The T accounts Summary PDF

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The T accounts Summary...

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1.3. THE “T-ACCOUNTS” 1. Concept and definition of an account - The accounting collects, classifies and treats the informati on flows that occur in the economic activity of a company for the preparation of its financial information. - Its objective is to prepare useful financial information fo r the economic-financial decision making process. - The assets, rights and obligations of a company are many, varied and with changes over time. - The representation of the fundamental equation Assets = Liabi lities + Equity is not enough What methodology do we apply to register not only the positions but t he movements of goods, rights and obligations of a company? ACCOUNT: Synthetic record unit that collects, starting from a chronological record of the transactions (Journal book), th e initial situation (opening balance), the economic inflows a nd outflows (journal entries) and the final situation (ending balance), all referring to the element to which it represents that it can be of assets, liabilities or equity. 2. Graphic representation and terminology of accounts The Journal Book chronologically records the accounting facts. The annotati ons of the accounting facts in the Journal Book are called journal entries. - General Ledger: systematic summary of all net assets variations Open an account: assign title and number - Debit; left part of the account - Credit: right part of the account - Charge or debit an account: make an entry in the Debit side - Credit an account: make an entry in the Credit side Account balance: difference between debit and credit amounts - If D> C • D - C = DebIt balance - If D Basic rules 1st Law of breakdown or dissociative : Every account can be divided into others, keeping each of them the same characteristics as the first. This division can be: - By concepts: Raw material A, Raw material B… - By type of annotations: in the Cash account, Debits represent c ollections and Credits represent payments... - For the transactions carried out: Customers by geographical area... 2nd Law of integration or associative : It is the inverse of the previous one; it refers to the possibili ty of joining several accounts in a more general one or in a smaller number of them: control account of Customers, Suppliers, Banks… 3rd Law of compensation : When the same account has to be debited and credited due to the same economic fact, the accounting can be eliminated, either tot ally or partially. However, this law has many limitations as compensations may occur that reduce the information 4th Law of connection or coordination: In an accounting system, any account thereof can be coordinated with another, either directly or indirectly. 5th Law of invariability: The criteria used to name or keep accounts must be maintained th roughout the accounting year. Debits and credits are the opposing sides of an accounting jour nal entry. They are used to change the ending balances in the general ledger accounts. The rules governing the use of debits and credits in a journal entry are as follows:

Rule 1: All accounts that normally contain a debit balance will inc rease in amount when a debit (left column) is added to them, and reduced when a credit (right col umn) is added to them. The types of accounts to which this rule applies are expenses, assets, and dividends Rule 2: All accounts that normally contain a credit balance will in crease in amount when a credit (right column) is added to them, and reduced when a debit (lef t column) is added to them. The types of accounts to which this rule applies are liabilities, revenues, and equity. Rule 3: Contra accounts reduce the balances of the accounts with wh ich they are paired. This means that (for example) a contra account paired with an asset account behaves as though it were a liability account. Rule 4: The total amount of debits must equal the total amount of credits in a transaction. Otherwise, a transaction is said to be unbalanced, and the finan cial statements from which a transaction is constructed will be inherently incorrect. An a ccounting software package will flag any journal entries that are unbalanced, so that they cannot be en tered into the system until they have been corrected. - However, just following the rules does not guarantee that th e resulting entries will be correct in substance, since that also requires a knowledge of how to record t ransactions within the applicable accounting framework (such as Generally Accepted Accountin g Principles or International Financial Reporting Standards)....