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Theory of Financial Accounting I > Chapter 3: The Accounting Information System > Flashcards

Chapter 3: The Accounting Information System Flashcards

1
Q

Modified Cash Basis

A

Mixture of Cash and Accrual basis accounting.

Mostly cash basis but with modifications

  • capitalizing and depreciating plat assets
  • recording inventory
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2
Q

NRV

A

Net Realizable Value

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3
Q

Unearned Revenues

A

Liability account

Receipt of payment creates performance obligation

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4
Q

Prepaid Expenses

A

An asset account (benefit received in the future)

expire either with passage of time or through use and consumption

Daily entries are impractical

Entry when paid for:
Debit Asset Account (prepaid expense)
Credit Cash

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5
Q

Deferrals

A

Type of adjusting entry

  • prepaid expenses (asset that expires to become an expense)
  • unearned revenue (liability that expires to become an asset)
  • supplies as they are used up

Recognized after the cash is received

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6
Q

Accruals

A

Type of Adjusting Entry

  • Accrued Revenues (services performed but cash not yet received)
  • Accrued expenses (expenses incurred but not yet paid for)

If not adjusted then the revenue (asset) or expense (liability) account are understated.

Accrual adjusting entries increase balance sheet and income statement account

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7
Q

Adjusting Entries

A

Must be done EVERY time financial statements are prepared

Enables revenues to be recorded in the period in which performance obligations are satisfied and expenses to be matched

  • not always efficient to record all events daily (salary accruals)
  • costs expire/ occur as time passes
  • Billings that are in arrears

Each account must be analyzed and brought up to date

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8
Q

Special Journals

A

Summarize transactions possessing a common characteristics

  • cash receipts
  • cash sales
  • purchases
  • cash payments
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9
Q

Posting

A

Transfer date, journal page, explaination and amount debited in account debited

  • write account number in journal reference column
  • repeat for credits
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10
Q

Three Column Account Form

A

An account format in the general ledger with three columns for money: Debit, credit and balance

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11
Q

Chart of Accounts

A

List of accounts and account numbers and their position in the ledger

Usually statement of financial system (balance sheet) account and then income statement accounts

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12
Q

Credit

A

CR right

Credit balance if credits exceed debits

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13
Q

Debit

A

DR Left

Debit balance if debits exceed credits

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14
Q

Financial Statements

A

Reflect the collection, tabulation and financial summarization of accounting data

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15
Q

Subsidiary Ledger

A

Contains details related to a given general ledger account

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16
Q

Account

A

Systematic arrangement showing the effect of transactions or other events on a specific element (asset, liability etc..)

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17
Q

Event

A

A happening of consequence

The source or cause of changes in assets liabilities and equity

May be internal or external

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18
Q

U.S. Foreign Corrupt Practices Act

A

Requires companies to make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect the transactions and deposition of assets.

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19
Q

ICFR

A

Internal control over financial reporting

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20
Q

Continuous Accounting

A

New Technologies enabling:

  • agility
  • intelligent analysis
  • data driven decision making

24/7 accounting

  • closes books on a daily basis
  • issues with unaudited data
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21
Q

Reversing entry for accruals adjustments

A

Reverses the adjusting entry for an accrual so that when the expense is paid or revenue is received the entry isn’t split between payables and expense (receivables and revenues)

Eliminates payables / receivables balance

  • all expenses debited to expense
  • all revenues credited to revenue
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22
Q

Reversing entry for deferrals adjustment

A

Unnecessary if deferred expenses not originally debited to expense account, but rather a real account

IF deferred expenses debited to expense account & then adjusted

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23
Q

Permanent accounts at the end of a period

A

single line under current period entries

account balance entered below single underline and carried forward to the next period

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24
Q

Closing temporary accounts

A

Total
Balance
Double Underlines
Accounts now at 0

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25
Q

Contra-asset account

A

Decreases the value of an asset account so can see both the historical cost of equipment and the current value

Debit Decrease Credit Increase
(Credit NB)

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26
Q

Ownership on Balance Sheet

A

Stockholders equity section on balance sheet

Common stock = investments by stockholders
Retained earnings = net income not distributed as dividends

Ownership structure dictates types of accounts in this section

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27
Q

Revenue Conversion Cash Basis to Accrual Basis

A 
Cash Receipts from Customers
- Beginning Accounts Receivable
\+ Ending Accounts Receivable
\+ Beginning unearned revenue
- Ending unearned revenue
= Revenue on accrual basis
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28
Q

Operating Expenses: Conversion cash basis to accrual basis

A 
Cash paid for operating expenses
\+ Beginning prepaid expenses
- Ending prepaid expenses
- Beginning Accrued liabilities
\+ Ending accrued liabilities
= Expenses on an accrual basis

