Bank Reconciliation

A company's general ledger account Cash contains a record of the transactions (checks
written, receipts from customers, etc.) that involve its checking account. The bank also
creates a record of the company's checking account when it processes the company's
checks, deposits, service charges, and other items. Soon after each month ends the bank
usually mails a bank statement to the company. The bank statement lists the activity in
the bank account during the recent month as well as the balance in the bank account.

When the company receives its bank statement, the company should verify that the
amounts on the bank statement are consistent or compatible with the amounts in the
company's Cash account in its general ledger and vice versa. This process of confirming
the amounts is referred to as reconciling the bank statement, bank statement
reconciliation, bank reconciliation, or doing a "bank rec." The benefit of reconciling the
bank statement is knowing that the amount of Cash reported by the company
(company's books) is consistent with the amount of cash shown in the bank's records.

Because most companies write hundreds of checks each month and make many
deposits, reconciling the amounts on the company's books with the amounts on the bank
statement can be time consuming. The process is complicated because some items
appear in the company's Cash account in one month, but appear on the bank statement
in a different month. For example, checks written near the end of August are deducted
immediately on the company's books, but those checks will likely clear the bank
account in early September. Sometimes the bank decreases the company's bank account
without informing the company of the amount. For example, a bank service charge
might be deducted on the bank statement on August 31, but the company will not learn
of the amount until the company receives the bank statement in early September. From
these two examples, you can understand why there will likely be a difference in the
balance on the bank statement vs. the balance in the Cash account on the company's
books. It is also possible (perhaps likely) that neither balance is the true balance. Both
balances may need adjustment in order to report the true amount of cash.

After you adjust the balance per bank to be the true balance and after you adjust the
balance per books to also be the same true balance, you have reconciled the bank
statement. Most accountants would simply say that you have done the bank
reconciliation or the bank rec.

The Bank Reconciliation Process

Step 1. Adjusting the Balance per Bank

We will demonstrate the bank reconciliation process in several steps. The first step is to
adjust the balance on the bank statement to the true, adjusted, or corrected balance. The
items necessary for this step are listed in the following schedule:

Step 1. Balance per Bank Statement on Aug. 31, 2008

Adjustments:
Add: Deposits in transit
Deduct: Outstanding checks
Add or Deduct: Bank errors
Adjusted/Corrected Balance per Bank

Deposits in transit are amounts already received and recorded by the company, but are
not yet recorded by the bank. For example, a retail store deposits its cash receipts of
August 31 into the bank's night depository at 10:00 p.m. on August 31. The bank will
process this deposit on the morning of September 1. As of August 31 (the bank
statement date) this is a deposit in transit.

Because deposits in transit are already included in the company's Cash account, there is
no need to adjust the company's records. However, deposits in transit are not yet on the
bank statement. Therefore, they need to be listed on the bank reconciliation as an
increase to the balance per bank in order to report the true amount of cash.

A helpful rule of thumb is "put it where it isn't." A deposit in transit is on

the company's books, but it isn't on the bank statement. Put it where it
isn't: as an adjustment to the balance on the bank statement.

Outstanding checks are checks that have been written and recorded in the company's
Cash account, but have not yet cleared the bank account. Checks written during the last
few days of the month plus a few older checks are likely to be among the outstanding
checks.

Because all checks that have been written are immediately recorded in the company's
Cash account, there is no need to adjust the company's records for the outstanding
checks. However, the outstanding checks have not yet reached the bank and the bank
statement. Therefore, outstanding checks are listed on the bank reconciliation as a
decrease in the balance per bank.

Recall the helpful tip "put it where it isn't." An outstanding check is on

the company's books, but it isn't on the bank statement. Put it where it
isn't: as an adjustment to the balance on the bank statement.

Bank errors are mistakes made by the bank. Bank errors could include the bank
recording an incorrect amount, entering an amount that does not belong on a company's
bank statement, or omitting an amount from a company's bank statement. The company
should notify the bank of its errors. Depending on the error, the correction could
increase or decrease the balance shown on the bank statement. (Since the company did
not make the error, the company's records are not changed.)

