Chart of Accounts & Business Transactions

Chart of Accounts

• Accounts are not arranged alphabetically within the chart of accounts.
• The chart of accounts lists all general ledger accounts systematically.
• The chart of accounts includes an entity's account titles and numbers and is designed based on the entity’s accounting system.
• A chart of accounts is entered upon assumption of a business
• Account titles and numbers are arranged as assets, liabilities, equity, revenue, and expenses
• A firm's chart of accounts is a list account titles used by a business entity
• Creating it is the first step undertaken in the accounting cycle
• Accounts are arranged following the Balance Sheet and then the Income Statement.
• A chart of accounts is specific for a particular entity.

Business Transactions and Source Documents

• A confirmation letter is not a business document used in recording business transactions.
• Source documents received from outside parties are important.
• Source documents are a basis for recording business transactions.
• Business source documents are required to analyze business transactions in the real world.
• A debit memo from a supplier is a source document that evidences a business transaction
• analyzing transactions from source documents is the first step in the accounting cycle.

Accounting and Financial Position

• Assets, expenses, and drawing accounts are debited for increases.
• An "account" is used to summarize the effects of transactions on assets, liabilities, equity, revenue, and expenses.
• The accountant determines the impact of transactions on the financial position.
• Financial position is represented by the basic equation: assets equal liabilities plus equity

Journal Entries

• A general journal entry includes the transaction date, accounts and amounts to be debited and credited, and a brief explanation.
• Debit and credit analysis of a transaction happens before the entry is recorded in the journal.
• Increasing an asset and decreasing equity is not a possible combination
• In the Double-entry accounting system, the dual effect of each transaction is recorded with a debit and a credit.
• Increase to assets and expense accounts use debit entries, while increases to liabilities, equity, and revenue accounts use credit entries
• "Debit" increases while "credit" decreases.

Recording process

• Transferring journal information into the appropriate account is not a basic step in the recording process
• Analysis of transactions looks at the effect on assets, liabilities, equity, revenues, and expenses.
• First step is to analyze each transaction based on source documents for the effect on balances

Sales Invoice and VAT

• Payment made after 10 days from the invoice date includes the full invoice amount plus the 12% Output VAT
• In the invoice terms of 2/10, n/30, the customer can get a 2% discount by paying in 10 days.
• An invoice supports the cash purchase of equipment and the transaction is recorded in the Cash Disbursements Journal

Accounting System

• A purchase order is not a source document used in recording a business transaction.
• The double-entry system means the dual effect of each transaction is recorded with a debit and a credit
• Complete sets of journals and ledgers are maintained in the double-entry accounting system.

Transaction Example

• Purchasing equipment for P160,000 by paying P60,000 cash and issuing a note payable for the balance increases total assets and total liabilities by P100,000.