Chapter 2: Review of the Accounting Process
Enterprise Resource Planning (ERP): installed in companies of all sizes to create a customized software
program that integrates all departments and functions across a company onto a single computer system that can
serve the information needs of those different departments.
THE BASIC MODEL
Economic events: any event that directly affects the financial position (assets, liabilities, S.E) of the company
- External events: exchange between the company and a separate economic entity
(i.e. purchasing merchandise inventory for $$, borrowing $$ from a bank, paying salaries)
- Internal events: directly affect the financial position of the company but don’t involve an exchange
transaction with another entity
(i.e. depreciation of equipment and the use of supplies)
** each event, or transaction, has a dual effect on the accounting equation **
Paid- in- capital: invested capital consisting primarily of amounts invested by shareholders when they purchase
shares of stock from the corporation
Retained earnings: amounts earned by the corporation on behalf of its shareholders and not (yet) distributed to
them as dividends.
Double entry system: Dual effect that each transaction has on the accounting equation when recorded.
Accounts: storage areas used to keep track of increases & decreases in financial position elements
General Ledger: collection of accounts
T- accounts: account with space at the top for the account title and two sides for recording increases and
decreases
Permanent accounts: Represents assets, liabilities, and shareholders’ equity at a point in time
Temporary accounts: Represent changes in the retained earnings component of shareholders’ equity for a
corporation caused by revenue, expense, gain, and loss transactions.
- need to be zeroed out to measure net income on an annual basis
THE ACCOUNTING PROCESSING CYCLE
Step 1: identifying external transactions affecting the accounting equation. Source Documents: sales invoices,
bills from suppliers, and cash register tapes serve this need
Step 2: transactional analysis: process of reviewing the source documents to determine the dual effect on the
accounting equation and the specific elements involved
* don’t use $ signs in records (journal entries, journals, ledgers, trial balances) only actual financial statements
Step 3: Record transaction in a journal: provides a chronological record of all economic events affecting a firm
Special journal: used to record a repetitive type of transaction. Journal entry: captures the effect of a transaction
on financial position in debit/credit form
Enterprise Resource Planning (ERP): installed in companies of all sizes to create a customized software
program that integrates all departments and functions across a company onto a single computer system that can
serve the information needs of those different departments.
THE BASIC MODEL
Economic events: any event that directly affects the financial position (assets, liabilities, S.E) of the company
- External events: exchange between the company and a separate economic entity
(i.e. purchasing merchandise inventory for $$, borrowing $$ from a bank, paying salaries)
- Internal events: directly affect the financial position of the company but don’t involve an exchange
transaction with another entity
(i.e. depreciation of equipment and the use of supplies)
** each event, or transaction, has a dual effect on the accounting equation **
Paid- in- capital: invested capital consisting primarily of amounts invested by shareholders when they purchase
shares of stock from the corporation
Retained earnings: amounts earned by the corporation on behalf of its shareholders and not (yet) distributed to
them as dividends.
Double entry system: Dual effect that each transaction has on the accounting equation when recorded.
Accounts: storage areas used to keep track of increases & decreases in financial position elements
General Ledger: collection of accounts
T- accounts: account with space at the top for the account title and two sides for recording increases and
decreases
Permanent accounts: Represents assets, liabilities, and shareholders’ equity at a point in time
Temporary accounts: Represent changes in the retained earnings component of shareholders’ equity for a
corporation caused by revenue, expense, gain, and loss transactions.
- need to be zeroed out to measure net income on an annual basis
THE ACCOUNTING PROCESSING CYCLE
Step 1: identifying external transactions affecting the accounting equation. Source Documents: sales invoices,
bills from suppliers, and cash register tapes serve this need
Step 2: transactional analysis: process of reviewing the source documents to determine the dual effect on the
accounting equation and the specific elements involved
* don’t use $ signs in records (journal entries, journals, ledgers, trial balances) only actual financial statements
Step 3: Record transaction in a journal: provides a chronological record of all economic events affecting a firm
Special journal: used to record a repetitive type of transaction. Journal entry: captures the effect of a transaction
on financial position in debit/credit form
