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Chapter 3

MGAB01H3 Chapter Notes - Chapter 3: Accounting Equation, Vise, Retained Earnings

Financial Accounting
Course Code
G.Quan Fun

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Saturday, September 19, 2009
TN: Chapter 1 [MGTB05]
Accounting Transactions
Accounting Information System: system of collecting and processing transaction data and
communicating financial information to decision-makers
Vary depending on the size, type of business, amount of data, type of information needed
Determining what transaction data should be collected and processed
Only events that cause changes in accounting equation should be recorded
Accounting Transaction: occurs when A., L., & SE. items change because of an economic event
1. Each transaction must be analyzed for its effect on the three main components of the
accounting equation (assets, liabilities, shareholders equity)
2. Two sides of the equation must always be equal
The Account
Accounts: an individual accounting record of increases & decreases in a specific item
Debit and Credit
Debiting: the process of entering an amount on the left side, vise versa for crediting
Debit Balance: when total of debit exceeds the credit, vise versa for credit balance
Double-Entry Accounting System: each transaction effects two or more accounts
Dr Cr
! !
Assets = Liabilities + Shareholders Equity
" "
Cr Dr
I. Assets Accounts
a) Show debit balance (i.e. Debits should exceed credits)
II. Liabilities and Shareholders Equity Accounts
a) Show credit balance
B. Increases in Shareholders Equity
a) Common share, retained earnings & revenue accounts ! by credit & " by debit
C. Decreases in Shareholders Equity
a) Dividends, expenses accounts ! by debit & " by credit
Steps in the Recording Process
1. Analyze each transaction
2. Enter transaction in a journal
3. Transfer journal information to ledger accounts
The Journal
The book of original entry in which transactions are recorded in chronological order
The process of journaling contributions to the recording process:
1. Shows the complete effect of a transaction in one place with information
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