Basic Accounting: Chapter 2: Analyzing Transactions

Accounting transactions are recorded using an accounting system.

An accounting system is designed to show the increases and decreases in accounts in the financial statements.

5 major types of accounts in financial statements:

1. Assets
2. Liabilities
3. Owner's Equity

• Capital
• Drawing

4. Revenue

5. Expenses

The rules of debit and credit apply to these accounts:

Recording Process

==============

1. Journal

• Transaction takes place
• Determine whether an asset, a liability, owner's equity, revenue, or expenses is affected by a transaction
• Apply the rules of debit and credit

2. Ledger

• Periodically, the journal entries are transferred to the accounts in the ledger
• Ledger contains accounts that the company has; the list of accounts is normally known as chart of accounts.

3. Trial Balance

• The trial balance is a list of account balances from the ledger 
• At the end of each accounting period, company will prepare a trial balance.
• The trial balance must balance, i.e. the total of the debit balances must equal to the total of credit balances.