Chapter 3

Question 1

Accounting information system

Answer 1

Collects and processes transaction data

Disseminates financial information to interested parties

Question 2

Accounting information system helps management answer what key questions?

Answer 2

How much and what kind of debt is outstanding?
Were sales higher this period than last?
What assets do we have?
What were our cash inflows and outflows?
Did we make a profit last period?
Are any of our product lines or divisions operating at a loss?
Can we safely increase our dividends to stockholders?
Is our rate of return on net assets increasing?

Question 3

Event

Answer 3

A happening of consequence. An event generally is the source or cause of changes in assets, liabilities, and equity. Maybe external or internal.

Question 4

Transaction

Answer 4

An external event involving a transfer or exchange between two or more entities.

Question 5

Account (or T-Account)

Answer 5

A systematic arrangement that shows the effect of transactions and other events on a specific element (asset, liability, etc). Companies keep separate accounts for each asset, liability, revenue, expense, and capital.

Question 6

Real Accounts

Answer 6

Real (permanent) Accounts are asset, liability, and equity accounts. They appear on the balance sheet.

Question 7

Nominal Accounts

Answer 7

Nominal (temporary) Accounts are revenue, expense (both appear on Income statement), and dividend accounts. Companies periodically close nominal accounts, they don’t close real accounts.

Question 8

Ledger
General Ledger
Subsidiary Ledger

Answer 8

Ledger is a book that contains the accounts.

General Ledger is a collection of all the asset, liability, stockholder’s equity, revenue and expense accounts.

Subsidiary Ledger contains the details related to a given general ledger account.

Question 9

Journal / Journalizing

Answer 9

Where the company initially records transactions and selected other events. Various amounts are transferred from the journal to the ledger. Entering transaction data is known as Journalizing

Question 10

Posting

Answer 10

Transferring journal entries to the ledger accounts is called posting. Posting involves the following steps.

1. In the ledger, in the appropriate columns of the account(s) debited, enter the date, journal page, and debit amount shown in the journal.
2. In the reference column of the journal, write the account number to which the debit amount was posted.
3. In the ledger, in the appropriate columns of the account(s) credited, enter the date, journal page, and credit amount shown in the journal.
4. In the reference column of the journal, write the account number to which the credit amount was posted.

Question 11

Trial Balance
Adjusted Trial Balance
Post-closing Trial Balance

Answer 11

The list of all open accounts in the ledger and their balances.
The trial balance after all adjustments have been posted is the Adjusted Trial Balance.
After closing entries have been posted is called a post-closing trial balance.

Question 12

Adjusting Entries

Answer 12

Entries made at the end of an accounting period to bring all accounts up to date on an accrual basis so that the company can prepare correct financial statements.
Every adjusting entry includes the adjustment of one balance sheet account and one income statement account

Question 13

Financial Statements

Answer 13

Statements that reflect the collection, tabulation and final summarization of the accounting data.
Balance Sheet
Income Statement
Statement of Cash Flows
Retained Earnings Statement

Question 14

Balance Sheet

Answer 14

Shows the financial condition of the enterprise at the end of a period

Assets
Liabilities
Stockholders’ Equity
Common Stock (investments by stockholders)
Retained Earnings (net income retained in the business)

Question 15

Income Statement

Answer 15

Measures the results of operations during the period

Reports revenues
- expenses
= Net income or Net loss

Question 16

Statement of Cash Flows

Answer 16

reports the cash provided and used by operating, investing, and financing activities during the period

Question 17

Retained Earnings Statement

Answer 17

Reconciles the balance of the retained earnings account from the beginning to the end of the period

Beginning retained earnings
+ Net income
- Dividends
= Ending Retained earnings

Question 18

Closing Entries (closing the ledger, closing the books, closing)

Answer 18

The formal process by which the enterprise reduces all nominal accounts to zero and determines and transfers the net income or net loss to a stockholders’ equity account

Question 19

Debits and Credits

Answer 19

An account shows the effect of transactions on a given asset, liability, equity, revenue, or expense account

Double-entry accounting system (two-sided effect)

Recording done by debiting at least one account and crediting another

Debits must equal Credits

Question 20

The Account (Debits and Credits)

Answer 20

Record of increases and decreases in a specific asset, liability, stockholders’ equity, revenue, or expense item.
Debit = “Left”
Credit = “Right”

Question 21

Normal Balance - Debit

Answer 21

Asset and Expense Accounts

Debit + (increase) Credit - (decrease)

Question 22

Normal Balance - Credit

Answer 22

Liability, Stockholders’ Equity, and Revenue Accounts

Debit - (decrease) Credit + (increase)

Question 23

The Accounting Equation

Answer 23

Relationship among the assets, liabilities and stockholders’ equity accounts of a business:

Assets = Liabilities + Stockholders’ Equity

Stockholders’ Equity: (+Common stock +Retained Earnings - Dividends +Revenues -Expenses)

Question 24

Types of Adjusting Entries

Answer 24

Deferrals:
1. Prepaid expenses: Expenses paid in cash before they are used or consumed. (Insurance, rent, supplies)
2. Unearned revenues: Cash received before services are performed. (rent, tuition, subscriptions)
Accruals:
1. Accrued revenues: Revenues for services performed but not yet received in cash or recorded.
2. Accrued expenses: Expenses incurred but not yet paid in cash or recorded. (taxes, salaries, interest)

Question 25

Depreciation

Answer 25

The process of allocating the cost of an asset to expense over its useful life in a rational and systematic manner.

Question 26

Book value

Answer 26

The book value of any depreciable asset is the difference between its cost and its related accumulated depreciation.

Question 27

Bad Debts

Answer 27

Companies estimate uncollectible accounts at the end of each period. This ensures that receivables are reported on the balance sheet at their net realizable value.

Question 28

Accrual-basis Accounting

Answer 28

Most companies use accrual-basis accounting. They:

recognize revenue when the performance obligation is satisfied and

expenses in the period incurred, without regard to the time of receipt or payment of cash.

Question 29

Cash-basis Accounting

Answer 29

Under the strict cash-basis, companies:

record revenue only when they receive cash

record expenses only when they disperse cash
Financial statements are not in conformity with GAAP.

Question 30

Chart of Accounts

Answer 30

This chart lists the accounts and the account numbers that identify their location in the ledger. The numbering system that identifies the accounts usually starts with the statement of financial position accounts and follows with the income statement accounts.

Question 31

Contra Asset Account

Answer 31

A contra asset account offsets an asset account on the balance sheet.
ex. Accumulated Depreciation—Equipment is a contra asset account.

Question 32

Reversing Entries

Answer 32

We summarize guidelines for reversing entries as follows.

1. All accruals should be reversed.
2. All deferrals for which a company debited or credited the original cash transaction to an expense or revenue account should be reversed.
3. Adjusting entries for depreciation and bad debts are not reversed.

Recognize that reversing entries do not have to be used. Therefore, some accountants avoid them entirely.