Step 2. Adjusting the Balance per Books

The second step of the bank reconciliation is to adjust the balance in the company's
Cash account so that it is the true, adjusted, or corrected balance. Examples of the items
involved are shown in the following schedule:

Step 2. Balance per Books on Aug. 31, 2008

Adjustments:
Deduct: Bank service charges
Deduct: NSF checks & fees
Deduct: Check printing charges
Add: Interest earned
Add: Notes Receivable collected by bank
Add or Deduct: Errors in company's Cash account
Adjusted/Corrected Balance per Books

Bank service charges are fees deducted from the bank statement for the bank's
processing of the checking account activity (accepting deposits, posting checks, mailing
the bank statement, etc.) Other types of bank service charges include the fee charged
when a company overdraws its checking account and the bank fee for processing a stop
payment order on a company's check. The bank might deduct these charges or fees on
the bank statement without notifying the company. When that occurs the company
usually learns of the amounts only after receiving its bank statement.

Because the bank service charges have already been deducted on the bank statement,
there is no adjustment to the balance per bank. However, the service charges will have
to be entered as an adjustment to the company's books. The company's Cash account
will need to be decreased by the amount of the service charges.

Recall the helpful tip "put it where it isn't." A bank service charge is
already listed on the bank statement, but it isn't on the company's books.
Put it where it isn't: as an adjustment to the Cash account on the
company's books.

An NSF check is a check that was not honored by the bank of the person or company
writing the check because that account did not have a sufficient balance. As a result, the
check is returned without being honored or paid. (NSF is the acronym for not sufficient
funds. Often the bank describes the returned check as a return item. Others refer to the
NSF check as a "rubber check" because the check "bounced" back from the bank on
which it was written.) When the NSF check comes back to the bank in which it was
deposited, the bank will decrease the checking account of the company that had
deposited the check. The amount charged will be the amount of the check plus a bank
fee.

Because the NSF check and the related bank fee have already been deducted on the
bank statement, there is no need to adjust the balance per the bank. However, if the
company has not yet decreased its Cash account balance for the returned check and the
bank fee, the company must decrease the balance per books in order to reconcile.

Check printing charges occur when a company arranges for its bank to handle the
reordering of its checks. The cost of the printed checks will automatically be deducted
from the company's checking account.
Because the check printing charges have already been deducted on the bank statement,
there is no adjustment to the balance per bank. However, the check printing charges
need to be an adjustment on the company's books. They will be a deduction to
company's Cash account.

Recall the general rule, "put it where it isn't." A check printing charge is
on the bank statement, but it isn't on the company's books. Put it where it
isn't: as an adjustment to the Cash account on the company's books.

Interest earned will appear on the bank statement when a bank gives a company
interest on its account balances. The amount is added to the checking account balance
and is automatically on the bank statement. Hence there is no need to adjust the balance
per the bank statement. However, the amount of interest earned will increase the balance
in the company's Cash account on its books.

Recall "put it where it isn't." Interest received from the bank is on the
bank statement, but it isn't on the company's books. Put it where it isn't:
as an adjustment to the Cash account on the company's books.

Notes Receivables are assets of a company. When notes come due, the company might
ask its bank to collect the note receivable. For this service the bank will charge a fee.
The bank will increase the company's checking account for the amount it collected
(principal and interest) and will decrease the account by the collection fee it
charges.Since these amounts are already on the bank statement, the company must be
certain that the amounts appear on the company's books in its Cash account.

Recall the tip "put it where it isn't." The amounts collected by the bank
and the bank's fees are on the bank statement, but they are not on the
company's books. Put them where they aren't: as adjustments to the Cash
account on the company's books.

Errors in the company's Cash account result from the company entering an incorrect
amount, entering a transaction that does not belong in the account, or omitting a
transaction that should be in the account. Since the company made these errors, the
correction of the error will be either an increase or a decrease to the balance in the Cash
account on the company's books.

