Recording Business Transactions

Flashcards to help review key vocabulary and concepts related to recording business transactions using debits, credits, journals, and ledgers in financial accounting.

Double-entry accounting

A formal system developed to record business transactions and validate the balance of each account, ensuring that total debits always equal total credits.

Luca Pacioli

An Italian friar who published the first book on double-entry accounting in 1494.

Accounting Cycle

A comprehensive sequence of steps and procedures used to record and process accounting information, from identifying transactions to preparing financial statements.

Source Documents

Original records, such as invoices, checks, or bills, that provide objective evidence of business transactions.

Journal

A chronological log of all financial transactions (events) that have occurred, showing debits and credits for each entry in date order.

Journal Entry

Each instance of recording a business transaction in a journal.

Posting

The process of copying (transferring) the debit and credit information from a journal entry to the respective ledger accounts (T-accounts).

Ledger

In an accounting system, a collection of all accounts used by a company, which is used to determine an account’s balance; it is simulated with T-accounts in ACCT 121.

T-Account

A graphical representation of a ledger account, featuring a vertical line and a horizontal line resembling the letter 'T', with the account name above and space for debits on the left and credits on the right.

Debit (DR)

The left side of a T-account; it increases asset, expense, and dividend accounts, and decreases liability, common stock, retained earnings, and revenue accounts.

Credit (CR)

The right side of a T-account; it increases liability, common stock, retained earnings, and revenue accounts, and decreases asset, expense, and dividend accounts.

Normal Balance

The side (debit or credit) on which an account's balance increases. For example, assets, expenses, and dividends have normal debit balances, while liabilities, equity, and revenues have normal credit balances.

Trial Balance

A list of all accounts and their balances at a specific point in time, prepared to verify that the total dollar value of all debits equals the total dollar value of all credits.

Adjustments

Journal entries made at the end of an accounting period to bring account balances up-to-date for items that have not been recorded or that require allocation before financial statements are prepared.

Adjusted Trial Balance

A trial balance prepared after all adjusting entries have been journalized and posted to the ledger accounts.

Financial Statements

Formal reports (Income Statement, Balance Sheet, Statement of Retained Earnings, Statement of Cash Flows) that summarize a company's financial position and performance for a specific period or at a specific point in time.

Closing Entries

Journal entries made at the end of an accounting period to transfer the balances of temporary accounts (revenues, expenses, and dividends) to the Retained Earnings account.

Post-Closing Trial Balance

A trial balance prepared after closing entries have been posted, containing only permanent accounts (assets, liabilities, and equity) with their end-of-period balances.

Notes Receivable

A written promise from another entity to pay a definite sum of money on a specified future date, typically including interest.

Prepaid Expense

An asset representing payments made for expenses that are expected to be incurred in a future accounting period (e.g., prepaid rent, prepaid insurance).

Notes Payable

A written promise to pay a definite sum of money at a specified future date, often to a supplier or bank, typically involving interest.

Accrued Liability

An expense that has been incurred but not yet paid or recorded (e.g., accrued salaries, accrued interest payable).

Unearned Revenue

A liability representing cash received in advance for goods or services that have not yet been delivered or performed; it becomes revenue only when earned.

Chart of Accounts

A comprehensive list of all account names and numbers used by a company to classify and record financial transactions, typically organized by account type.