Chapter 2: Analyzing Transactions

What is Account in terms of transactions?

is used to record the increases and decreases in financial statement each individually.

What are the three parts that are needed for an account?

1. Title (name of the Accounting Equation recorded in account)

2. A space for increases in amount of element

3. A space for decreases inn amount of element

What is a T-account and why do we use it?

The chart is a T with debits on the left and credits on the right side

• We use it to get a clear illustration of what credits and debits are

• It’s a simple way to show effects on transactions

• Debits → money coming in | Credits → money coming out

What is a Ledger?

A group of account for business entities

What is a Chart of Account and why is it important?

A list of accounts in the ledger. It allows companies to easily distinguish the different accounts

• Normally listed in the order in which they show in Financial state

• Illustrated accounts are numbered in the reference book

• numbering system is used

What are the different names used for a chart of Account?

• Assets are the rights of a business entity to economic benefits

• Liabilities are obligations by a business entity to transfer assets to third parties.

• Stockholders' equity is the stockholders' right to the assets of the business.

• Stockholders' equity is represented by the balance of the common stock and retained earnings accounts.

• A dividends account represents distributions of earnings to stockholders.

• Revenues are increases in assets and stockholders' equity as a result of selling services or products to customers.

• Expenses result from using up assets or consuming services in the process of generating revenues.

What is Double-Entry Accounting System?

Recording transactions based on recording increases & decreases in accounts so that debits equal credits

• DEBITS = CREDITS

What does the Double-System Accounting system require?

It requires every transaction to be recorded in two accounts and the total debit to be equal to the total credits

What are the Balance Sheet Rules? MUST KNOW BY HEART

• Assets → Debit (+) and Credit (-)

• Liabilities → Debit (-) and Credit (+)

• Shareholders Equity → Debit (-) and Credit (+)

What are the Income Statement Rules? MUST KNOW IMPORTANT

• Revenue Account → Debit (-) and Credit (+)

• Expense Account → Debit (+) and Credit (-)

What are the Stockholders Equity Rules? MUST KNOW IMPORTANT

• Dividend Account → Debit (+) and Credit (-)

What is Normal Balance of Account?

is either a debit or credit depending on whether increases in the account are recorded as debits or credits.

What is Journalizing?

using rules of debit and credit, recording transactions being reported in the journal

What are the steps when we Journalize an Account?

1. The date of the transaction is entered in Date Column

2. The title of the account to be debited is recorded in the left-hans margin under the description column, and the amount to be debited is entered in the debit column

3. The title of the account to be credited is listed below to the right od the debited account title, and the amount to be credited is entered in the credit Column

4. A brief description may be entered below the credited account

5. The Posting Reference column is left blank when the journal entry is initially recorded. This column is used later in this chapter when the journal entry amounts are transferred to the accounts in the ledger.

What are the useful methods that we can use to analyze Journalizing transactions?

• Carefully read the description and determine where to classify

• For the account affected, look to see if it increases or decreases

• Look to see if it’s a possible debit or credit

• Record transaction using Journal entry

What is posting?

process of transferring debits and credits from journal entry to account

What is the Four Column Account?

the four column account is used to show the date, item, reference number, debits, credits, and the Total balances of credits and debits

What is a trial balance?

A summary listing of the title and balances of account in the ledger which is used to verify that debit is equal to credit

What are the steps in preparing a trial balance?

1. List name, title, of trial, and date the trial balance is made

2. List account, enter credits and debits

3. Total the credit and the debit

4. Verify Debit and credit are equal to one another

What is unadjusted trial balance?

Trial balance prepared at the end of the accounting period before adjusting entries are made

What are the errors affecting trial balance?

1. If the difference between the credit and debit total is 10, 100, 100

   • an error in addition may have occurred

2. if the difference between credit and debit total is divisible by 2

   • the error may be due to the entering of a debit as a credit and vice versa

3. if difference between credit and debit is divisible by 9

   • trace account back to the ledger to see if the account balance was incorrectly copied from the ledger

4. if difference between credit and debit is NOT divisible by 2 and 9

   • review ledger to see if an account balance error has been skipped from the trial balance

5. if error is not discovered

   • you must go back and restart from the first ledger

What are the errors not affecting trial balance?

Sometimes error is not the credit or debit balance instead it could be the name entry being incorrect

• Ex. using supplies instead of using the correct one being Equipment

What is Horizontal Analysis?

the amount each item on a current financial statement is compared with same item on an earlier statement

• useful to compare companies financial standing over two or more accounting periods to evaluate performance and trends

What is the Horizontal analysis formula for amount? What about the percentage?

• Latest year — oldest year

  • Ex. Year 2 — Year 1

• Difference between the years / Oldest year