MBA Fundamentals Accounting and Finance (Kaplan Test Prep)

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.

Accountants memorize these rules: • Credits increase liabilities and equity; credits decrease assets. • Debits decrease liabilities and equity; debits increase assets.

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

Assets are a company’s resources—things the company owns. Examples of assets include cash, accounts receivable, inventory, prepaid insurance, investments, land, buildings, equipment, and goodwill.

Assets (what it owns)· • Liabilities (what it owes to others)· • Owner’s equity (the difference between assets and liabilities)

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 +

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

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

It is a chronological record of the transactions of a business. However, the journal should not be confused with the ledger—the collection of accounts used by the firm and the real heart of the accounting system.