LO1 – Identify the effect of debit and credit transactions on asset,liability, and shareholders’ equity accounts.
Assets are resources that have future economic benefits. Examples are cash, accounts receivable, prepaid expenses, and machinery. Increases in assets are recorded as debits and decreases as credits. Liabilities represent an obligation to pay an asset in the future. Examples include accounts payable and unearned revenues. Inceases in liabilities are recorded as credits and decreases as debits. Shareholders’ equity represents the amount of net assets of the corporation that belong to owners. It includes share capital, dividends, revenues, and expenses. Increases in shareholders’ equity caused by the issuing shares and earning revenues are recorded as credits. Decreases in shareholders’ equity, like paying dividends and incurring expenses, are recorded as debits.
LO2 – Analyze transactions using double-entry accounting.
In double-entry accounting, each transaction is recorded in at least two accounts where the total debits always equal the total credits. The double-entry accounting rule is rooted in the accounting equation: Assets = Liabilities + Shareholders’ equity.
LO3 – Prepare a trial balance, explain its use, and prepare financialstatements from it.
To help prove the accounting equation is in balance, a trial balance is prepared. The trial balance lists all the account balances at a point in time. The total debits must equal total credits on the trial balance. The trial balance is used to prepare the financial statements.
LO4 – Record transactions in a general journal and post them to ageneral ledger.
Recording financial transactions was introduced in this chapter using T-accounts. A business actually records transactions in a general journal, a document which chronologically lists each debit and credit journal entry. To summarize the debit and credit entries by account, the entries in the general journal are posted (or transferred) to the general ledger. The account balances in the general ledger are used to prepare the trial balance.
LO5 – Define the accounting cycle.
Analyzing transactions, journalizing them in the general journal, posting from the general journal into the general ledger, preparing the trial balance, and generating financial statements are steps followed each accounting period. These steps form the core of the accounting cycle. Additional steps in the accounting cycle will be introduced in Chapter 3.
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