3 - The Accounting Information System

Question 1

What is the accounting information system?

Answer 1

The system of collecting and processing transaction data and communicating financial information to decision makers.

Question 2

Which relevant transaction data should be collected and processes according to the accounting information system?

Answer 2

Only those events that cause changes in assets, liabilities, or shareholders’ equity.

Question 3

When does an accounting transaction occur?

Answer 3

When assets, liabilities, or shareholders’ equity items change as a result of an economic event.

Question 4

How are investments by shareholders recorded?

Answer 4

Not as revenue but as common shares of the corporation.

Question 5

How are payments to rent recorded?

Answer 5

Rent Expense

Rent is an expense incurred in an effort to generate revenues.

Question 6

What do expenses do to the accounting equation?

Answer 6

Expenses decrease retained earnings, which in turn decrease shareholder equity.

Question 7

What increases or decreases retained earnings?

Answer 7

Retained earnings are increased by revenue and decreased by expenses and dividends.

Question 8

What are prepaid expenses or prepayments?

Answer 8

Assets which are payments of expenses that will benefit more than one accounting period.

Question 9

How does hiring new employees affect the accounting equation and why?

Answer 9

It doesn’t affect the accounting equation because the company’s assets, liabilities, or shareholders’ equity have not changed.
An accounting transaction had not occurred because the employees have not worked yet.

Question 10

How is the accounting equation affected by the purchase of supplies on account?

Answer 10

Assets are increased by this transaction because supplies represent a resource that will be used int he future in the process of providing services to customers. Liabilities are increased by the amount due.

Question 11

How does performing services on account affect the accounting equation and why?

Answer 11

Because revenue increases retained earnings, both assets and shareholder equity are increased by this transaction.
Accounts receivable increases.
Revenue increases because revenue is recorded when services are performed even though cash has not been received.

Question 12

How does receiving cash in advance from a customer affect the accounting equation and why?

Answer 12

This transaction results in an increase in Cash (an asset) and an increase in Unearned revenue (a liability).
Revenue should not be recorded until the work has been performed.

Question 13

How does a payment of an account affect the accounting equation and why?

Answer 13

Accounts payable is decreased and cash is also decreased.

Question 14

How does the payment of salaries affect the accounting equation and why?

Answer 14

Salaries Expense is increased (decreasing retained earnings) and cash is decreased.
Salaries are an expense similar to rent because they are a cost of generating revenues. While the act of hiring employees does not result in an accounting transaction, the payment of the employees’ salary is a transaction because assets and expenses are affected.

Question 15

How do the payments of dividends affect the accounting equation and why?

Answer 15

Cash is decreased and dividends is increased, which reduces both retained earnings and shareholders’ equity.
Dividends are a distribution of retained earnings rather than an expense - they are not incurred to generate revenue.

Question 16

How does the collection of an account affect the accounting equation and why?

Answer 16

Revenue should not be recorded again when cash is collected. Rather, Cash is increased, and Accounts Receivable is decreased.
Total assets and total liabilities and shareholders’ equity are unchanged.

Question 17

How do the payments of income tax affect the accounting equation and why?

Answer 17

Cash is decreased and Income Tax Expense is increased, which in turn decreases retained earnings and shareholders’ equity.

Question 18

What is an account?

Answer 18

An individual accounting record of increases and decreases in a specific asset, liability, or shareholders’ equity item.

Question 19

In its simplest form, an account consists of which 3 parts and what is it called?

Answer 19

A T-Account.

• The title of the account
• A left or Debit side Dr.
• A right or Credit side Cr.

Question 20

What are debits and credits?

Answer 20

Directional signals used in the recording process to describe where entries are made in the accounts.

Question 21

When will an account have a debit or credit balance?

Answer 21

Debit balance if debit > credits.

Credit balance if debit < credit

Question 22

When we record transactions, how many accounts are affected?

Answer 22

Two or more accounts are affected and their balances change.

Question 23

When we record transactions, what must the debits and credits equal?

Answer 23

The debit movement in the accounts must equal the credit movement in the accounts. The equality of debits and credits is the basis for the double-entry accounting system, in which the dual (two-sided) effect of each transaction is recorded in appropriate accounts. If every transaction is recorded with equal debits and credits, then the sum of all the debits to the accounts must be equal to the sum of all the credits.

Question 24

What kind of balance do assets accounts typically have?

Answer 24

Debit balance

Question 25

What kind of balance do liabilities accounts typically have?

Answer 25

Credit balance

Question 26

What kind of balance do contra asset accounts typically have?

Answer 26

Credit balance

Question 27

What kind of balance do common shares accounts typically have?

Answer 27

Credit balance

Question 28

What kind of balance do retained earnings accounts typically have?

Answer 28

Credit balance

Question 29

What kind of balance do revenue accounts typically have?

Answer 29

Credit balance

Question 30

What increases retained earning (and, in turn, shareholders’ equity)?

Answer 30

Revenues

Question 31

What decreases retained earning (and, in turn, shareholders’ equity)?

Answer 31

Expenses and Dividends

Question 32

What kind of balance do expense accounts typically have?

Answer 32

Debit balance

Question 33

What kind of balance do dividend accounts typically have?

Answer 33

Debit balance

Question 34

What are the first 4 steps of the accounting cycle?

