ACG2021 Chapter 2 (Principles of Financial Accounting)

An account is the detailed record of all increases and decreases that have occurred in an individual asset, liability, or equity during a specified period

An economic resource that are expected to benefit the business in the future

A customer promises to pay in the future. Listed as an asset

A customer promises to pay a fixed amount of money (principle) and interest

A payment of an expense in advance. It is considered an asset since it is an economic resources that provides an expected benefit to the business in the future.

ex)

You spend \$1,200 on house insurance. This is considered an asset.



But, ever month \$100 goes to insurance expense.

Debt, something a business owes

A promise made by the business to pay a debt in the future.


*Money you owe and you have recieved an invoice.

ex), Suppliers & Utilites; that is because these usually aways have an invoice

A promise made by a business to pay a debt, usually involving interest, in the future

A promise made by the business to pay a debt in the future.

*Money you owe even tough no invoice exist


ex)Wages, Interest, Taxes; You owe this money, but you will not receive an invoice

Occurs when a company recives cash from a cosutomer but as not yet provided the good or serviuce.


LIABILITY

Things to keep in mind
-The number system for accounts differs from each business
-Account numbers are just short-hand versions for the account
-It is typical though that Assets are 1, Liabilities are 2, Equity is 3, Revenue is 4 and Expenses are 5.

A ledger is similar to a chart of accounts but also includes the changes in those accounts.


So a ledger as all the accounts, the account numbers, just like a chart of accounts.

But, a ledger also includes the changes in the balance of those accounts and contians a detialed record of transations from those accounts

A system in accounting where in which ever transaction effects at least two accounts


ex)You buy land

Cash (Goes down)

Land (Goes up)

A way to seperate the left side and the right side the accounting equation


1)A way to seperate the account increasing and the account decreasing

2)A way to make sure the accounting equation always stays balances.

So, if you were to record a transaction in the Asset section, if it were to increased the asset, then it woud go into the debit side on the left.

Dividends and Expenses both and a increase for debit and a decrease for credit.


This is because they both decrease Equity

The "normal balance" of an T-account is the side that makes the account increase


ex) The normal balance of the Asset account is debit.

It means you withdrawed more money than was comming in. Your balance is negative.



*(In the T-account, the credit is higher than the debit)

You made a mistake. You can't have negative land.

You have more money leaving for that account, then coming in.


The credit side increases when I get the Account Payable. When I pay it, it should be that exact amount.

If I over pay it, then the account becomes a debit balance. More money leaving then coming in. Thats a problem

Increases Equity: Revenue and Common Stock



Decreases Equity: expenses and Dividends

1)Add both from the right side and add then all from the left side.

2)Then subtracting the smaller number from the larger number

3)The balance is always put on the side with the highest number

1) Which of the six does it belong too

2) Does it decrease of increase the account. If cash increased, then it would increase an asset, and therefore be recorded as a debit.

Asstes, Expenses, Dividends, Liabilites, Revenues, Common Shares


It would be a Revenue. And it would increase it and that would be a credit


answer: CREDIT (CR)

Provides the evidence and data for accounting transactions

Documents that tell the business how much and when to pay a vendor for purchases on account

A record of transactions in date order

Transferring Data from the Journal to the Ledger

A journal entry that is characterized by having mutliple debtis and/or mutliple credits

An alternative to the T-account. It also shows the running balance. It is typically used more often compared to the T-account since it offers more information.



*Post ref. is related to posting. In a computerized system, if you cliked on it, it would show you the related journal entry

A trail balance summarizes the ledger by listing all the accounts and their balances. Assets first, then liabilities and then Equity.



The purpose is to add up all the debits and credits and see if they are equal to each other. If they are not, a mistake as been made.



*It says "unadjusted Trial Balance" for some reasons we will learn next chapter

Writing 1,000 as 100

Writing 1,200 as 2,100

.NO!-There is still a possibility of an error

1. Charts of Account
-Defines which accounts exist and their codes

2. Journal
-Analyze source documents and record on here

3. Ledger

-Data from the Journal is "posted" onto the ledger. The ledger includes a running balance.

4. T-accounts / Four-column account

-These are two formats that the ledger can take to record financial data. Four-column is most commonly used since it has more info.


5. Trail Balance

-Check if debits = credits

The process by which companies produce their financial statements for a specific period of time

1. Start with the begining balances. Make sure to have this data


2. Analyze source documents and record transactions in journals


3. Post journal entries in the ledger (This is done automatically in accounting software)


4. Preprare the unadjusted trail balance

Total Liabilites / Total Assets


*The higher the debt ratio, the higher the risk

Trail Balance

It is the page number of the journal that the journal entries are from. (To cross reference them)


ex) If the journal entries that you are putting on four-column account are from page 10 of the journal, then the post reference number is J10

You use the NORMAL BALANCE of the account. So, just subtract the credit from the debit and put the balance in the NORMAL BALANCE.

2%