Add depreciation or amortization as necessary

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29
Q

Sarbanes Oxley Act

A
  • Determines internal control standards for U.S. publicly traded companies. Protects investors from fraudulent financial reporting by corporations
  • 2002
  • criminal penalties for officers who knowingly sign off on false reports
  • created Public Company Accounting Oversight Board (PCAOB) to monitor auditors
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30
Q

Statement of Cash Flows

A
  • Covers a specific period of time and shows:
    • where cash came from
    • what cash was used for
    • total change in cash balance

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

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31
Q

Balance Sheet

A

Shows financial position

  • snapshot of a single point in time
  • shows that accounting equation balances (A=L+OE)
  • shows current balance of all accounts in general ledger (assets and liabilities accounts)
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32
Q

Statement of Retained Earnings

A

Aka: Retained earnings statement

Retained Earnings (start of period)
+ Net income (or - Net loss)
- dividends
= Retained Earnings (end of period)

Balance of retained earnings account from the beginning to the end of the period

  • income statement
  • retained earnings, dividends accounts
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33
Q

Income Statement

A

AKA: profit and loss, statement of earnings

Income (revenue)
less expenses
= net income or loss

Done for a specific period
Results of operation for a period (revenue and expense accounts)

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34
Q

Basic Accounting Equation

A

Assets = Liabilities + Owners Equity

aka

What a business has and those who have claim to those assets

MUST always balance

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35
Q

Double Entry Accounting

A
  • each transaction effects two or more accounts
  • keeps accounting equation in balance (A=L+OE)
  • Debits must equal credits in each transaction
  • can prove accuracy of the accounts
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36
Q

Journal

A

“Book of original entry”

  • chronological record of all transactions
  • Debits always recorded first
  • $ not always used
  • Select events/ transactions journalized and then posted to the ledger
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37
Q

General Ledger

A

Tracking of transactions sorted by account

arranged in trial balance order

”$” not used

collection of all accounts

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38
Q

Transaction

A

EXTERNAL EVENTS

Transaction is an event that affects the financial position of the company
AND
can be measured with faithful representation

“an external event involving a transfer of exchange between two or more entities”

39
Q

Transaction steps

A
  1. Identify accounts affected and account type
  2. decide if each account increases or decreases
  3. record transaction in journal
  4. post journal entries to general ledger accounts
  5. Assure accounting equation is still in balance
40
Q

Accounts that Decrease Owner’s Equity

A
  • owners drawings (dividends)

- Business expenses

41
Q

Accounts that increase owners equity

A
  • owner investments (capital, stock)

- revenue

42
Q

Revenue

A

Debit Decrease Credit Increase
Credit Normal Balance

Temporary account - closed at the end of each cycle

43
Q

Owner’s Equity

A

Equity/ stocks/ capital

Debit Decrease Credit Increase
Credit Normal balance

On a classified balance sheet:

  • proprietorship = one capital account
  • partnership = one account per partner
  • corporation = capital stock account + retained earnings account

Permanent accounts

44
Q

Liabilities

A

Debit decrease Credit increase
Credit Normal Blaance

Permanent account

45
Q

Owners Drawing

A

Debit increase Credit Decrease
Debit Normal Balance

Temporary account - closed at the end of the cycle

46
Q

Expenses

A

Debit Increase Credit Decrease
Debit normal blance

Temporary account - closed at the end of each cycle

47
Q

Assets

A

Debit increase Credit Decrease
Normal balance

Something that provides future benefit for the company

permanent account

48
Q

Normal Balance

A

Always on the increase side of the account

49
Q

Trial balance

A
  • list of account balances at a given time
  • in order of general ledger accounts
  • proves only that debit balances = credit balances
  • ”$” on 1st item in the column and on column totals
50
Q

Trial Balance Error checks

A

Does the credit vs debit difference:

  • evenly divisible by 2: something probably in the wrong column
  • evenly divisible by 9: transposition error or missing account

HOWEVER. many potential errors are not visible on a trial balance

51
Q

Expanded Accounting Equation

A

Assets = Liabilities + Owners capital - Owner’s drawing + revenues - expenses

Retained earnings = revenue - expenses - owner drawings

Owner’s capital = common stock + retained earnings

52
Q

Adjusting Entries

A
  • ensure that revenue recognition and matching principles are followed (expense recognition)
  • required every time financial statements are prepared - bring all accounts up to date on an accrual basis
  • will ALWAYS include one income statement and one balance sheet account
53
Q

Depreciation

A

The process of allocating the cost of an asset to expense over its useful life

Accumulated depreciation = contra asset account

NOT an attempt to report accurate change in fair market value. About allocation, not valuation

