Principles of Accounting

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					Principles of Accounting

      Chapter Two
    Notes and Terms
• Economic resources that benefit the

  –Notes Receivable
  –Accounts Receivable
  –Prepaid Expenses
• A debt
  – Inside Liability
     • Debt owed to the owner
  – Outside Liability
     • Debt owed to another
        –Notes Payable
        –Accounts Payable
        –Accrued Liabilities
Inside Liability – Owner’s Equity
• Capital
  –The owner’s claim to the assets of
   the business
• Revenues
  –The increase in owner’s equity
   created by delivering goods or
   performing services to customers
Inside Liability – Owner’s Equity
• Expenses
  –Amounts that use up assets or
   create liabilities in the normal
   course of operating a business
• Withdrawals
  –Cash or other assets removed from
   the business for personal use
 Outside Liabilities – Accts Pay’ble

• Accrued Liability
  –A liability for an expense that has
   not yet been paid

    • Taxes Payable
    • Interest Payable
    • Salary Payable
    Double-Entry Accounting

• Why is a double-entry system
  preferable to a single-entry
  system (listing transactions in a
    The Accounting Equation
• Assets   = Liabilities
  Assets     Outside Lia.         O.E.
  NB                NB                 NB

                            NB              NB

                         Withdrawals     Capital
                         Expenses        Revenue
• A chronological accounting record
  of an entity’s transactions
      Journalizing Transactions

1.   Date of the transaction
2.   Title of the account debited
3.   Title of the account credited
4.   Dollar amounts of the debit/credit
5.   Document reference (number)
• Transferring the amounts from the
  journal to separate account pages
  in the ledger
1.   Date of the transaction
2.   Journal page (posting reference)
3.   Amount to debit/credit
4.   Extended balance
5.   Posting reference (account
     number recorded in the journal)
   Trial Balance – an INTERNAL
• A list of all the accounts with their

  –Proves accuracy of the ledger
          The Ledger
• Grouped:
  –Balance sheet accounts
    • Assets
    • Liabilities
    • Owner’s Equity
  –Income statement accounts
    • Revenue
    • Expenses
        Chart of Accounts
• A listing of all the accounts and
  their account numbers in ledger
        Account Numbers
• Companies assign account
  numbers so that accounts can be
  sorted into more categories than
  just assets, liabilities, and owner’s
     Consider Account 56802
 –All expenses begin with 5
• 68
 –Refers to the specific expense:
   • Supplies Expense
• 02
 –Refers to the specific department:
   • Sales Department
        Charts of Accounts

• Review the Chart of Accounts in the
  Appendix to Chapter Two

  –List 10 accounts that you HAVE
   NOT worked with before

  –Hypothesize what each account
   might mean
   Charts of Accounts
For Example:

Uncollectible Account Expense

Now…you find 10, write them
 down and what you THINK
 each account records
Finding New and Unknown
    Accounts Activity
Chart of Accounts Activity
  Correcting Errors in the T.B.
• Search the trial balance for missing
• Search the journal for incorrect
• Search the Ledger for incorrect posting
• Divide the out-of-balance amount by 2
• Divide the out-of-balance amount by 9
Correcting Errors in the Trial
      Balance Activity
               Land’s End Activity

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          Return on Equity
  Net Income/average equity

 Net Income/(Beginning + Ending Capital/2)

 A measure of the success of the business
  against the value invested by the owner
     Journalizing and Financial
   Documents Practice #1 (Sylvia
(includes Return on Investment and Return on Equity ratio)
Chapter Two Assignments

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