Step 3. Comparing the Adjusted Balances

After adjusting the balance per bank (Step 1) and after adjusting the balance per books
(Step 2), the two adjusted amounts should be equal. If they are not equal, you must
repeat the process until the balances are identical. The balances should be the true,
correct amount of cash as of the date of the bank reconciliation.

Step 4. Preparing Journal Entries

Journal entries must be prepared for the adjustments to the balance per books (Step 2).
Adjustments to increase the cash balance will require a journal entry that debits Cash
and credits another account. Adjustments to decrease the cash balance will require a
credit to Cash and a debit to another account.

Q&A: Bank Reconciliation

What does debit memo mean on a bank statement?

How does one prepare a company's first bank statement reconciliation?
What is meant by reconciling an account?
How do you record a check that clears the bank months after it was voided?
What adjustment is needed when a check that was written in a previous month appears
on the current month's bank statement?
What is an unpresented cheque or check and does it require an adjustment to the
balance sheet?
Is an entry made for outstanding checks when preparing a bank reconciliation?
How many days after a month ends should the bank reconciliation be done?
 What are some reasons that cause the balance on the bank statement to differ from the
cash balance on the books?
When does a negative cash balance appear on the balance sheet?

Bank Reconciliation
Banks send statements to their depositors each month. A bank reconciliation compares the information in
the bank statement with the company's Cash account, and finds any discrepancies. These are recorded or
dealt with as needed. The process is fairly simple.

The bank balance and book Cash balance are listed on a piece of paper (now we often use computers).
Some items show up on the bank statement, but have not been reflected in the books yet. These items will
be added to or subtracted from the book balance.

Some transactions have been recorded in the books, but have not yet cleared the bank. These include
deposits in transit, which are not yet posted in the bank's records - those made after the date of the bank
statement. And outstanding checks - those which have been written and mailed, but haven't cleared the
bank yet. These items are added to or subtracted from the bank balance.

Once all items have been included, the adjusted bank and book balances should be equal. If they are not,
the reconciliation needs to be reviewed and corrected until the two amounts are equal.

Bank Reconciliation

Adjustments to Bank Balance Adjustments to Book Balance

Add Deposits in transit
Subtract Outstanding checks
Bank errors (add or subtract as needed); notify
bank of error; these don't happen very often, but
we need to watch for them
Do not record any of these adjustments in the
books.
Welcome to MiddleCity - Online Accounting Tutorial
Add anything on bank statement that increases cash
balance, but has not been recorded in the books: bank
collections, interest earned
Subtract anything on bank statement that decreases cash
balance, but has not been recorded in the books: bank
charges and fees, bad checks, interest charges
Add or subtract for accounting errors relating to deposits
or checks.
These adjustments must be entered as journal entries, so
the books agree with the bank balance.

Cash Flow Statement

The terms "Cash Flow Statement" and "Statement of Cash Flows" are
interchangeable.

The Cash Flow Statement is relatively easy to prepare. It is better to use logic and
"common sense" to understand what is happening and how information should be
presented in this statement.

The Income Statement and Balance Sheet are both prepared using Accrual
Accounting. This involves making a combination of adjustments to the books,
including accruals, deferrals, apportioning costs such as depreciation, and charging
Income with future expenditure such as warranty claims and post-retirement
benefits. Every time we make an adjustment in the books and records, the resulting
financial statements comply with accrual accounting, but are also farther away from
cash accounting.

Before 1987 we prepared a third financial statement called the Statement of

Changes in Financial Position. This was generally prepared on a Working Capital
basis, but could also be prepared on a Cash Flow basis.

In 1987 FASB mandated the use of the Cash Flow Statement, in place of the
Statement of Changes. The Statement of Cash Flows removes all accruals, deferrals
and other non-cash adjustments, and provide investors and creditors with
information about a company's Sources and Uses of Cash. An Income Statement
might show a Profit or a Loss, but that says nothing about how the company's
Management managed the company's money.

