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Financial Accounting - Chapter 2

T - account

a device or convention for organizign and accumulating the accounting of entries of transactions that affect and individual account

Income Statement 'articulates' with the Balance Sheet
by Retained Earnings

Retained Earnings (beginning) + Net Income - Dividends = retained Earnings (ending)

Account

a device for representing the amount (balance) for any line in the balance sheet or income statement

Permanent accounts

An account that appears on the balance sheet.

Contract with temporary account.

Temporary accounts

An account that does not appear on the balance sheet; revenue and expense accounts and purchase related accounts.

Balance sheet equation

Assets = Liabilities + Owners' Equity

Assets = All Sources of Financing

dual effects of transactions

The proper recording of any transaction in accounting records results in equal amounts debited to various accounts as credited to various accounts.

Debit

An entry on the LEFT side of an account

To make an entry on the LEFT side of an account.

Records increases in Assets and Expenses; records decreases in liabilities, owners' equity and revenues

Credit

An entry on the RIGHT side of an account.

To manke and entry on the RIGHT side of an account.

Records increases in liabilities, owners' equity, revenues and gains; records decreases in Assets and Expenses

Journal entry

A dated journal recording, showing the accounts affected, of equal debits and credits, with an explanation of the transaction, if necessary.

Posting process

To record entries in an account to a ledger, usually as transfers frokm a journal.

Adjusting entries

An entry made at the end of an accounting period to record a transaction or other accounting event that the firm has not yet recorded ; and entry to update the accounts.

Contra account

An account, such as accumulated depreciation, that accumulatse subtractions from another account, such as machinery.

Contrast with adjunct account.

Closing process

the entries that accomplish the transfer of balances in temporary accounts to the related balance sheet accounts.

Relation between a T-account and a Journal entry?

Journal entries provide a record of transactions, and T-accounts summarize the effects of transaction on specific accounts.

T-account is used to record the effects of events and transactions that affect a specific asset, liability, SH's equity, revenue or expense account. It captures both the increses and decreases in that specific account. Shows the beginning and ending balances of balance sheet accounts.

Journal entry shows all the accounts affected by a single event or transactions; each debit and each credit in a journal entry will affect a specific T-account.

Distinguishes noncurrent assest from current assets?

Time.

Current assets are expected to be converteed to cash within a year (Accounts Receivable)

Noncurrent assets are expected to be converted to cash over longer periods.

Purpose of Income statement

Show the user of the financial statments the components of net income, the causes of net income.

A user of financial statements can calculate net income by analyzing the change in retainaed earnings, but this analysis does not reveal the specifc factors that combine to produce the net income number.

Purpose of Contra accounts

Provide disaggregated information concerning the net amount of an asset, liability, or sharholders' equity item.

IE: The account, Property, Plant and Equipment net of Accumulated Depreciation does not indicate seperately the qcquesition cost of fixed assests and the portion of that acquisition cost written off as depreciation since acquisition. Using a Contra Account, it would have such information.

Balance Sheet Equation

Assets = Liabilities + Shareholders' Equity

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