Learning objective number 1 is to identify the steps in the accounting cycle and discuss the role of accounting records in an organization.
All accountants play a pivotal roll in establishing and maintaining economic information about a company. Much of Chapter Three will illustrate how an accounting system works. Most information is stored on computers -- and accounting information is no exception.
Accountants must be proficient in establishing and maintaining databases of financial information for a company. This information is used to prepare financial statements and other reports of interest to management and others.
Learning objective number 2 is to describe a ledger account and a ledger.
An account is an individual record showing increases and decreases in the balance. Think of a checkbook as an account. In it, cash receipts and disbursements are maintained, in chronological order, as well as the current account balance.
The entire group of accounts for a particular business is called the ledger.
Accountants often use a T-account to represent a general ledger account. It is a quick way to analyze transactions before entering information in the journal. The left side of a T-account is always called the debit side, and the right side is always called the credit side. This terminology comes from the time when the double-entry system was first developed. These terms are still used as a matter of convention. The words do not have any significant meaning other than they stand for the left and right side of a ledger account. Increases and decreases in an account balance are handled differently, depending upon the nature of the account.
Let’s go back to JJ’s Lawn Care Service and look at how to record transactions in the cash account.
Part I Here are the dates and amounts of transactions that impacted the cash account of JJ’s Lawn Service for the month of May. Part II Because cash is an asset, all receipts, or increases, should be placed on the debit, or left, side of the ledger account.
Part III If increases are placed on the left side of the account, all payments, or decreases, should be placed on the right, or credit, side of the account, according to the basic accounting rules for assets.
Part IV The balance in any account is the difference between total debits and credits. The balance is placed on the side with the greater dollar amount.
Learning objective number 3 is to understand how balance sheet accounts are increased and decreased.
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Learning objective number 4 is to explain the double-entry system of accounting.
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Learning objective number 5 is to explain the purpose of a journal and its relationship to the ledger.
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Learning objective number 6 is to explain nature of net income, revenue, and expenses.
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Part I Revenues represent the price of goods sold or services rendered to customers during any given accounting period. Revenues increase owners’ equity. Part II Expenses are the cost of goods or services used up in the process of earning revenue. Accountants try to match expenses incurred with the revenues generated in an accounting period. Expenses decrease owners’ equity.
Learning objective number 7 is to apply the realization and matching principles in recording revenue and expenses.
One of the basic concepts of accounting is that revenue should be recognized when the goods or services are sold to customers. This concept may take some time to understand, as most people are cash-based. That is, they recognize revenue when cash is received rather than when it is earned and recognize expenses when paid rather than when incurred.
The matching principle states that we must match expenses with the period in which they are used.
Part I Let’s look more closely at the recording of revenues and expenses. To review, revenues increase owners’ equity and expenses decrease owners’ equity. Part II A decrease is shown in owners’ equity with a debit. Increases in expenses must be recorded as debits in a separate ledger account. Part III An increase in owners’ equity is shown with a credit. Increases in revenues must be recorded as credits in a separate ledger account.
Part I To review, payments to owners decrease owners’ equity and investments by owners increase owners’ equity. Part II Dividends represent payments to owners of a corporation. An increase in the dividend account must be shown with a debit. Part II Capital stock represents investments by owners of a corporation. An increase in the capital stock account must be shown with a credit.
Learning objective number 8 is to understand how revenue and expense transactions are recorded in an accounting system.
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Learning objective number 9 is to prepare a trial balance and explain its uses and limitations.
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Learning objective number 10 is to distinguish between accounting cycle procedures and the knowledge of accounting.
