Recording Business Transactions and T-Accounts in Accounting, Study notes of Accounting

Download Recording Business Transactions and T-Accounts in Accounting and more Study notes Accounting in PDF only on Docsity! Recording Business Transactions The account We now know how business transactions impact financial statements. With only a few transactions, directly changing the amounts that appear on financial statements to reflect each transaction works well. Real businesses however, have thousands of transactions each year. With so many transactions to consider, directly changing the amounts on financial statements would not provide adequate documentation of individual transactions and would likely lead to serious recording errors. Businesses, therefore, use a more formal recording process designed to carefully record each individual business transaction so that its effect will be properly indicated in the amounts that appear on financial statements. We will now focus on how data relating to the hundreds or thousands of business transactions is collected and recorded in formal accounting records to culminate in the useful tools known as financial statements. The purpose of accounting is to provide information to economic decision makers. As an information system, accounting must identify and record results of business entities. As each business transaction occurs, its impact is recorded in two or more information storage units known as accounts. The total number of accounts in the information system and the titles of the accounts are based on the information needs of the business. For instance, some businesses have one account called “CASH” in which the effects of all transactions, increasing and decreasing the total cash of the business are recorded. Other companies might have three cash accounts. 1. An account called Cash in Bank - Current, for cash in the company current or checking account. 2. Cash in Bank - Savings, for cash in the company savings account, and still another. 3. Cash on Hand, for cash stored or kept at the business. As we pointed out, accounts are the basic information storage units. However, the amount (balance) in each individual account may or may not be shown on financial statements. The purpose of financial statements is to present information that is detailed enough to be informative, yet not so detailed that is confusing and otherwise loses its usefulness. Account names are not formally fixed by accounting rules. They differ from company to company. The only requirement is that each account should adequately describe the item it represents. In addition to the account name, most companies use account numbers to help identify each account. For instance, in the case of companies with several cash accounts to help identify each account. For instance, in the case of companies with several cash accounts, referring to the account number may reduce confusion. There are no accounting rules dictating how accounts are to be numbered. The T-account We have described an account as an information storage unit, but what does an account look like? It depends. Accounting systems can vary quite a bit. Some are manual (paper) systems and others are electronic (computer-based). The representation of an account universally used to illustrate the effects of transactions is the T-account. A T-account for cash is represented below: Cash Basically, a T-account is simply a large “T” drawn under an account name. Results of transactions are recorded by placing the peso amount on one side of the “T” or the other. As we will see, the placement of the peso amount on either the left side or right side of the “T” is very significant. 502 Cost of Beverage Sales 601 Salaries and Wages 602 Employee Benefits 603 Employee Meals 701 Utilities 702 China, Glassware, and Silver 801 Operating Supplies 802 Telephone 803 Office Supplies 804 Credit Card Fees 805 Repairs and Maintenance 806 Taxes and Licenses 901 Rent 902 Insurance 904 Depreciation 905 Provision for income taxes A sample chart of accounts for hotels follow: Pacific Hotel, Inc. Chart of Accounts Account Number Account Name Assets Accounts 101 Cash 201 Marketable Securities 301 Accounts Receivable 401 Food Inventory 402 Beverage Inventory 403 Office Supplies Inventory 404 Operating Supplies Inventory 405 Cleaning supplies Inventory 501 Prepaid Rent 502 Prepaid Insurance 601 Land 602 Buildings 603 Furniture and Equipment 604 Accumulated Depreciation-Building 605 Accumulated Depreciation-Furniture & Equipment 606 China, Glassware and Silver 701 Organization Cost 702 Security Deposits 703 Pre Operating expenses Liability Accounts 801 Accounts Payable 802 VAT Payable 803 Notes Payable 804 Mortgage Payable 806 Income Taxes Payable 807 Other Payable 808 Accrued Expenses Equity Accounts 901 Common Stock 902 Additional Paid-in Capital 903 Retained Earnings Revenue Accounts 1001 Room Sales 1002 Food Sales 1003 Beverage Sales 1004 Telephone Sales