Scribd
Upload
58 views4 pages

Chapter 3 - Processing Accounting Information: Economic Events: The Basis For Recording Transactions

The document discusses key accounting concepts including: 1) Economic events form the basis for recording transactions which can be external or internal. 2) Source documents provide evidence for transactions and are used to identify and measure events for recognition. 3) Transactions are analyzed to determine their impact on accounts and financial statements through increases and decreases to assets, liabilities, and equity.

Uploaded by

Hareem Zoya Warsi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
58 views4 pages

Chapter 3 - Processing Accounting Information: Economic Events: The Basis For Recording Transactions

The document discusses key accounting concepts including: 1) Economic events form the basis for recording transactions which can be external or internal. 2) Source documents provide evidence for transactions and are used to identify and measure events for recognition. 3) Transactions are analyzed to determine their impact on accounts and financial statements through increases and decreases to assets, liabilities, and equity.

Uploaded by

Hareem Zoya Warsi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 4

Chapter 3 – Processing Accounting Information

Economic Events: The Basis for Recording Transactions


• Many different types of economic events affect an entity during the year.
• Event: a happening of consequence to an entity.

External and Internal Events


• External event: an event involving interaction between an entity and its environment.
• Internal event: an event occurring entirely within an entity.
• Transaction: any event that is recognized in a set of financial statements.
• An event must be measured to be recognized. Certain events are relatively easy to measure,
whereas others are not.
• Not all events that affect an entity can be measured reliably because of the difficulty of measuring
them.

Role of Source Documents in Recording Transactions


• The first step in the recording process is identification.
• Source document: a piece of paper that is used as evidence to record a transaction.
• Source documents take many different forms: an invoice, a cash register tape, employee
timecards, etc.
• Not all recognizable events are supported by a standard source document. For certain events,
some form of documentation must be generated.

Analyzing the Effects of Transactions on the Accounting Equation


• Some transactions affect just the balance sheet, and others affect both the balance sheet and the
income statement.
• Economic events are the basis for recording transactions in an accounting system.

S. No. Event Increase Decrease


Assets
1 Issuance of Capital Stock
Stockholder’s Equity
Acquisition of Property in Exchange for a Assets
2
Note Liabilities
Acquisition of Equipment to Open an Assets
3
Account Liabilities
Assets
4 Sale of Monthly Memberships on Account
Stockholder’s Equity
Assets
5 Sale of Court Time for Cash
Stockholder’s Equity
Assets
6 Payment of Wages & Salaries
Stockholder’s Equity
Assets
7 Payment of Utilities
Stockholder’s Equity
8 Collection of Accounts Receivable Asset Asset
Assets
9 Payment of Dividends
Stockholder’s Equity
• The cost principle requires that we record an asset at the cost to acquire it and continue to show
this amount on all balance sheets until we dispose of the asset.
• The cost of an asset can be verified by an independent observer and is more objective than market
value.
• Even though individual transactions may change the amount and composition of the assets and
liabilities, the equation must always balance for each transaction and the balance sheet must
balance after each transaction.
• Dividends appear on a statement of retained earnings rather than on the income statement. They
are a distribution of net income of the period, not a determinant of net income as are expenses.

What is an Account?
• Account: a record used to accumulate amounts for each individual asset, liability, revenue,
expense, and component of stockholders’ equity.
• It is the basic unit for recording transactions.
• No two entities have exactly the same set of accounts. To a certain extent, the accounts used by
a company depend on its business.
 A manufacturer normally has three inventory accounts: Raw Materials, Work in Process, and
Finished Goods.
 A retailer uses just one account for inventory, a Merchandise Inventory account.

Chart of Accounts
• Chart of accounts: a numerical list of all accounts used by a company.
• Companies need a way to organize the large number of accounts they use to record transactions.

The General Ledger


• General ledger: a book, a file, a hard drive, or another device containing all of the accounts. Also
called the Set of Accounts.

Identify and Analyze


• For every transaction three questions must be answered:
1. What type of activity did the transaction reflect? All transactions are the result of an operating,
financing, or investing activity of the company.
2. What accounts are affected by the transaction and are they increased or decreased? Every
transaction involves at least two accounts.
3. Which financial statements are affected by the transaction? All transactions affect either just
the balance sheet or both the balance sheet and the income statement.
Appendix Accounting Tools: The Double-Entry System
• Debits and credits are tools to record increases and decreases in accounts.
• Debits increase asset accounts, and expense accounts.
• Credits increase liability and stockholders’ equity accounts, and revenue accounts.
• Double-entry system: a system of accounting in which every transaction is recorded with equal
debits and credits and the accounting equation is kept in balance.

The T Account
• The form of account often used to analyze transactions is called the T account, so named because
it resembles the capital letter T.
• The name of the account appears across the horizontal line and one side is used to record
increases; the other side, decreases.
• However, the same side is not used for increases for every account. As a matter of convention, the
left side of an asset account is used to record increases; the right side, decreases.

Debits and Credits


• Debit: an entry on the left side of an account.
• Credit: an entry on the right side of an account.
• Debit and credit are locational terms. They simply refer to the left or right side of a T account. They
do not represent increases or decreases.
• When one type of account is increased, the increase is on the left, or debit, side. When certain
other types of accounts are increased, however, the entry will be on the right, or credit, side.
• Because assets and liabilities/stockholder’s equity are opposites, if an asset is increased with a
debit, a liability/stockholder’s equity is increased with a credit.

Debits and Credits for Revenues, Expenses, and Dividends


• Revenues are an increase in Retained Earnings, whereas expenses and dividends are decreases in
Retained Earnings.

Normal Account Balances


Debits and Credits Applied to Transactions
• Three distinct steps are involved in recording a transaction in the accounts:
1. Analyze the transaction. That is, decide what accounts are increased or decreased and by how
much.
2. Recall the rules of debits and credits as they apply to the transaction being analyzed.
3. Record the transaction using the rules of debits and credits.

The Journal: The Firm’s Chronological Record of Transactions


• Journal: a chronological record of transactions. Also known as book of original entry.
• Posting: the process of transferring amounts from a journal to the ledger accounts.
• Posting does not result in any change in the amounts recorded.
• Each journal entry contains a date with columns for the amounts debited and credited. A brief
explanation normally appears on the line below the entry.
• General Journal: the journal used in place of a specialized journal.

The Trial Balance


• Trial balance: a list of each account and its balance at a specific point in time; used to prove equality
of debits and credits.
• It is not a financial statement but a tool.
• Certain types of errors are detectable from a trial balance.
• A trial balance can be prepared at any time; it is usually prepared before the release of a set of
financial statements.
• It assures us that the balances of all of the debit accounts equal the balances of all of the credit
accounts, but an equality of debits and credits does not necessarily mean that the correct accounts
were debited and credited in an entry. Hence, not too much significance should be attributed to
a trial balance than is needed.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy