chapter three notes Flashcards
transaction
an economic event (external or internal)
is it true that not all events constitute an economic event or transaction?
yes
ex: signing a contract
transaction analysis
studying a transaction to determine its economic effect on the business in terms of the accounting equation
what are the two important concepts of transaction analysis?
- the accounting equation must stay in balance
2. dual effects (at least two accounts are affected)
what are the steps of transaction analysis?
- identify at least two affected accounts
- classify accounts
- determine the direction and the amount of the change
- apply debit and credit rules
what are the steps to recording a journal entry?
- identify a minimum of 2 account titles that summarize the transaction
- classify the account titles
- increase or decrease the account with a debit or a credit
debits on the ___
left
credits on the ___
right
t-account
summarizes all transactions for an individual account in one place
how do you increase an asset?
debit
how do you decrease an asset?
credit
what is the normal balance for an asset?
debit
how do you increase a liability?
credit
how do you decrease a liability?
debit
what is the normal balance for a liability?
credit
how do you increase stockholder’s equity?
credit
how do you decrease stockholder’s equity?
debit
what is the normal balance for stockholder’s equity?
credit
how do you increase revenue?
credit
how do you decrease revenue?
debit
how do you increase an expense?
debit
how do you decrease an expense?
credit
perpetual inventory method
continuously tracking inventory (2 entries)
- record revenue
- record cost of goods sold
DEAD
“Debits increase”
Expenses
Assets
Dividends
CLEAR
"Credits increase" Liabilities Equity Accumulated Depreciation Revenue
general journal
a chronological listing of transactions
trial balance
a list of all accounts in the ledger and their ending balance (credit or debit)
what is the purpose of a trial balance?
- prove debits=credits
2. catch some obvious errors
