2 - 1 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Analyzing and Recording Transactions Chapter 2

2 - 2 Accounting Principles C4 Cost Principle Accounting information is based on actual cost. Actual cost is considered objective. Matching Principle A company must record its expenses incurred to generate the revenue reported. Full Disclosure Principle A company is required to report the details behind financial statements that would impact users’ decisions. Revenue Recognition Principle 1.Recognize revenue when it is earned. 2.Proceeds need not be in cash. 3.Measure revenue by cash received plus cash value of items received.

2 - 3 C 1 Analyzing and Posting Process The accounting process identifies business transactions and events, analyzes and records their effects, and summarizes and presents information in reports and financial statements. These reports and statements are used for making investing, lending, and other business decisions.

2 - 4 Sales Tickets Bank Statements Purchase Orders Checks Source Documents Bills from Suppliers Employee Earnings Records C 1

2 - 5 An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. The Account and Its Analysis The general ledger is a record containing all accounts used by the company. C 2

2 - 6 The Account and its Analysis Owner, Capital Owner, Withdrawals Owner, Capital Owner, Withdrawals C 2

2 - 7 Land Equipment Buildings Cash Notes Receivable Supplies Prepaid Accounts Accounts Receivable Asset Accounts C 2

2 - 8 Accrued Liabilities Unearned Revenue Notes Payable Accounts Payable Liability Accounts C 2

2 - 9 Equity Accounts Revenues Owner’s Capital Owner’s Withdrawals Expenses Equity Accounts C 2

The Account and its Analysis C 2 Revenues and owner’s contributions increase equity. Expenses and owner’s withdrawals decrease equity.

Ledger and Chart of Accounts The ledger is a collection of all accounts for an information system. A company’s size and diversity of operations affect the number of accounts needed. The chart of accounts is a list of all accounts and includes an identifying number for each account. C 3