Chapter 2: analyzing and recording transactions

Asset accounts:

Cash
Accounts receivables: money customers owe you
Notes receivables
Inventory: includes raw materials used to produce products
and partially finished products
Prepaid expenses: expenses a company has made in
advance. For example buying a one year insurance policy.
The payment is considered prepaid insurance expense
Land, buildings, equipment, and supplies

Liabilities accounts:

Accounts payable: when you pay for something on credit.

Accrued liabilities: includes salaries payable, interest
payable wages payable, tax payable etc
Unearned revenue

Shareholders equity:

Capital: money a company receives from owners in

exchange of shares
Retained earnings: beginning retained earnings plus net
income or loss minus dividends
Dividends: payments to shareholders
Revenues: it is earned when a service is provided
Expense: costs incurred to purchase goods.
Gains and losses: if a company sells a land for more money
than purchased, it would be a gain. Gains increase OE,
wheras losses decrease it.

Assets= liabilities + (share capital +operating retained earnings-

dividends + revenue-expenses)
Analyzing and recording process

1) You analyze each transaction and event from source

documents
2) Record relevant transaction in a journal
3) Then post journal to ledger accounts.
4) Prepare trial balance

Accounts and its analysis:

Account is a record or increase and decrease in a specific

asset, liabilities and OE.
The general ledger is a record containing all accounts used.

We are going to learn a new way to record business transaction,

instead of the chapter 1 way. That way is the T account.

T-account

The left side of a T-account is called debit, and the right side
is called credit. We abbreviate debit with Dr and credit with
Cr.
An account is called a Debit balance account, where it
increases when you debit it and decreases when you credit
it.
An account is called a Credit balance account, where it
increases when you credit it and decreases when you debit
it.
Assets are debit balance accounts, whereas liabilities and
are credit balance accounts.
Owners equity is a bit different; we look at each account in
OE separately. Capital increases when you credit it,
dividends increase when you debit them, revenue increases
when you credit it, expenses increase when you debit. But in
general equity increases when you credit and decreases
when you debit.
However, after we analyze a transaction, we record the change in
a journal entry. This step comes before making a T-account. Ex:
suppose you purchase supplies for $250 cash. The journal entry
would look like the following:

Office supplies 250

Cash 250

Whenever you make a journal entry, you first list the accounts
being debited, then the accounts credited. And the total you debit
must equal the total you credit

After we finish the journal, we post the changes in a T-account or

the ledger.