CHAPTER 2

MEASURING BUSINESS TRANSACTIONS

Measurement issues

• Recognition - predetermined time at which a transaction should be recorded



• Valuation - reliance on the cost principle



• Classification - proper categorization of transactions

• accounts are the basic storage unit for accounting data - used to accumulate amounts from similar transactions (ex: a transaction involving the purchase of equipment on account is stored in 2 accounts - equipment and accounts payable)



• chart of accts is a numbering system used to help identify accounts in the general ledger



• sequencing usually reflects type of accounts (ex: acct numbers starting with 1000 are assets, accounts starting with 2000 are liabilities, etc.)



• chart of accounts is unique for every business (there is no standard chart of accts)

• principle of duality - all transactions will affect at least 2 accounts



• double entry system - uses offsetting debits and credits to record transaction effects.

• RECORDING ANY TRANSACTION WILL REQUIRE AT LEAST ONE DEBIT AND AT LEAST ONE CREDIT



• TOTAL DEBITS MUST EQUAL TOTAL CREDITS FOR EVERY TRANSACTION.



• T-accounts are tools used by accountants to ensure that transactions are recorded properly.

• The left side of a T-acct is the debit side
• The right side of a T-acct is the credit side.



• Using T-accounts

• Increases to asset, withdrawal and expense accounts are shown by debiting the account. Decreases in these accounts are shown by credits.



• Increases to liability, capital and revenue accounts are shown by crediting the account. Decreases in these accounts are shown by debits.



• The normal balance of an account depends on how increases are reflected. So, assets, withdrawals and expense accounts have normal debit balances. Liabilities, capital and revenue accounts have normal credit balances.

• T-accounts are only tools used by accountants, much like scratch paper. They are not part of a company's records.



• Transactions are initially recorded as journal entries in the company's general journal. Proper format is shown in Exhibit 3 on page 65.



• Journal entries are recorded chronologically, as they occur in the general journal. The journal does not show any individual account's balance. (Ex: in reviewing the journal for 5/30/97, you could see all of the transactions that occurred that day, many of which might affect cash. However, you would not know what the cash balance was.)

• More sophisticated version of a T-acct. The ledger has a form (page) for each account (i.e. cash, equipment, revenues, etc.)



• Individual transactions are posted from the journal to the ledger. Posting means that all accounts affected in the journal entry are updated in the ledger.



• After all transactions are posted from the journal, the ledger balance for each account is obtained by summing all debits and credits to the ledger account.

• The trial balance lists all accounts in the ledger showing each account's balance in either the debit or credit column.



• If all journal entries balanced (debits=credits) and all journal entries were properly posted to the ledger, the total debits will equal the total credits in the trial balance.



• When the trial balance is not balanced (debits don't = credits) this indicates an error in journalizing, posting or math.

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