Chapter 3 Readings.docx

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Business Administration
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Business Administration 3300K

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Chapter 3 Notes Accounting Transactions - The accounting information system is the system of collecting and processing transaction data and communicating financial information decision-makers - Accounting information systems vary widely based on: o The type of business and its transactions o The size of the company o The amount of data o The information needed - An accounting information system begins with determining what relevant transaction data should be collected and processed o Not all events are recorded and reported as accounting transactions; only events that cause changes in assets, liabilities or shareholders’ equity should be recorded - An accounting transaction occurs when assets, liabilities or shareholders’ equity items change as a result of some economic event Analyzing Transactions - The accounting equation (assets = liabilities + equity) must ALWAYS be in balance, so each transaction will have a dual (double-sided) effect on the equation o Ie. if an asset is increased, then there must be a corresponding decrease in another asset or an increase in a liability or shareholder’s equity - Two or more items could be affected when analyzing the accounting equation The Account - An accounting information system uses accounts - An account is an individual accounting record of increases and decreases in a specific asset, liability or shareholders’ equity item - In its simplest form, an account consists of 3 parts: o The title of the account o A left or debit side o A right or credit side - The alignment of these parts of an account resembles a T and so it is called a T- account Debits and Credits - The term debit means left and the term credit means right o Commonly abbreviated to Dr. and Cr. - Merely directional signals used in the recording process to describe where entries are made in the accounts o If you make an entry on the left side of an account you debit the account o If you make an entry on the right side of an account you credit the account - When the two sides are compared, an account will have a debit or credit balance o An account has a debit balance if it has more debits than credits o An account will have a credit balance if it has more credits than debits - When we record transactions, two or more accounts are affected and their balances change; we use debits and credits to explain the effects of these changes - DEBIT MOVEMENT IN ACCOUNTS MUST EQUAL CREDIT MOVEMENT IN ACCOUNTS o This equality of debits and credits is the basis for the double-entry accounting system, in which the dual (two-sided) effect of each transaction is recorded in appropriate accounts - Increases in asset accounts are recorded as debits; decreases in asset accounts are recorded as credits - Increases in liabilities and equity are recorded as credits; decreases in liabilities and equity are recorded as debits Assets - Increases must be entered on the left (debit) side - Decreases must be entered on the right (credit) side - Assets normally show a debit balance Liabilities and Shareholders’ Equity - Increases made on the right (credit) side - Decreases made on the left (debit) side - Liabilities and shareholders’ equity normally show a credit balance Increases in Shareholders’ Equity - Common shares and retained earnings both increase shareholders’ equity o Common shares are issued in exchange for the shareholders’ investments o Retained earnings are the potion of the shareholders’ equity that has been accumulated through the profitable operation of the company; can be further divided into revenues and expenses and dividends - Common shares, retained earnings and revenues are increased by credits and decreased by debits o These accounts normally show a credit balance Decreases in Shareholders’ Equity - Dividends and expenses both decrease retained earnings which decreases shareholders’ equity - Decreases in shareholders’ equity are recorded by debits, and since dividends and expenses decrease shareholders’ equity, they increase with debits and decrease with credits o These accounts normally show a debit balance Summary of Debit and Credit Effects - Accounts that ↑ with debits, and ↓ with credits o Dividends o Expenses o Assets o Losses - Accounts that ↑ with credits, and ↓ with debits o Gains o Revenues o Liabilities o Shares Steps in the Recording Process - The procedures used in the recording process are part of what is called the accounting cycle, which consists of nine steps in total; the first three steps are called the recording process o In step one, each transaction is analyzed to determine if it has an effect on the accounts  Evidence of the transaction comes from a source document  Determine the effect on specific accounts  Most critical point in the accounting process o In step tw
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