Answer 34

1) Analyze business transactions
2) Journalize the transactions
3) Post to general ledger accounts
4) Prepare a trial balance

Question 35

What is a source document?

Answer 35

Evidence of a transaction: sales slip, cheque, bill, etc

Question 36

What is the most critical point in the accounting process?

Answer 36

Deciding whether a transaction has occurred, and if so what to record.

Question 37

How is transaction information recorded as a journal entry in the general journal?

Answer 37

Transactions are recorded in chronological order. For each transaction, the journal shows the debit and credit effects on specific accounts.

Question 38

What is the first contribution the general journal makes to the recording process?

Answer 38

It discloses the complete effect of a transaction in one place, including an explanation and, where applicable, identification of the source document.

Question 39

What is the second contribution the general journal makes to the recording process?

Answer 39

It provides a chronological record of transactions.

Question 40

What is the third contribution the general journal makes to the recording process?

Answer 40

It helps to prevent and locate errors because the debit and credit amounts for each entry can be quickly compared.

Question 41

What’s the first feature of the journal entry?

Answer 41

The date of the transaction is entered in the date column

Question 42

What’s the second feature of the journal entry?

Answer 42

The account to be debited is entered first at the left. The account to be credited is the entered on the next line, indented under the line above. The indentation differentiates debits from credits and decreases the chance of switching the debit and credit amounts by mistake.

Question 43

What’s the third feature of the journal entry?

Answer 43

The amounts for the debits are recorded in the debit column, and the amounts for the credits are recorded in the credit column.

Question 44

What’s the fourth feature of the journal entry?

Answer 44

A brief explanation of the transaction is given.

Question 45

What is a simple journal entry?

Answer 45

A journal entry which affects only two accounts, one debit and one credit.

Question 46

What is a compound journal entry?

Answer 46

A journal entry which affects three or more accounts

Question 47

What is the third step in the accounting cycle?

Answer 47

To transfer entries recorded in the general journal to the appropriate accounts in the general ledger.

Question 48

What is a ledger and what is it’s purpose?

Answer 48

The entire group of accounts maintained by a company. The ledger keeps all the information about changes in specific account balances in one place.

Question 49

What does a general ledger contain?

Answer 49

All the assets, liability, shareholders’ equity, revenue, and expense accounts.

Question 50

How is the ledger typically arranged?

Answer 50

In the order in which accounts are presented in the financial statements, beginning with the statement of financial position accounts. The asset accounts come first, followed by liability accounts, and then shareholders’ equity accounts, including share capital, retained earnings, and dividend accounts, followed by revenue and expense accounts.

Question 51

How do most companies list their ledger accounts?

Answer 51

In a chart of accounts.

Question 52

What is a chart of accounts?

Answer 52

The chart of accounts is the framework for the accounting database. It lists the accounts and the account numbers that identify where the accounts are in the ledger,

Question 53

How is the chart of accounts typically arranged?

Answer 53

Similar tot he ledger, the chart of accounts usually starts with the statement of financial position accounts, followed by the income statement accounts.

Question 54

What is posting?

Answer 54

The procedure of transferring entries from the general ledger accounts.

Question 55

How should posting be done?

Answer 55

In chronological order. That is, all the debits and credits of one journal entry should be posted before going on to the next journal entry. Posting should also be done on a timely basis - at least monthly - to ensure that the general ledger is up to date.

Question 56

What is a trial balance?

Answer 56

A list of general ledger accounts and their balances at a specific time.

Question 57

When is a trial balance prepared?

Answer 57

At the end of an accounting period, which is usually monthly, but could also be quarterly or annually.

Question 58

How are accounts listed in the trial balance?

Answer 58

In the order in which they appear in the ledger, with debit balances listed in the left column and credits in the right column. The totals of the two columns must be equal.

Question 59

What is the main purpose of the trial balance?

Answer 59

To prove (check) that the debits equal the credits after posting. That is, the sum of debit account balances must equal the sum of the credit account balances. If the debit and credit totals don’t agree, the trial balance can help uncover errors in journalizing and posting. If the trial balance doesn’t balance, then the error must be located and corrected before proceeding.

Question 60

What are the 3 steps tot he procedure for preparing the trial balance?

Answer 60

1. List the account titles and their balances in the same order as in the general ledger. Debit balances should be entered in the debit column and credit balances in the credit column.
2. Total the debit column and the credit column
3. Ensure that the debit and credit column totals are equal.

Question 61

What’s important to remember about retained earnings account included in the trial balance?

Answer 61

The retained earnings account balance that is listed on the trial balance is not the retained earnings balance at the end of the period; rather it is the retained earnings balance at the beginning of the period.

Question 62

What’s important to remember about accounts in the trial balance?

Answer 62

Accounts with zero balances are not normally included in a trial balance.

Question 63

What are 5 errors which may still exist even if the trial balance column totals agree?

Answer 63

1. A transaction is not journalized
2. A correct journal entry is not posted
3. A journal entry is posted twice
4. Incorrect accounts are used in journalizing or posting
5. Errors that cancel each other’s effect are made in recording the amounts of a transaction

In other words, as long as equal debits and credits are posted, even to the wrong account or in the wrong amount, the total debits will equal the total credits.