Analyzing Transactions Flashcards
4.1: Analyze the effect of transactions on the accounting equation.
What is the accounting information system?
The system of collecting and processing transaction data and communicating financial information to decision makers
Can range from basic to complex
What is the accounting cycle?
A series of nine steps used to account for, and report, transactions: analyze transactions (step 1), journalize transactions (step 2), post transactions (step 3), prepare a trial balance (step 4), journalize and post adjusting entries (step 5), prepare an adjusted trial balance (step 6), prepare financial statements (step 7), journalize and post closing entries (step 8), and prepare a post-closing trial balance.
What are the 9 steps of the accounting cycle?
- Analyze transactions
- Journalize transactions
- Post transactions
- Prepare a trial balance
- Journalize and post adjusting entries
- Prepare an adjusted trial balance
- Prepare financial statements
- Journalize and post closing entries
- Prepare a post-closing trial balance
What factors shape an accounting information system?
Type of business, size, transaction volume, and information needs of users.
Why do small businesses often start without a formal accounting system?
They have fewer transactions and simpler needs at the beginning.
When does an organized accounting system become essential?
As the business grows and transactions become more numerous and complex.
What does the accounting information system rely on?
The accounting cycle
Where does the accounting cycle begin and end?
It starts with transaction analysis and ends with a post-closing trial balance.
What is an accounting transactions?
An economic event that is recorded in the financial statements because it involves an exchange that affects assets, liabilities, and/or shareholders’ equity
What is the first step in the accounting cycle?
Analyzing transactions to determine their effect on the accounting equation.
Are all events affecting a company recorded in its accounting system?
No, only those events that result in a measurable change in financial position.
What constitutes an accounting transaction?
An economic event that results in a change in assets, liabilities, or shareholders’ equity.
Why wouldn’t hiring a new employee be recorded as a transaction?
Because no asset, liability, or equity item is affected simply by hiring the employee.
How can the accounting equation help determine if a transaction has occurred?
By checking if there’s a change in the accounting equation: assets = liabilities + shareholders’ equity.
What types of transactions must be recorded in the accounting records?
Economic events that affect the company’s financial position in measurable amounts, like purchasing a computer or paying rent.
Why is a discussion with a potential customer not recorded as a transaction?
May affect a company’s future financial performance if they actually purchase goods or services but has no immediate effect on the company’s current financial position until a purchase is made.
Why isn’t simply agreeing to hire a player recorded as an accounting transaction?
It doesn’t change the team’s assets, liabilities, or shareholders’ equity until the player starts playing and earns a salary.
When does and accounting transaction occur in the case of hiring a hockey player?
Despite the team’s perceived value rising by the hiring of top talent, an accounting transaction does not occur until the player starts playing and earns his salary and hopefully generates additional revenue for the team.
How can signing bonuses affect accounting transactions in the NHL?
If part of the signing bonus is paid upfront, it affects the team’s assets, liabilities, and equity, triggering an accounting transaction.
Why might signing bonuses be paid over time in the NHL?
To comply with salary cap limitations imposed by the league.
What is the basic accounting equation?
Assets = Liabilities + Shareholder’s Equity
All public company’s shareholder’s equity is made up of at least what 2 things?
- Common shares
- Retained earnings
How are retained earnings calculated?
Net income (revenues - expenses) - Any dividends declared
What decreases retained earnings?
- A net loss
- Dividends declared (distribution of retained earnings)