Liabilities

Creditors' claims on assets; obligations to transfer assets or provide services

Examples of liability accounts

Accounts Payable, Notes Payable, Unearned Revenue, Accrued Liabilities

Unearned revenue

Revenue collected before goods or services are provided (a liability)

Equity

Owner's claim on a company's assets (Owner's Capital + Revenues - Withdrawals - Expenses)

Examples of equity accounts

Owner's Capital, Owner's Withdrawals, Revenues (Sales, Fees Earned), Expenses (Rent Expense, Supplies Expense)

General ledger

Collection of all accounts and their balances

Chart of accounts

List of all ledger accounts with identification numbers

Double-entry accounting

System requiring every transaction to affect at least two accounts, with total debits = total credits

T-account

Tool shaped like a "T" to show debit (left) and credit (right) entries for an account

Debit side of a T-account

Left side

Credit side of a T-account

Right side

Normal balance of asset accounts

Debit

Normal balance of liability and equity accounts

Credit

Normal balance of revenue accounts

Credit (increases equity)

Normal balance of expense and withdrawal accounts

Debit (decreases equity)

Journalizing

Recording transactions chronologically in the general journal

Journal entry

Record of a transaction in the general journal, with equal debits and credits

Compound journal entry

Journal entry affecting more than two accounts

Posting

Transferring journal entries to the ledger accounts

Balance column account

Ledger format with debit, credit, and running balance columns