BUS 251 Lecture 3: Chapter 3 notes
SchoolSimon Fraser University
Course CodeBUS 251
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Double-Entry Accounng and the Accounng Cycle
How does the double-entry accounng system work and how does it overcome the
limitaons of the template method?
Double-entry accounng system: requires that each transacon be recorded in a way that
aects at least two accounts
- This method can overcome the limitaon of using the template method by enabling
companies to use hundreds or even thousands of accounts to capture informaon at
the level of detail required to manage the business eecvely
What is the normal balance concept and how it is used?
Normal balance: the balance (debit or credit) that an account is normally expected to have.
- Assets, expenses and losses normally have debit balances (le' side of T account)
- Liabilies, shareholders’ equity, revenues and gains normally have credit balances
(right side of T account)
Each type of accounts is listed in order of liquidity (ability to convert its assets into
cash to be able to meet its obligaons and pay its liabilies)
-General ledger (G/L): T-accounts
Another key dierence between the template method and the double-entry
accounng system is that there are revenue, expense and dividends declared
accounts. At the end of each accounng period, we will transfer the balances to the
retained earnings account.
-Retained earning= opening retained earnings+ net income- dividend declared
Understanding the accounng cycle- what are the steps in the accounng cycle?
Accounng cycle: the sequence of steps that occurs in the recording, summarizing,
and reporng of events in the accounng system
The Chart of Accounts – what is the chart of accounts?
When a company is formed, one of the most crical inial decisions management
makes as they set up the accounng system is to determine what informaon they
need to manage the business.
-The list of all of a company’s account is known as its chart of accounts
-Accounts are listed in the chart of accounts in the order in which they will
appear on the 2nancial statements so that it is easy to locate them in the
general ledger and easier to prepare the 2nancial statement
-If account numbers are assigned to the accounts, a dierent set of account
number will usually be assigned to each secon of the 2nancial statement
Can companies change their chart of accounts and what are the implicaons if they
Yes, companies can add new accounts when they enter into new types of operaons,
open new locaons, wish to capture informaon at a dierent level of detail, etc.
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They can also delete accounts that are no longer required.
Opening Balance – What is the di$erence between permanent and temporary
Permanent accounts: accounts with balances that carry over from one period to the
-Assets, liabilies, and shareholders’ equity accounts are permanent accounts
Temporary accounts: accounts with balances that are closed at the end of each
-Revenue, expenses, and dividends declared accounts are temporary accounts
Transacon Analysis and Recording – how are transacons iden&ed?
Transacon analysis: involves idenfying whether an event or transacon has
occurred and, if so, determining its eects on the company’s accounts.
-Evidence of a transacon or event: some sort of source document
-When a transacon or event has occurred, the accountant must analyze it to
determine what accounts have been aected and how the transacon should
How are transacons recorded in the general journal?
The inial entries are usually made in the general journal – a chronological lisng of
all the events that are recorded in the accounng system
-Are always dated and are normally numbered sequenally
-The accounts are being debited are listed 2rst, followed by the accounts being
credited. The credit porons are indented. Then, an explanaon of the
transacons is generally included for future references.
-Dollars signs are omi8ed from journal entries
Compound journal entry: journal entries that aects more than two accounts
Contra-asset account: an asset account, but its normal balance is contrary or
opposite to what an asset account would normally have (ex: accumulated
Carrying amount: cost of the property, plant, and equipment less the accumulated
depreciaon on that asset
Summarizing the informaon from the general journal is known as posng to the
general ledger (or posng)
Why are transacons also recorded in the general ledger?
To prepare 2nancial statements, the accounts would have to go through this process
for all of the accounts in order to determine their ending balances.
Posng: process of transferring the informaon from the journal entries to the ledger
-Each account in the ledger represents a separate, special T account
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