# AC 211 Lecture Notes - Lecture 3: Accounting Equation, Accounts Payable, Accounting Information System

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8 Feb 2017
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Chapter 2: The Balance Sheet
Building a balance sheet from business activities
Key activity for start-up is to obtain financing: equity (owners' contributions and
reinvestments of profit) and debt (loans)
business is obligated to repay debt financing, but it is not obligated to
repay its equity financing
After obtaining initial financing, a company will start investing in assets that will
be used after the business opens
Three features to help understand how accounting works:
The company always documents its activities
The company always receives something and gives something
fundamental idea of business: to create value through exchange
“double-entry” system: captures both what is received and what is
given
Cost: dollar amount that represents the value of items given and
received and is used to measure the financial effects of the
exchange
Cost principle: Requires assets to be recorded at the
historical cash-equivalent cost, which is the amount paid or
payable on the date of the transaction
After each activity is documented, accountants assign names to the items
exchanged and then analyze their financial effects on the accounting equation
ultimate goal is to capture these financial effects so that they can be reported in
the financial statements for use by decision makers inside and outside the
company
Transactions and other activities
Transaction: An exchange or an event that has a direct economic effect on the
assets, liabilities, or stockholders' equity of a business, only activities that enter
the financial accounting system
External exchanges: involving assets, liabilities, and/or stockholders'
equity between the company and someone else
Internal events: do not involve exchanges with others outside the
business, but rather occur within the company itself
an exchange of only promises is not an accounting transaction
The Accounting Cycle
Step 1: Analyze Transactions
involves determining whether a transaction exists and, if it does, analyzing its
impact on the accounting equation
Duality of effects: Every transaction has at least two effects on the basic
accounting equation
A = L + SE
As part of transaction analysis, a name (account title)is given to each item
exchanged
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