Chapter 2

• Two common types of transactions in any business are cash and credit transactions:

  • Cash transactions: payment is made at the same time or immediately during a cash sale or purchase
  • Credit transactions: payment is delayed or postponed to a later date during a credit sale or purchase
• Accounting entity theory states that activities of a business are separate from the actions of the owner, and all transactions are recorded from the business point of view
• Monetary theory dictates that only business transactions that can be measured in monetary terms are recorded
• The accounting cycle comprises four stages:

  1. Identify and record: source documents are used to record transactions in the journal, which are then posted to the ledger daily

  2. Adjust: ending balances of ledger accounts are listed in a trial balance, adjusting entries are recorded in the journal and posted to the ledger, and accounts are adjusted at least once in a financial year

  3. Report: based on the adjusted trial balance, financial statements are prepared at least once in a financial year

  4. Close: income, expenses, income summary, drawings, and dividends accounts are closed by passing journal entries before being posted to the ledger, and accounts are closed once at the end of the financial year
• Accounting Information System (AIS) is a system that a business uses to collect, store, and process accounting data, with most businesses having computerized AIS
• Source documents provide evidence to capture the occurrence of a transaction and contain the details needed for recording, ensuring that accounting information recorded is supported by reliable and verifiable evidence to be free from opinions and biases