I. Analyzing and Recording Process—steps include:
A. Analyzing each transaction and event from source documents. Source
documents are business papers that identify and describe economic
events and transactions. Examples: sales tickets, checks, purchase
orders, bills, and bank statements. Source documents provide
objective and reliable evidence about transactions and events.
B. Record relevant transactions and events in a journal.
C. Post journal information to ledger accounts.
D. Prepare and analyze the trial balance.
II. The Account and its Analysis
A. An account is a record of increases and decreases in a specific asset,
liability, equity, revenue, or expense item.
B. Accounts are arranged into three basic categories based on the
accounting equation. Categories are:
1. Assets—resources owned or controlled by a company that have
future economic benefit. Examples include Cash, Accounts
Receivable, Note Receivable, Prepaid Expenses, Prepaid
Insurance, Supplies, Store Supplies, Equipment, Buildings, Land.
2. Liabilities—claims (by creditors) against assets, which means
they are obligations to transfer assets or provide products or
services to others. Examples include Accounts Payable, Note
Payable, Unearned Revenues, and Accrued Liabilities.
a. Accounts Payable—verbal or implied promise to pay later
usually arising from purchase of inventory or other assets.
b. Notes Payable—formal promise to pay usually denoted by
signing a promissory note, to pay a future amount.
c. Unearned revenue—revenue collected before it is earned;
before services or goods are provided.
d. Accrued liabilities—amounts owed that are not yet paid.
3. Equity—owner’s claim on company’s assets is called equity or
owner’s equity. Examples include Owner’s Capital, Owner’s
Withdrawals (decreases in equity). Revenues (results from
providing goods or services; i.e. Sales, Fees Earned) increases
equity. Expenses (results from assets or services used in
operation; i.e. Supplies Expense) decreases equity.
III. Analyzing and Processing Transactions
A. The general ledger or ledger (referred to as the books) is a record
containing all the accounts a company uses.
B. The chart of accounts is a list of all accounts in the ledger with their
C. A T-account represents a ledger account and is a tool used to
understand the effects of one or more transactions. Has shape like the
letter T with account title on top.