Role of accounting records

Establishes accountability for assets and transactions

Keeps track of routine business activities

Obtains detailed information about a particular transaction

Evaluates efficiency and performance within company

Maintains evidence of a company’s business activities

Which events are to be reflected in the accounting records

Determining the amount of a transaction

- Events that cannot be reliably measured in monetary terms will not be reflected in the financial
statements
- Information relating to the competitive environment, product development, and marketing and
sales efforts is included in a company’s annual report to stockholders, but not as part of the
accounting information

Competitive attempts to gain market share, like developing Big Mac clones, could have serious impact
on a company’s profitability, but are not reported in the financial statements

Determining if an arm’s length transaction has occurred

- Accounting is concerned primarily with reflecting the effects of transactions between two
independent entities

Analyzing and recording process

Analyze each transaction and event from source documents – record relevant transactions and events in
a journal – post journal information to ledger accounts – prepare and analyze the trial balance

Source documents

- Bills from suppliers

- Purchase orders
- Bank statements
- Sales ticker
- Checks
- Employee earnings records
Ledger

Accounts are individual records showing increases and decreases

The entire group of accounts is kept in an accounting record called a ledger

Ledger us a collection of all accounts for an information system. A company’s size and diversity of
operations affect the number of accounts needed*

A t account represents a ledger account and is a tool used to understand the effects of*

Increases are recorded on one side of the T account and decreases are recorded on the other side

In the double entry accounting system, every transaction is recorded by equal dollar amounts of debits
and credits

An account balance is the difference between the increases and decreases in an account

Journalizing and posting transactions

Analyze transactions and source documents – apply double entry accounting – record journal entry –
post entry to ledger

Journalizing transactions

 Transaction date
 Titles of affected accounts
 Amounts of debt and credit
 Transaction explanation

T accounts are useful illustrations, but balance column ledger accounts are used in practice

Special journals are for repetitive transactions

The trial balance lists all account balances in the general ledger. If the books are in balance, the total
debits will equal the total credits
Preparing a trial balance involves three steps:

List each account title and its amount in the trial balance. If an account has a zero balance, list it with a
zero in the normal balance column

Compute the total debit balances and the total credit balances

Verify total debit balances equal credit balances

 Make sure the trial balance columns are correctly added

 Make sure account balances are correctly entered from the ledger
 See if debit or credit accounts are mistakenly placed on a trial balance
 Re-compute each account in the ledger
 Verify that each journal entry is posted correctly
 Verify that each journal entry has equal debits and credits

Presentation issues

1. Pero are not used in journals and ledgers

2. Peso signs appear in financial statements and other reports such as trial balances. The usual
practice us to put peso signs beside only the first and last numbers in a column
3. When amounts are entered in the journal, ledger, or trial balance, commas are optional to
indicate thousands, millions and so forth
4. Commas are always used in financial statements
5. Companies commonly round amounts in reports to the nearest dollar

Debt ratio = total liabilities/total assets

Evaluates the level of debt risk

A higher ratio indicates that there is a greater probability that a company will not be able to pay it’s debt
in the future