Monday, May 26, 2014

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.

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