Today this is more important than every. Managers are frequently caught "cooking
the books," hiding losses and liabilities, overstating or understating Income, all for
the purpose of influencing the market price of company stock. Managers frequently
benefit personally from increases in company stock prices, so there is a high
incentive for these people to manipulate information.

The Cash Flow Statement is fairly simple.There are only 3 sections, which report
Increases and Decreases in Cash. The sections are always presented in the
following order.

Operating Cash Flows -

Inflows - Money received from customers for sales of products or services.
Outflows - Money paid to suppliers, employees, etc. for normal business expenses.
Investing Cash Flows -
Inflows - Money received from selling assets, including land, buildings equipment,
stocks, bonds. Money received from loans made to others, such as Notes
Receivable.
Outflows - Money paid to purchase assets; and money paid out to make loans to
others.

Financing Cash Flows -

Inflows - Money received from stockholders purchasing company stock, from
bondholders for bonds payable, and money borrowed from banks and other
creditors.
Outflows - Money paid to stockholders for dividends, to bondholders, banks and
other creditors.

The Statement of Cash Flows also reconciles the Cash balance from the beginning
to end of the year. The beginning and ending Cash balances can be found on the
Balance Sheet.

Direct and Indirect Method

There are 2 ways to present the Statement of Cash Flows - Direct and Indirect. Your
textbook presents the Direct Method. The Indirect Method is illustrated in the
appendix at the end of the chapter. FASB recommends the use of the Direct
Method. A recent survey of company shows the following:

Companies using the Direct Method 5%

Companies using the Indirect Method 95%

Despite these statistics, most accounting textbooks teach the Direct Method.You
should also note that when the Direct Method is used, the statement must also
include a supplemental calculation of Operating Cash Flows using the Indirect
Method. Accountants should be able to do both methods.

Preparing the Statement of Cash Flows

I generally include the cash flow worksheet as part of my 13-column trial balance
worksheet. I use the space in the far right side of the trial balance worksheet to
analyze cash flows for all accounts. Calculate the difference between the beginning
and ending balances for all accounts, and determine if the change reflects an
increase or decrease in cash flow. Mark each account with and O for Operating
cash flows, I for Investing cash flows and F for Financing cash flows.

Next lay out the general format of the statement on a piece of paper or spreadsheet.
I generally identify the Investing and Financing activites first, and put them in the
appropriate place. There should only be a few items that fall in these categories.
Most of the accounts will be Operating activities. These include all Income and
Expense accounts - the majority of accounts on the trial balance.

You may need to look at a few Ledger accounts. For instance, the company may
have purchased Land and also sold Land in the same year. The purchases would be
outflows of cash, and recorded as Debits in the Land account. Sales would be
inflows of cash, and recorded as Credits in the Land account.

Land

Date Description Debit Credit Balance

1/1/04 Beginning balance forward 100,000

3/17/04 Purchase of Land 30,000 130,000
9/12/04 Sale of Land 20,000 110,000

Let's analyze the Land account

Beginning balance 100,000

Ending balance 110,000
Increase in Land 10,000

If the Land was sold and purchased for Cash, there would be a net decrease in Cash
of $10,000, but really we have an Outflow of $30,000 for the purchase of Land, and
an Inflow of $20,000 from the sale of Land.

Let's assume the Cash account looks like this for these transactions....

Cash

Date Description Debit Credit Balance

-
3/17/04 Purchase of Land (cash outflow) 30,000 -
9/12/04 Sale of Land (cash inflow) 20,000 -
[Cash balance is irrelevant]

The Investing section of the Cash Flow statement would look like this:
Investing Cash Flows

Cash Inflows:
Sale of Land $20,000
Cash Outflows:
Purchase of Land (30,000)
Net Cash used for Investing activities $(10,000)

Analyzing the Cash Flow Statement

Analyzing cash flows is an important part of financial statement analysis. Here are
some important things to look for:

1. There should be a net Increase in Cash from Operating Activities. If operations

don't produce positive cash flows, the business will soon be in trouble. Without
adequate operating cash flows, the company may have to dip into cash reserves or
sell investments to meet regular payment of expenses.

