MUHASEBE I - Deneme Sınavı - 10

The accounting equation provides the analytical framework that we use throughout this book to understand the effects of transactions and events on the financial statements. This equation requires that a company’s assets exactly balance, or offset, an equal amount of financing provided by creditors and owners of the corporation. Each transaction must affect two or more accounts to keep the basic accounting equation in balance. In other words, for each transaction, one or more accounts must be debited, or entered on the left side of the account, and one or more accounts must be credited, or entered on the right side of the account, and the total monetary amount of the debits must equal the total dollar amount of the credits. The equality of debits and credits provides the basis for the double-entry system of recording transactions. Under double-entry system, debit and credit procedure is used to keep the accounting equation in balance by using appropriate accounts instead of using plus and minus procedure.

Date column includes the dates of transactions. Note that transactions are recorded in chronological order. The titles of the accounts used in the recording and the explanations of each transaction are shown in the next column. References of each account are mentioned. Debit and credit amounts for each account are entered. This is called journalizing. The followings are the items which could be seen in a journal entry:
1. The date of transaction.
2. The debit account title (it shows an increase in assets in this journal entry). Note that, debit accounts are entered first at the left margin of the column.
3. The credit account title (it shows an increase in owner’s equity in this journal entry). Note that, credit accounts are entered on the next line and right margin of the column.
4. Explanation of the transaction.
5. Numerical identifications of the accounts which are used later in posting.
6. Debit amount.
7. Credit amount.

The journalizing and posting process has five steps:
Step 1: Identify the accounts and the account types (asset, liability, or equity).
Step 2: Decide whether each account increases or decreases and then apply the rules of debits and credits.
Step 3: Record the transaction in the journal.
Step 4: Post the journal entry to the ledger.
Step 5: Determine whether the accounting equation is in balance

A trial balance is a list of accounts and their balances at a given time. The trial balance proves the mathematical equality of debits and credits after posting. The primary purpose of a trial balance is to prove (check) that the debits equal the credits after posting.The trial balance does not prove that the company has recorded all transactions correct. There may be errors in classification or measurement even the equality is provided. It indicates only that the debits and
the credits are equal.

In addition to proving the equality of debits and credits, the trial balance is also used to prepare the financial statements. The trial balance is normally prepared at the end of every accounting period and is the basis for preparation of financial statements. The income statement is prepared using the revenue and expense accounts from the trial balance. The net income relates to the increase (or in the case of a net loss, the decrease) in owner’s equity.

Businesses will have a lot of financial transactions with customers, suppliers, creditors, employees, tax authorities, governmental agencies, and others. Financial transactions are economic events that affect a company’s financial position. Therefore, you need to understand both the recording of transactions and combining of those transaction records to prepare financial statements

A liability is a debt of company –that is, something the business owes. A payable is always a liability. The most typical liability accounts:

Accounts Payable. The Accounts Payable account is the opposite of Accounts Receivable. A or The company promises to pay a debt in the future. Arises from a credit purchase.

Notes Payable. A note payable is the opposite of a Note Receivable. The Notes Payable account includes the amounts the company must pay because the company signed a written promise to pay a debt amount in the future. Notes payable, like notes receivable, usually involves interest.

Unearned Revenue (Advances from customers). The obligation occurs when a company receives cash from a customer in advance but has not provided the product or service. The company gives promise to provide services or deliver goods in the future.

Accrued Liabilities. An accrued liability is a liability for an expense you have not yet paid. In another words, an amount owed but not paid yet. Interest Payable, Salary Payable, and Income Tax Payable are typical accrued liability accounts for most companies.

Assets are economic resources that provide a future benefit for a business –something the business owns. Most firms use the following asset accounts:

Debiting refers to the act of making an entry on the left side of an account and when debit amount exceeds credits, debit balance occurs.

Assets, distributions, and expenses increase by debiting (on left side) and normally show debit balance.

In a journal entry, Debits are ALWAYS entered first, and Credits are INDENTED and listed second.

The journalizing and posting process has five steps:
Step 1: Identify the accounts and the account types (asset, liability, or equity).
Step 2: Decide whether each account increases or decreases and then apply the rules of debits and credits.Step 3: Record the transaction in the journal.
Step 4: Post the journal entry to the ledger.
Step 5: Determine whether the accounting equation is in balance.

A trial balance is a list of accounts and their balances at a given time. The trial balance proves the mathematical equality of debits and credits after posting.

A note payable is the opposite of a Note Receivable. The Notes Payable account includes the amounts the company must pay because the company signed a written promise to pay a debt amount in the future. Notes payable, like notes receivable, usually involves interest.

The company will receive assets (for example, cash) in exchange for goods sold and services rendered. Therefore, company’s assets and owner’s equity will increase. The increase in owner’s equity created by delivering goods or services to customers is called revenue. The company uses as many revenue accounts as needed. Examples include Sales Revenue account, Service Revenue account, Interest Revenue account, or Rent Revenue account.

In cash basis accounting, companies record revenues when they receive the cash and they record expenses when the cash is paid.

The time-period concept assumes that unlimited economic life of a company will be divided into regular intervals and that financial statements will be prepared for specific periods such as a month, quarter, or year.

Matching Principle (Expense recognition principle) means that you will record the expenses at the same time with the revenues related with these expenses are recorded.

In deferral adjustments the cash payment occurs before an expense is incurred. Deferred expenses are advance payments of future expenses. Deferred expenses are also called as prepaid expenses. As mentioned before, deferred expenses are the ones that are firstly paid and reported as an asset but will not be recorded as an expense until a future accounting period. In other words, cash is paid before the expense is recognized.