CH 2: Analyzing and Recording Transactions

ACT 111 Fall 2026 Chapter 2

Used to identify and describe transactions and events enetering the accounting system.

Source Documents

What are some example of source documents?

sales receipts

checks

bills

payroll records

bank statements

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

Account

Ledger/General Ledger

The collection of all accounts and their balances.

Chart of Accounts

A list of all ledger accounts with an ID number assigned to each account

Excludes account balances

The 6 Asset accounts

cash

accounts receivable

notes receivable

inventory

prepaid accounts

supplies

equipment

buildings

land

What is an asset account?

An account which describes the resources owned or controlled by a company.

cash account

Shows a company’s cash balance and all its increases and decreases.

Type of asset account

Accounts receivable account

Shows all increases, decreases, and overall balance of receivables AKA credit sales.

What is a note receivable?

A written promise of another entity to pay a specific sum of money on a specified future date to the holder of the note.

Comes from a formal contract called a promissory note and requires interest, whereas accounts receivable do not

Notes receivable account

Shows all increases, decreases, and the overall balance of notes receivable.

What is a prepaid account/prepaid expense?

Assets from prepayments of future expenses.

Prepaid expenses account

Records all increases or decreases to prepaid expenses.

Common examples of prepaid accounts

prepaid insurance

prepaid rent

prepaid services

Supplies accounts

Asset account that records all increases, decreases, and the overall balance of unused supplies.

When supplies decrease as they are used, they are reported as expenses

Type of asset that once used is no longer an asset and is reported as an expense

Supplies

Equipment accounts

Report the actual cost/cash value of equipment, and any contributions/increases the company makes towards equipment.

What happens to equipment assets over time

The cost/cash value of equipment is allocated over time to expense as it depreciates.

Depreciation

The lost of value over time

Building Accounts

Record the cost/cash values of any buildings owned by the company.

Which assets slowly depreciate over time and must have their cost reported as expense?

Buildings and equipment

Records the cost/cash value of land owned by the company

Land account

The cost/cash value of any buildings located on land owned by the company is separately recorded in a buildings account

True

Creditors

Individuals and organizations that have rights to receive payments from a company

Liability Accounts

Accounts that describe the claims of creditors against assets and/or the obligation to transfer assets or provide money or services to others

Accounts payable account

Records all increases, decreases, and overall balance in accounts payable AKA purchases on credit

Notes payable account

Type of liability account that records all increases, decreases, and overall balance in notes payable.

Unearned revenue

Liability created when customers pay in advance for products or services; earned when the products or services are later delivered.

When a customer pays in advance for products and services, how is this recorded by the seller

Unearned Revenue

Once products or services are delivered, what happens to unearned revenue

Unearned revenue is transferred from liabilities to revenue

Accrued liabilities

Amounts owed that are no paid yet.

Different from accounts payable since they’re not purchases on credit, but will be paid at a later date

Examples of accrued liabilities

Wages

Taxes

Interest

The 4 Liability Accounts

Accounts payable

Note payable

Unearned revenue

Accrued liabilities

Equity accounts

Accounts that report on the owner’s claim on a company’s assets

What is Equity?

An owner’s claim over a company’s assets

The owner’s redidual interest in the assests ofa business after subtracting liabilities

The 4 Equity Accounts

Owner capital

Owner Withdrawals

Revenue

Expenses

Key words that indicate an asset

receivable

prepaid

Key words that indicate a liability

payable

unearned

T-account

represent a ledger account and is used to show the effects of transactions.

What is the layout of a T-account?

Account title

Debits on the left

Credits on the right

Debit and credit are accounting directions for left and right, by themselves they DO NOT mean increase or decrease

True

Account Balance

The difference between total debits and total credits for an account, including any beg. balance

What are the two demands of of the double-entry accounting system?

At least two account must be involved in every transaction, at least one debit and one credit

Total amount debited must equal total amount credited

Debits must always go before credits

True

What are the specific sides that debits and credits must go on in the T-account/ledger?

Debits on the left

Credits on the right

The ending balance of an account should always be put on the side with the larger amount

True

Zero Balance

Total debits and total credits are equal

Debit Balance

Total debits are greater than total credits

Credit Balance

Total credits are greater than total debits

What direction does debit mean?

Left

What direction does credit mean?

Right

The normal ending balance of an account is found on the side where INCREASES are recorded

True

Journal

Complete chronological record of each transaction in one place, shows the debits and credits for each transaction

Posting

Transferring journal entry information to the ledger

What are the elements of a journal

Date

Accounts title

Transaction Explanations (Optional)

Posting reference (PR)

Debit

Credit

Posting reference (PR)

A column in journals in which individual ledger account numbers are entered when entries are posted to those ledger accounts.

The posting reference (PR) is left blank at first and filled in with an ID number in the ledger

True

Balance column account

Alternative formatting of T-accounts/Ledger

Diffrent from T-accounts because they include columns for the transaction date, explanation, an balance after each entry is recorded.

What term is used to refer to massive, complex datasets?

Big data

What three factors make big data different from other data sets?

Volume

Velocity

Variety

Trial Balance

A list of all ledger accounts and their balances at a point in time

A trial balance is a financial statement

False

A tool for checking equality of debits and credits in the ledger

Trial Balance

Elements of a Trial Balance

Name of Company

Name of report

Specific Date in Time

Column of Account titles

Column of Debits

Columns of Credits

Totals

Term that refers to the one year reporting period of financial statements

accounting/fiscal year

Businesses whose fiscal year begins on Jan. 1 and ends on Dec. 31

Calender-year companies

1st step to go from transactions to financial statements

Identify transactions and events from source documents

2nd step to go from transactions to financial statements

Analyze transactions and events using the accounting equation

3rd step to go from transactions to financial statements

Record transactions and events in journal

4th step to go from transactions to financial statements

Post transactions and events from journal to ledger

5th step to go from transactions to financial statements

Prepare and analyze trial balance and financial statements

What are the steps to go from transactions and events to financial statements

1. use source documents

2. analyze using accounting equation

3. record in journal

4. post from journal to ledger

5. create trial balance and financial statements