2. If a company shows net Increase in Investing Cash Flows, it means they are
selling off assets. That is generally not a good sign. I would also look to see if teh
company was posting losses and had negative cash flows from Operating activities.
This might indicate that Management is selling off assets to pay bills. More analysis
is needed in this case.

1999-2006 Copyright Malcolm E. White, Fulton, Missouri, USA For personal educational use only. All rights reserved. No part of
this tutorial may be reproduced or stored in any way without permission.
 Basic Financial Statements
The accounting process
Financial Statements
The Accounting Equation
Chart of Accounts

Chapter 2 introduces you to the basic financial statements used to communicate a company's financial information to outsiders - parties other than
the company's directors and managers, who are the "insiders."

What is a financial statement? What does it tell us? Why should we care?
T hese are good questions and they deserve an answer.

A business is a financial entity separate from its owners. Each business must keep financial records. A number of federal and
state laws require this. But even if there were no laws, it would still be a good idea anyway. Businesses provide vital goods and
services to those living in the community. They provide jobs for people, and tax dollars that improve our roads, parks and schools. It is in everyone's
best interest that our community's businesses be successful.

B usiness owners take a risk. What if no one wants to buy their goods or services? The owner has spent time and money to start a business,
purchased land, buildings and equipment, hired people to work in the business.... all this done with the hope that the business will be successful. And
if the business is NOT a success, the owner may have lost his or her life's savings, workers must find jobs, and creditors may go unpaid.

F inancial information may not make a business successful, but it helps the owner make sound business decisions. It can also help a bank or creditor
evaluate the company for a loan or charge account. And the IRS will be interested in collecting the appropriate amount of income tax. So financial
information will serve many purposes.

F inancial information comes in many forms, but the most important are the Financial Statements. They summarize relevant financial information in
a format that is useful in making important business decisions. If this were not possible, the whole process would be a waste of time. Too much
information may be equally useless. Financial statements summarize a large number of Transactions into a small number of significant categories.
To be useful, information must be organized.

Quick Quiz
The financial statements of a business entity:
A) Include the balance sheet, income statement, and income tax return.
B) Provide information about the profitability and financial position of the company.
C) Are the first step in the accounting process.
D) Are prepared for a fee by the Financial Accounting Standards Board.
Click for answers

Financial statements have generally agreed-upon formats and follow the same rules of disclosure. This puts everyone on the same level playing
field, and makes it possible to compare different companies with each other, or to evaluate different year's performance within the same company.
There are three main financial statements:

1. Income Statement
2. Balance Sheet
3. Statement of Cash Flows
 Each financial statement tells it's own story. Together they form a comprehensive financial picture of the company, the results of
its operations, its financial condition, and the sources and uses of its money. Evaluating past performance helps managers identify
successful strategies, eliminate wasteful spending and budget appropriately for the future. Armed with this information they will
be able to make necessary business decisions in a timely manner.

The accounting process in a nutshell:

1) Capture and Record a business transaction,
2) Classify the transaction into appropriate Accounts,
3) Post transactions to their individual Ledger Accounts,
4) Summarize and Report the balances of Ledger Accounts in financial statements.

There are 5 types of Accounts.

1) Assets
2) Liabilities
3) Owners' Equity (Stockholders' Equity for a corporation)
4) Revenues
5) Expenses

All the accounts in an accounting system are listed in a Chart of Accounts. They are listed in the order shown above. This helps us prepare financial
statements, by conveniently organizing accounts in the same order they will be used in the financial statements.

Financial Statements
The Balance Sheet lists the balances in all Asset, Liability and Owners' Equity accounts.

The Income Statement lists the balances in all Revenue and Expense accounts.

The Balance Sheet and Income Statement must accompany each other in order to comply with GAAP. Financial statements presented separately do
not comply with GAAP. This is necessary so financial statement users get a true and complete financial picture of the company.

