MGT120H5 Chapter Notes - Chapter 2: Trial Balance, The Ledger, Financial Statement
CHAPTER 2: RECORDING BUSINESS TRANSACTIONS
Summary:
• A business transaction is any event that has a financial impact on a
business and that can be reliably measured. Business transactions
are recorded in the accounts affected by the transactions. An
account is the record of all transactions affecting a particular asset,
liability, or element of shareholders’ equity.
• Assets: Cash, Accounts Receivable, Inventory, Prepaid Expenses,
Land, Buildings, Equipment
• Liabilities: Accounts Payable, Accrued Liabilities, Loans Payable
• Shareholders’ equity: Share Capital, Retained Earnings,
Dividends, Revenues, Expenses
• Assets = Liabilities + Shareholders’ Equity
• Every business transaction affects at least one element of the
accounting equation.
• When a company issues shares in exchange for $50,000 in cash,
for example, the Cash asset increases by $50,000 and so does the
Share Capital component of shareholders’ equity. After each
transaction is recorded in the accounting equation, the equation
must remain in balance, as it is in our example, with $50,000 on
each side of the equation. If the equation is out of balance, the
transaction has been recorded incorrectly and must be revise
• These accounts can be represented in form of T accounts
• The vertical line divides the account into left (debit) and right
(credit) sides, while the account title rests on the horizontal line.
The left side of the ac- count is called the debit side, and the right
side is called the credit side. We can use these T-accounts to record
transactions instead of using the cumber- some accounting
equation approach
• When using T-accounts to record transactions, we apply the rules
of debit and credit, which help us translate the impacts of
transactions on the accounting equation into impacts on specific
accounts
• To record an increase in assets, use a debit.
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MGT120H5 Full Course Notes
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Document Summary
Summary: a business transaction is any event that has a financial impact on a business and that can be reliably measured. Business transactions are recorded in the accounts affected by the transactions. An account is the record of all transactions affecting a particular asset, liability, or element of shareholders" equity: assets: cash, accounts receivable, inventory, prepaid expenses, Land, buildings, equipment: liabilities: accounts payable, accrued liabilities, loans payable, shareholders" equity: share capital, retained earnings, After each transaction is recorded in the accounting equation, the equation must remain in balance, as it is in our example, with ,000 on each side of the equation. The left side of the ac- count is called the debit side, and the right side is called the credit side. This ensures that the accounting equation remains in balance after each transaction: the normal balance of each account falls on the same side as where the in- creases to the account are recorded.