54
Q

Contra Account

A

Account paired with and listed immediately after its related account in the chart of accounts and in financial statements

Normal balance is opposite of normal balance of its related account

55
Q

Residual value

A

Expected value of a depreciable asset at the end of its natural life

56
Q

Book Value

A

The difference between the cost of an asset and its accumulated depreciation (remaining value)

57
Q

Worksheet

A

An internal document that helps summarize data for the preparation of financial statements

  • generally done in excel

Sections:

1) account names
2) unadjusted trial balance
3) adjustments
4) adjusted trial balance
5) income statement
6) balance sheet
7) net income or loss

58
Q

Cash-Basis accounting

A

Opposite of accrual accounting
Revenue increases when cash is received
Expenses increase when cash is paid

NOT in accordance with GAAP

  • ignores existence of credit
  • removes much of forcasting ability
59
Q

Accrual Accounting

A

Revenues increase when company performs work (not when receive payment)

Expenses increase when company incurs expenses, not when paid

Transactions recorded when events occur (not when their paid for)

In accordance with GAAP and IFRS

60
Q

If Accrued Expenses not adjusted

A

Expenses understated
Liabilities understated

Income statement: expenses understated, net income overstated

Balance sheet: liabilities understated, equity overstated

61
Q

Adjusting Entry, Accrued Expenses

A

Debit (increase) expense account
Credit (increase) liability account

If not adjusted - expenses understated, liabilities understated

expenses incurred but not paid for

62
Q

Accrued Expenses

A

Expenses accrued but not yet paid

liability account
payables, accrued interest

permanent account

63
Q

If Accrued revenues are not adjusted

A

Assets understated
Revenue understated

Income statement: revenues understated, net income understated

Balance Sheet: Assets understated, equity understated

64
Q

Adjusting Entry, Accrued Revenue

A

Debit (increase) asset account
Credit (increase) revenue account

If not adjusted: assets understated, revenue understated

revenues earned but not yet received payment for

65
Q

Accrued Revenues

A

Revenue earned (obligation fulfilled) but not yet received

Asset account

Receivables (including interest receivable that accrues with passage of time)

Debit (increase) asset account
Credit (increase) service revenue account

Permanent account

66
Q

If unearned revenue NOT adjusted

A

Liabilities overstated
Revenues understated

Income statement: revenues understated, net income overstated

balance sheet: liabilities overstated, equity understated

67
Q

Adjusting entry, unearned revenues

A

Debit (decrease) liability account
Credit (increase) revenue account

Once revenue has been earned (time passed, subscription fulfilled, services provided)

If not adjusted - liabilities overstated, revenues understated

68
Q

Adjusting Entry, Accumulated Depreciation

A

contra asset account - always appears after the account it offsets on the balance sheet

Debit (increase) Depreciation expense
Credit (increase) accumulated depreciation

If skipped assets/ equity/ income all overstated

69
Q

Property, plant & equipment

A

Fixed assets, plat assets

Assets with long useful lives that are currently used for business operations

depreciation allocates cost over useful years

Accumulated depreciation - depreciation thus far expensed, listed as a single amount after listed PPE assets

LAND IS NOT DEPRECIATED

70
Q

If prepaid expenses not adjusted

A

Assets overstated
Expenses understated

income statement effect: expenses understated, net income overstated

Balance sheet effect: assets overstated, equity overstate

71
Q

Adjusting Entry, prepaid expenses

A

Debit (increase) expense account
Credit (decrease) asset (prepaid expense) account

via use of asset or passage of time

accounts like supplies are adjusted by inventory

If not adjusted assets overstated, expenses understated

72
Q

Unearned Revenue

A

Aka deferred Revenue

  • considered a liability (deferral)

Payment collected in advance of services

Debit (increase) cash
Credit (increase) liability (unearned revenue)

Permanent account

73
Q

Prepaid expense

A

Aka: deferred expenses (recognition is deferred)

Considered an asset

Payments of expenses that will benefit more than one accounting period

Debit (increase) asset account (prepaid expense)
Credit cash or a/p

Permanent account

74
Q

adjusted Trial balance

A

Primary basis for preparation of financial basis

Second trial balance prepared after adjusting entries are journalized/ posted

proves that debits = credits

balance sheet, income statement, owner’s equity statement prepared from adjusted trial balance

75
Q

Depreciation on balance sheet

A

Under assets section

Asset
less accumulated depreciation
= net asset

76
Q

Straight-line method of depreciation

A

Depreciation formula

Straight line depreciation = (cost - residual value) / useful life

Usually measured in years

77
Q

Interest

A

Amount of interest = principle x rate x time

Time is expressed as a fraction of a year (in months or days)

rate always expressed as annual

78
Q

Closing Process

A

At the end of a period. journalizing and posting the closing entries to set the balance of temporary (nominal) accounts (revenues, expenses, income summary & dividends) to zero

