Chapter 3: The Accounting Information System Flashcards
Modified Cash Basis
Mixture of Cash and Accrual basis accounting.
Mostly cash basis but with modifications
- capitalizing and depreciating plat assets
- recording inventory
NRV
Net Realizable Value
Unearned Revenues
Liability account
Receipt of payment creates performance obligation
Prepaid Expenses
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
Deferrals
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
Accruals
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
Adjusting Entries
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
Special Journals
Summarize transactions possessing a common characteristics
- cash receipts
- cash sales
- purchases
- cash payments
Posting
Transfer date, journal page, explaination and amount debited in account debited
- write account number in journal reference column
- repeat for credits
Three Column Account Form
An account format in the general ledger with three columns for money: Debit, credit and balance
Chart of Accounts
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
Credit
CR right
Credit balance if credits exceed debits
Debit
DR Left
Debit balance if debits exceed credits
Financial Statements
Reflect the collection, tabulation and financial summarization of accounting data
Subsidiary Ledger
Contains details related to a given general ledger account
Account
Systematic arrangement showing the effect of transactions or other events on a specific element (asset, liability etc..)
Event
A happening of consequence
The source or cause of changes in assets liabilities and equity
May be internal or external
U.S. Foreign Corrupt Practices Act
Requires companies to make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect the transactions and deposition of assets.
ICFR
Internal control over financial reporting
Continuous Accounting
New Technologies enabling:
- agility
- intelligent analysis
- data driven decision making
24/7 accounting
- closes books on a daily basis
- issues with unaudited data
Reversing entry for accruals adjustments
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
Reversing entry for deferrals adjustment
Unnecessary if deferred expenses not originally debited to expense account, but rather a real account
IF deferred expenses debited to expense account & then adjusted
Permanent accounts at the end of a period
single line under current period entries
account balance entered below single underline and carried forward to the next period
Closing temporary accounts
Total
Balance
Double Underlines
Accounts now at 0