J David Spiceland,
University of Memphis James F Sepe,
Santa Clara University Lawrence A Tomassini,
Ohio State University
Review of the Accounting Process
eLearning Session
The Basic Model
External events involve an exchange between the company and another entity; internal transactions do not involve an exchange transaction but do affect financial position.
The accounting equation underlies the process used to capture the effect of economic events (transactions):
Assets = Liabilities + Owners' Equity
Each transaction has a dual effect on the accounting equation.
The double-entry system is used to process transactions.
Elements of the accounting equation are represented by accounts in a general ledger.
In the double-entry system, debit means left side of an account, and credit means right side of an account.
Asset increases are entered on the debit side of accounts and decreases are entered on the credit side. Liability and equity account increases are credits and decreases are debits. Here is a graphic illustrating the process. (91.0K)
Step 1. Obtain information about transactions from source documents.
Step 2. Transaction analysis is the process of reviewing source documents to determine the dual effect on the accounting equation and the specific elements involved. Illustration (36.0K)
Step 3. Record the transaction in a journal. For most external transactions, special journals (discussed in Appendix 2C) are used to capture the dual effect of the transaction in debit/credit form. Illustration (38.0K)
Step 4. Post from the journal to the general ledger accounts. In addition to general ledger control accounts, a subsidiary ledger (discussed in Appendix 2C) contains a group of subsidiary accounts associated with particular general ledger control accounts. Illustration (147.0K)
Concept Check What are permanent general ledger accounts? Temporary accounts?
Step 5. Prepare an adjusted trial balance. (49.0K) A spreadsheet (discussed in Appendix 2A) can be utilized as a tool after and instead of step 5 in the processing cycle.
Add (deduct) increases (decreases) in assets. For example, an increase in accounts receivable means that the company earned more revenue than cash collected.
Add (deduct) decreases (increases) in accrued liabilities. For example, a decrease in interest payable means that the company incurred less interest expense than the cash interest paid, requiring the addition to cash basis-income.