79
Q

Accounting Cycle

A 
Process to produce financial statements for a period:
1) analyze business transactions
2) journalize transactions
3) post to ledger accounts
4) prepare trial balance
5) journalize and post adjusting entries
6) Prepare an adjusted trial balance
7) Prepare financial statements
8) journalize and post closing entries
9) Prepare a post closing trial balance
(optional 10: reversing entries)
start new period at 1
80
Q

Reversing Entry

A

Optional step of the accounting cycle

Switches the debit and credit of a previous entry

makes the next period’s accounting easier

entries to reverse:

  • all accruals
  • deferrals debited/ credited to an expense or revenue account (instead of an asset or liability account)
  • bad debt and depreciation are NOT reversed
81
Q

Income Summary Account

A

Only used at closing

Account used to close out expenses & revenue at the end of the accounting period

Debit decrease Credit increase
Credit normal balance

Closed to retained earnings

82
Q

Closing the books: Revenues & Expenses

A

Debit (decrease) revenue to 0
Credit (increase) income summary

Debit income (decrease) income summary
          Credit (decrease) expenses to 0

Debit Income Summary to 0
Credit owner’s capital/ retained earnings

(this assumes all accounts on normal balance side - net gain for period. If net loss will Debit Owners capital, credit income summary

83
Q

Closing the books: Owners Drawing

A

Debit Owner’s Capital/ Retained Earnings
Credit Owner’s Drawing down to 0

Do NOT close dividends through income summary, they are not an expense!

84
Q

Closing Entries

A

Net Income (loss) + Drawings closed to owner’s capital

Fiscal year-end adjusting journal entries

Formally recognizes the transfer of net income (or loss) and owner’s drawings to owners capital (or retained earnings) or stockholders equity. Sets all nominal accounts to 0

85
Q

Temporary vs Permanent Accounts

A

Temporary (aka Nominal) accounts:

  • income statement accounts
  • closed at the end of the fiscal year/ period
  • account only relates to a specific accounting period
  • Revenue and Expense accounts
  • owner’s drawing account

Permanent (aka real accounts):

  • Balance sheet accounts
  • not closed at the end of the period
  • Asset and Liability accounts
  • Owner’s Capital (stock) accounts
86
Q

Post Closing Trial balance

A

Proves the debt vs credit equality of permanet account balances after temporary accounts are closed (after closing entries are posted)

Does not prove that all transactions were necessarily recorded correctly

87
Q

Classified balance sheet

A

Merchandising company balance sheet

  • snapshot of the company position at a single point in time
  • similar assets/ similar liabilities grouped together
  • still in Assets = Liabilities + Owners’ Equity form

Assets:

  • current assets
  • long term investments
  • property, plant & equipment
  • intangible assets

Liabilities

  • current liabilities
  • long term liabilities

Owner’s/ Stockholders Equity

88
Q

Balance Sheet Accounts

A

All assets, liabilities & stockholders’ equity

  • assets + contra assets
  • liabilities (payables)
  • Equity/ common stock

all permanent accounts

89
Q

Merchandising company income formula

A 
Sales revenue
less cost of goods sold
= gross profit
less operating expenses
= net income
90
Q

Multi-step income statement

A

Distinguishes between operating and non-operating activities (sometimes also between selling and admin expenses)

Sales
less contra-revenue accounts
= net sales
less COGS
= Gross Profits
less Operating expenses
= income from operations
plus other revenue/gains
less other expenses/ loss
let income tax expenses
= net income
91
Q

Percentage of receivables method of estimating allowance for doubtful accounts

A
  • focuses on accurate valuation of receivables on the balance sheet
  • often uses A/R aging schedule (sometimes just a total % of all A/R)
  • existing balance in allowance for doubtful accounts is considered (since all outstanding a/r considered)
    • if ADA credit balance: subtract balance from target balance to get adjustment
    • if ADA debt balance: add balance to target to get adjustment
92
Q

Uncollectable Accounts Receivable

A

Accrual accounting
Debit (increase) Bad Debt Expense
Credit Allowance for Doubtful Accounts

Direct write off method not acceptable for under GAAP, must use allowance method

93
Q

Recording Payroll

A

To Accrue:
Debit Salaries/ Wages Expense
Credit Deduction payables
Credit salaries/ wages payables

use payrolll register as source document

when paid:
Debit Salaries/Wages payable
Credit Cash

Theory of Financial Accounting I (13 decks)

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