MBA Fundamentals Accounting and Finance (Kaplan Test Prep)

For liabilities, assume only two accounts: notes payable for dollars borrowed by the firm and accounts payable for amounts owed to suppliers.

When you examine the balance sheet of a corporation, many of the accounts are really a summation or aggregation of several accounts. For example, accounts receivable (money owed to the business by customers who have purchased on credit) shown on a balance sheet could be comprised of hundreds of subsidiary accounts of all the company’s customers.

Assets = Liabilities + Stockholders’ Equity

Debits, which are always entered on the left -hand side of an account, are a component of an accounting transaction that will increase assets and decrease liabilities and equity.

For simplicity’s sake, assume just one equity account, where we will record sales and expenses:

understanding that transactions are analyzed and then recorded in a journal (journalized). A journal is used once the accountant or bookkeeper has examined a source document (such as an invoice, a contract, a loan agreement, a calculation, etc.). Journalizing is the recording of the details of all of these source documents into multicolumn journals

To perform transaction analysis, two important rules need to be followed: 1. Every transaction affects at least two accounts. 2. The accounting equation must remain in balance after each transaction. In other words, this equilibrium must always be in place (both before and after the transaction’s effects have been recorded): Assets = Liabilities +

Because there are two or more accounts affected by every transaction, the accounting system is referred to as double-entry accounting.

Economic Entity: The accounting for an entity (i.e., a business) should be kept separate from the accounting for the owners of that entity. This assumption establishes the idea that economic resources and obligations shown on the balance sheet should not be confused with the resources and obligations of the owners of the entity. Owner’s assets shou