Chapter 3 Flashcards
Accounting information system
Collects and processes transaction data
Disseminates financial information to interested parties
Accounting information system helps management answer what key questions?
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?
Event
A happening of consequence. An event generally is the source or cause of changes in assets, liabilities, and equity. Maybe external or internal.
Transaction
An external event involving a transfer or exchange between two or more entities.
Account (or T-Account)
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.
Real Accounts
Real (permanent) Accounts are asset, liability, and equity accounts. They appear on the balance sheet.
Nominal Accounts
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.
Ledger
General Ledger
Subsidiary Ledger
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.
Journal / Journalizing
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
Posting
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.
Trial Balance
Adjusted Trial Balance
Post-closing Trial Balance
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.
Adjusting Entries
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
Financial Statements
Statements that reflect the collection, tabulation and final summarization of the accounting data. Balance Sheet Income Statement Statement of Cash Flows Retained Earnings Statement
Balance Sheet
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)
Income Statement
Measures the results of operations during the period
Reports revenues
- expenses
= Net income or Net loss
Statement of Cash Flows
reports the cash provided and used by operating, investing, and financing activities during the period
Retained Earnings Statement
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
Closing Entries (closing the ledger, closing the books, closing)
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
Debits and Credits
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
The Account (Debits and Credits)
Record of increases and decreases in a specific asset, liability, stockholders’ equity, revenue, or expense item.
Debit = “Left”
Credit = “Right”
Normal Balance - Debit
Asset and Expense Accounts
Debit + (increase) Credit - (decrease)
Normal Balance - Credit
Liability, Stockholders’ Equity, and Revenue Accounts
Debit - (decrease) Credit + (increase)
The Accounting Equation
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)
Types of Adjusting Entries
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)
Depreciation
The process of allocating the cost of an asset to expense over its useful life in a rational and systematic manner.
Book value
The book value of any depreciable asset is the difference between its cost and its related accumulated depreciation.
Bad Debts
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.
Accrual-basis Accounting
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.
Cash-basis Accounting
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.
Chart of Accounts
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.
Contra Asset Account
A contra asset account offsets an asset account on the balance sheet.
ex. Accumulated Depreciation—Equipment is a contra asset account.
Reversing Entries
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.
