FA 2 - Recording Transactions Flashcards
What are the steps of recording a transaction?
i. Identify transaction;
ii. Understanding transaction;
iii. Create journal entry;
iv. Post to T-Accounts;
v. Create trial balance; and
vi. Create financial statements.
Ledger of Accounts
Also called ‘Chart of Accounts’
List of all of the accounts of a business.
The concept of materiality comes into play for businesses to choose the right accounts.
Double entry system
i. Two entries for every transaction;
ii. Generally debit first and then credit;
iii. Debits on the left, credits on the right; and
iv. Accounting equation and debits and credits are balanced after each transaction.
Credit and debit for different accounts
Assets, expenses - debits up, credits down; and
Liabilities, equity, revenues - debits down, credits up.
Why is it called a T-Account?
Because it’s shaped like a T
Accrual
Revenue that is recorded after it has been earned but before the payment has been received.
[TRANSACTION] Expense to record services received
(at time of service)
Expense account debit, Accounts payable credit
(at time of payment)
Accounts payable debit, Cash credit
[TRANSACTION] To record sale, paid at time of sale
(at time of sale)
Cash debit, revenue credit
Cost of goods sold debit, inventory credit
[TRANSACTION] To record payments received in advance
(at time of payment) Cash debit, Deferred revenue credit (at time of redemption) Deferred revenue debit, Revenue credit Cost of goods sold debit, Inventory credit
[TRANSACTION] To record pre-payments
(at time of payment)
Prepaid expense debit, Cash credit
(at time of redemption, e.g. monthly)
Expense account credit, Prepaid expense credit
Trial balance
List of general ledger accounts of the business and their balances at a point in time.
Deferred revenue
is a liability account
Prepaid expense
is an asset account
