Analyzing Transactions ACG 2021 Chapter 2

Steps in the Accounting Process Analyze Transactions from source documents Record relevant transactions in journal Post journal info to general ledger Prepare trial balance

Usefulness of an Account Account – shows increases and decreases in financial transactions Ledger – a group of accounts Chart of Accounts –List of accounts

Chart of Account Example American Company Chart of Accounts Assets Cash Accounts receivable Prepaid insurance Supplies Equipment Liabilities Accounts payable Notes payable Stockholder’s equity Capital stock Retained earnings Dividends Revenue Fees Earned Expenses Rent expense Salaries expense

Definition of Accounts AccountDefinition CashFunds in the bank Accounts receivableAmounts due from customers for services rendered Prepaid expensesRepresents a prepayment of a future expense Accounts payableAmounts due to our suppliers. Usually with payment due in 30 days Retained earningsEarnings from prior periods which have been kept in the business DividendsDistribution of income to shareholders Common StockShareholders investment in the business Fees earnedRevenues earned from the operation of the business

Characteristics of an Account Each account has a title which is the name of the item recorded in the account Each account has a space for recording increases in the amount of the item Each account has a space for recording the decreases in the amount of the item

T- Account DebitCredit DRCR

Journal The first book in which a transactions is recorded. Chronological order Debit before credit Indent credit information Each entry  debit = credit

Account Debit Increase Credit Decrease Assets Liabilities Debit Decrease Credit Increase Equity and revenues act like liabilities Expenses act like assets Memorize

Mar 1: American Co received cash for company’s capital stock $20,000 DateAccountPRPR DebitCredit Mar 1Cash$20,000 Capital stock$20,000

Mar 5: Paid rent of $500 DateAccountPRPR DebitCredit Mar 5Rent expense500 Cash500

Mar 10: Purchased supplies for cash $1,000 DateAccountPRPR DebitCredit Mar 10 Supplies1,000 Cash1,000

Mar 12: Received cash from customers for services rendered $2,500 DateAccountPRPR DebitCredit Mar 12 Cash2500 Fees earned2500

Mar 15: Purchased equip on account $5,000 DateAccountPRPR DebitCredit Mar 15 Equipment5000 Accts payable5000

Mar 20: Billed customers for services rendered $3,000 DateAccountPRPR DebitCredit Mar 20 Accounts receivable3000 Fees earned3000

Mar 25: Paid amount due on account $400 DateAccountPRPR DebitCredit Mar 25 Accounts payable400 Cash400

Mar 26: Paid dividends $1,000 DateAccountPRPR DebitCredit Mar 26 Dividends1,000 Cash1,000

Mar 31: Received cash from customers billed $900 DateAccountPRDebitCredit Mar 31 Cash900 Accts receivable900

American Company Trial Balance March 31, 2007 Cash$20,500 Accts rec 2,100 Supplies 1,000 Equip 5,000 Accts pay$ 4,600 Capital stock 20,000 Dividends 1,000 Fees earned 5,500 Rent expense 500 Total30,100

Balance Sheet Accounts Asset accounts…….Increase (+)Decrease (-) Liability accounts.…Decrease (-)Increase (+) Stockholders’ equity accounts…Decrease (-)Increase (+) DEBIT CREDIT

Credit for increases (+) Debit for decreases (–) Stockholders’ Equity Accounts Credit for decreases (–) Debit for increases (+) Asset Accounts Credit for increases (+) Debit for decreases (–) Liability Accounts Balance Sheet Accounts

Debits Credits Revenue accounts…Decrease (-)Increase (+) Expense accounts…Increase (+)Decrease (-) 2-1 Income Statement Accounts 40

Credit for increases (+) Debit for decreases (–) Revenue Accounts Income Statement Accounts Credit for decreases (–) Debit for increases (+) Expense Accounts Less (Continued)

Equals Net income (credit > debits) increases stockholders’ equity (retained earnings) Net loss (debits > credits) decreases stockholders’ equity (retained earnings)