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Lecture 3

BUS 251 Lecture 3: Chapter 3 notes

Business Administration
Course Code
BUS 251
Maureen Fizzel

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Double-Entry Accounng and the Accounng Cycle
How does the double-entry accounng system work and how does it overcome the
limitaons of the template method?
Double-entry accounng system: requires that each transacon be recorded in a way that
aects at least two accounts
- This method can overcome the limitaon of using the template method by enabling
companies to use hundreds or even thousands of accounts to capture informaon at
the level of detail required to manage the business eecvely
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)
- Liabilies, 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 obligaons and pay its liabilies)
-General ledger (G/L): T-accounts
Another key dierence between the template method and the double-entry
accounng system is that there are revenue, expense and dividends declared
accounts. At the end of each accounng period, we will transfer the balances to the
retained earnings account.
-Retained earning= opening retained earnings+ net income- dividend declared
Understanding the accounng cycle- what are the steps in the accounng cycle?
Accounng cycle: the sequence of steps that occurs in the recording, summarizing,
and reporng of events in the accounng system
The Chart of Accounts – what is the chart of accounts?
When a company is formed, one of the most crical inial decisions management
makes as they set up the accounng system is to determine what informaon 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 dierent set of account
number will usually be assigned to each secon of the 2nancial statement
Can companies change their chart of accounts and what are the implicaons if they
Yes, companies can add new accounts when they enter into new types of operaons,
open new locaons, wish to capture informaon at a dierent 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, liabilies, and shareholders’ equity accounts are permanent accounts
Temporary accounts: accounts with balances that are closed at the end of each
accounng period
-Revenue, expenses, and dividends declared accounts are temporary accounts
Transacon Analysis and Recording – how are transacons iden&ed?
Transacon analysis: involves idenfying whether an event or transacon has
occurred and, if so, determining its eects on the companys accounts.
-Evidence of a transacon or event: some sort of source document
-When a transacon or event has occurred, the accountant must analyze it to
determine what accounts have been aected and how the transacon should
be recorded
How are transacons recorded in the general journal?
The inial entries are usually made in the general journal – a chronological lisng of
all the events that are recorded in the accounng system
-Are always dated and are normally numbered sequenally
-The accounts are being debited are listed 2rst, followed by the accounts being
credited. The credit porons are indented. Then, an explanaon of the
transacons is generally included for future references.
-Dollars signs are omi8ed from journal entries
Compound journal entry: journal entries that aects 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
depreciaon account)
Carrying amount: cost of the property, plant, and equipment less the accumulated
depreciaon on that asset
Summarizing the informaon from the general journal is known as posng to the
general ledger (or posng)
Why are transacons 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.
Posng: process of transferring the informaon from the journal entries to the ledger
-Each account in the ledger represents a separate, special T account
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