Chapter 3 Flashcards
Accounting infomation system
The system of collecting and processing transaction data and communicating financial info to decision makers
factors: nature of business
Types of transactions
size of company
amount of data
Accounting transactions
Economic events that require recording in the financial statements
When assets, liabilities, or stockholders’ equity change as a result of an economic event
Transaction analysis
The process of identifying the specific effects of economic events on the accounting equation
Unearned service revenue
A revenue that often occurs through prepay processes when a company gets money (asset) but has not yet delivered the service (liability)
ex. airlines
Revenue’s effect on stockholder’s equity
Revenue increases stockholder’s equity
adds cash to assets
increase stockholder’s equity (rev-exp-div)
Services on acount
Company performs service but allows it to be paid later
Company receives an asset (accounts receivable) and receives service revenue because the service has been provided
Expenses effect on stockholder’s equity
Decreases revenue so decreases total stockholder’s equity
Prepaid expenses or prepayments
Payments of expenses that will benefit more than one accounting period
Hiring of new employees
Does not affect accounting equation until employees are paid
Dividends (accounting equation relevance)
A reduction of stockholder’s equity but not an expense
Fannie Mae troubles
Announced a series or large accounting errors
mortgage company market depends on them
Bank One Corporation
Fined 1.8 billion dollars because of unreliable accounting
Waste Management Company
10,000 employees received error pay slips
Account
An individual accounting record of increases and decreases in a specific asset, liability, stockholder’s equity, revenue, or expense item
Three parts of account
Title of account
Left or debit side
Right or credit side
= T account
Debit (Dr.)
Indicates the left side of an account
Credit (Cr.)
Indicates the right side
Debiting
The act of entering an amount on the left side of an account
Crediting
Making an entry on the ride side of the account
Debit balance
Account shows a debit balance if the total of the debit amount exceeds the credits
Credit balance
Shows a credit balance if the credit amounts exceed the debits
For each transaction
Debits must equal credits
Double-entry system
The two-sided effect of each transaction is recorded in appropriate accounts
International Note: double-entry system
Europeans rely less on historical cost and more on fair value
However, double-entry accounting system is the basis of accounting systems worldwide
Debits include:
increase in assets
Decrease in liabilities
Credits include:
Decrease in assets
Increase in liabilities
Asset accounts…
Normally show debit balances
Liability accounts
Normally show credit balances
Retained earings is…
Decreased by debits
increased by credits
Dividends…
recoreded in debits
dividends account normally has a debit balance
Revenues and expenses
Debits: decrease venue, increase expenses
Credits: increase revenue. decrease expenses
Revenue accounts show
Credit balances
Expense accounts show
Debit balances
Source document
Evidence of the transaction such as a sales slip, a check, a bill, or a cash register tape
Journals
Transactions are intitially recorded in chronological order in journals before transferred to accounts
shows debit/credit effects
General journal
the most basic form of a journal
every company has one
Three contributions of a journal
- Discloses in one place the complete effect of a transaction
- Provides a chronological record of transactions
- Helps to prevent or locate errors because the dr. and cr. amounts for each entry can be compared
Journalizing
Entering trnsaction data in the journal
A complete journal entry
- date of transaction
- accounts and amounts to be debited and credited
- Brief explanation of the transaction
*Debit listed on first and left line, Credit on second and right
*Brief explanation of transaction
Ethics note: International Outsourcing Services
International Outsourcing Services was accused of submitting fradulent documents (coupons) for Kraft Foods and PepsiCo for 250 million.
Ensuring that all recorded transactions are backed up by proper business documents reduces the likelihood of fraud activity (provide evidence that transactions occured)
Ledger
The entired group of accounts maintained by a company
Keeps in once place all the information about changes in specific account balances
General ledger
Contains all the assets, liabilities, stockholders’ equity, revenue, and expense accounts
Every company has one
Chart of accounts
A list of all accounts a company has
Posting
The procedure of transferring journal entry amounts to ledger accounts
Purpose of transaction analysis
First- identify the type of account involved
Then - determine whether a debit or a credit to the account is required
Trial balance
Lists accounts and their balances at a given time
Prepared at the end of an accounting period
proves mathematical equality of debits and credits after posting
useful in the prepatation of financial statements
Preparing a trial balance
- list the account titles and their balances
- Total the debit column and total the credit column
- Verify the equalityof the two columns
Order of trial balance
Assets
Liabilities
Stockholder’s Equity
Revenues
Expenses
Error
Irregularity
An intentional misstatement
Viewed as unethical
Order of trial balance
order in which they appear on the ledger