All accounts are used in one or the other statement, but not both. All accounts are used once, and only once, in the financial statements. The Balance
Sheet shows account balances at a particular date. The Income Statement shows the accumulation in the Revenue and Expense accounts, for a given
period of time, generally one year. The Income Statement can be prepared for any span of time, and companies often prepare them monthly or
quarterly.

It is common for companies to prepare a Statement of Retained Earnings or a Statement of Owners' Equity, but one of these statement is not required
by GAAP. These statements provide a link between the Income Statement and the Balance Sheet. They also reconcile the Owners' Equity or
Retained Earnings account from the start to the end of the year.
The Statement of Cash Flows is the third financial statement required by GAAP, for full disclosure. The Cash Flow statement shows the inflows
and outflows of Cash over a period of time, usually one year. The time period will coincide with the Income Statement. In fact, account balances are
not used in the Cash Flow statement. The accounts are analyzed to determine the Sources (inflows) and Uses (outflows) of cash over a period of
time.

There are 3 types of cash flow (CF):

1) Operating - CF generated by normal business operations
2) Investing - CF from buying/selling assets: buildings, real estate, investment portfolios, equipment.
3) Financing - CF from investors or long-term creditors

The SEC (Securities and Exchange Commission) requires companies to follow GAAP in their financial statements. That doesn't mean companies do
what they are supposed to do. Enron executives had millions of reasons ($$) to falsify financial information for their own personal gain. Auditors are
independent CPAs hired by companies to determine whether the rules of GAAP and full disclosure are being followed in their financial statements.
In the case of Enron and Arthur Andersen, auditors sometimes fail to find problems that exist, and in some cases might have also failed in their
responsibilities as accounting professionals.

The Accounting Equation

You may have heard someone say "the books are in balance" when referring to a company's accounting records. This refers to the use of the double-
entry system of accounting, which uses equal entries in two or more accounts to record each business transaction. Because the dollar amounts are
equal we say the transaction is "in balance." You can think of it like an old two pan balance scale, which measures things in dollars, instead of
pounds.

Double-entry accounting follows one simple rule, called the accounting equation. It is a simple algebraic equation, expressed as an equality. E =
MC2 OOPS! That's not it.

The Accounting Equation really is:

Liabilities +
Assets =
Owners' Equity
 another way to think about it
everything we own = who provided the financing

Remember in Chapter 1, I told you that each transaction describes both an object and form of financing. In the accounting equation, Assets are the
objects, and are on the Left side of the equation. Financing activities are on the Right side of the equation. Liabilities represent borrowings and credit
arrangements. Owners' Equity represents investments by owners, residual net worth and retained earnings from ongoing business operations.

The accounting equation uses "simple math" and involves only addition and subtraction. In fact, almost all the math you will do in this course is
simple math. We will occasionally use multiplication and division, but all changes to accounts will be addition or subtraction.

Think for a moment about a new company. It's accounting system consists of a new, "fresh" set of books, no entries have ever been made, all
accounts have a zero balance.

Assets = Liabilities + Owners' Equity

$0 = $0 + $0
The books are in balance!!

If each, and every, transaction is a entered as a "balanced" entry, the books will stay in balance.

There are three general types of transactions and entries.

1) Routine, daily operating events - represents over 99% of all transactions.
2) Occasional events involving major assets, liabilities and owners' equity transactions.
3) Adjusting and Closing entries - made to prepare statements and close the books at the end of the year.

Here are some examples of common type 2 transactions. Before and after each one, the books must be in balance. In Chapter 3 we will see how
these are actually entered into the books, in the form of journal entries.

Owner deposits $100 in the company checking account.

Assets = Liabilities + Owners' Equity

$100 = $0 + $100
Cash is an Asset, on the Left side. Owners' Equity is on the Right side.
The amounts are equal

A $1000 computer is purchased on credit.

