Double Entry Accounting- each business transaction has dual effects. As a result, every transaction affects at least two accounts. One Debit and One Credit
ACCOUNT | Debit | Credit |
Assets | + | - |
Expenses | + | - |
Dividends or Withdrawals | + | - |
Revenue | - | + |
Liabilities | - | + |
Capital | - | + |
Retained Earnings | - | + |
Normal Balance- side the account increases
Contra Account- has a normal balance opposite of its companion account balance.
Few examples of contra account – Allowance for doubt full account (ADA) for A/R
- Sales Discount for Sales Revenue
- Sales Return for Sales Revenue
- Accumulated ...view middle of the document...
The balance sheet at December 31,20XX.
4) Cash Flow Statement- reports the cash receipts and disbursements during a period. It reports under 3 types of business activities (operating, investing, and financing activities). The statement for the month ended December 31,20XX.
1) Accrual -basis Accounting- records the effect of every business transaction as it occurs, no matter when cash receipts and cash payment occur.
- Record revenue when you make a sale or perform a service.
- Record expense when the business uses goods or services.
2) Cash -basis Accounting- records transaction only when cash receipts and cash payment occur.
- Record revenue when you receive cash, regardless of when service was performed or sale made.
- Record expense when you pay cash, regardless of when the expense was incurred or the item was used.
3) Revenue Recognition principle- revenue should be recorded when it has been earned (but not before). In most cases revenue is earned when the business has delivered a good or services to the customer.
4) Matching Principle – is the basis for recording expenses.
The objectives of the matching principle are 1) to identify the expenses that have been incurred in an accounting period, 2) to measure the expenses, and 3) to match them against revenues earned during the same period.
5) Time Period Concept- interacts with the revenue and the matching principles. It states that accounting information must be reported at regular intervals, and that income must be measured accurately each period.
6) Going Concern Assumption- holds that the entity will remain in operation for the foreseeable future. Therefore, the relevant measure of the entity’s assets is historical cost. If the entity were going out of business, the relevant measure of its assets would be market value.
7) Historical Cost- states that the assets and services should be recorded at their actual (historical) cost. For example, if a firm pays $100,000 for land, then $100,000 is the value recorded in the books, even if an independent appraiser states that the land is worth $120,000.
8) Monetary Unit Assumption- concept holds that the purchasing power of the dollar is relatively stable. Therefore, accountants may add and subtract dollar amounts as though each dollar had the same purchasing power. Note the effects of inflation are ignored in accounting.
9) Cost Benefit Assumption- benefit must outweigh the cost
10) Full Disclosure Principal- requires disclosure of important information that could influence the decision of the investors.
Account is the basic summary device used to record changes that occur in a particular asset, liability, or owner’s equity.
Journal is a chronological record where the entity’s transactions are first recorded. It is the first place a transaction is recorded.
Ledger- All accounts grouped together form the ledger. The order of the accounts in the ledger is assets...