Assets = Liabilities + Owners' Equity

$1000 = $1000 + $0
Computer is an Asset, on the Left side.
A Charge account is a Liability and is on the Right side.

The owner transfers a parcel of land to the company, and signs a contract for a building to be constructed. The land is worth $10,000 and the
building will cost $90,000. The building will be paid for with a bank loan.
Assets = Liabilities + Owners' Equity
 $100,000 = $90,000 + $10,000
Land and Building are Assets, on the Left side. Bank loan is a Liability and is on the Right side. This is a compound entry, and involves more than
two accounts.

Balance Sheet accounts can increase or decrease, so you will be adding to or subtracting from their balance after each transaction.

The accounting equation can be expressed in 3 ways:

1. Assets = Liabilities + Owners' Equity

2. Liabilities = Assets - Owners' Equity
3. Owners' Equity = Assets - Liabilities

It is common to abbreviate the accounting equation as A=L+OE. Using the numbers from the balance sheet above we get the following equations:
1. 33,000 = 14,000 + 19,000 [A=L+OE]
2. 14,000 = 33,000 - 19,000 [L=A-OE]
3. 19,00 = 33,000 - 14,000 [OE=A-L]

If you know any two of the amounts you can calculate the third.

Quick Quiz Try solving these equations for practice.

Assets = Liabilities + Owners' Equity

1 ? = 27,000 + 36,000
2 426,600 = ? + 168,400
3 1,537,618 = 692,327 + ?
Click for answers

Try making up several examples on your own for practice.

We can see the Accounting Equation reflected in the layout of the Balance Sheet, as shown below. Notice that Total Assets equals the sum of Total
Liabilities and Total Owners' Equity, shown in bold below.

ABC Company
Balance Sheet
December 31, 2002
Assets

Cash $ 10,000

Accounts Receivable 6,000

Inventory 17,000
Total Assets $ 33,000 <-
|
Liabilities & Owners' Equity |
Accounts Payable $ 6,000 E
Notes Payable 8,000 Q
Total Liabilities 14,000 U
A
Common Stock, $1 par 10,000 L
 Retained Earnings 9,000 |
Total Owners' Equity 19,000 |
Total Liabilities & Owners' Equity $ 33,000 <-

Accounts and the Chart of Accounts

An Account is a record used to summarize increases and decreases in a particular asset or liability, revenue or expense, or in owner's equity.
Accounts usually have very simple and generic titles such as Cash, Accounts Payable, Sales, and Inventory. These are simple and descriptive terms
under which many different transactions can be recorded.

Accounts are organized in a Chart of Accounts . This is a simple list of account titles presented in the following order: Assets, Liabilities, Owners'
Equity, Revenue, Expenses. Organizing accounts in the correct order makes it much easier to prepare financial statements and enter transactions.

When doing homework problems students should read carefully and look for a Chart of Accounts, or for references to specific accounts, that should
be used in that problem. If you don't find these, you should review the examples in the textbook chapter material for the correct accounts to use.

Here is a sample Chart of Accounts, showing accounts in the correct order. Account group dividers are usually omitted in actual practice. They
are shown here for illustrative purposes, so the student can see how the Chart of Accounts is organized, and how it relates to the financial statements.

ABC Company, Inc.

Chart of Accounts

Balance Sheet Accounts Income Statement Accounts

---- Asset Accounts ---- ---- Revenue Accounts ----
Cash Sales Revenue
Accounts Receivable Sales Returns & Allowances
Prepaid Expenses Sales Discounts
Supplies Interest Income
Inventory ---- Expense Accounts ----
Land Advertising Expense
Buildings Bank Fees
Vehicles & Equipment Depreciation Expense
Accumulated Depreciation Payroll Expense
Other Assets Payroll Tax Expense
---- Liability Accounts ---- Rent Expense
Accounts Payable Income Tax Expense
Notes Payable - Current Telephone Expense
Notes Payable - Long Term Utilities Expense
---- Stockholders' Equity Accounts ----
Common Stock
Retained Earnings