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
Contra-asset account
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)
26
Ownership on Balance Sheet
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
27
Revenue Conversion Cash Basis to Accrual Basis
``` Cash Receipts from Customers - Beginning Accounts Receivable + Ending Accounts Receivable + Beginning unearned revenue - Ending unearned revenue = Revenue on accrual basis ```
28
Operating Expenses: Conversion cash basis to accrual basis
``` 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
29
Sarbanes Oxley Act
- 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
30
Statement of Cash Flows
- 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
31
Balance Sheet
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)
32
Statement of Retained Earnings
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
33
Income Statement
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)
34
Basic Accounting Equation
Assets = Liabilities + Owners Equity aka What a business has and those who have claim to those assets MUST always balance
35
Double Entry Accounting
- 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
36
Journal
"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
37
General Ledger
Tracking of transactions sorted by account arranged in trial balance order "$" not used collection of all accounts
38
Transaction
EXTERNAL EVENTS Transaction is an event that affects the financial position of the company AND can be measured with faithful representation "an external event involving a transfer of exchange between two or more entities"
39
Transaction steps
1. Identify accounts affected and account type 2. decide if each account increases or decreases 3. record transaction in journal 4. post journal entries to general ledger accounts 5. Assure accounting equation is still in balance
40
Accounts that Decrease Owner's Equity
- owners drawings (dividends) | - Business expenses
41
Accounts that increase owners equity
- owner investments (capital, stock) | - revenue
42
Revenue
Debit Decrease Credit Increase Credit Normal Balance Temporary account - closed at the end of each cycle
43
Owner's Equity
Equity/ stocks/ capital Debit Decrease Credit Increase Credit Normal balance On a classified balance sheet: - proprietorship = one capital account - partnership = one account per partner - corporation = capital stock account + retained earnings account Permanent accounts
44
Liabilities
Debit decrease Credit increase Credit Normal Blaance Permanent account
45
Owners Drawing
Debit increase Credit Decrease Debit Normal Balance Temporary account - closed at the end of the cycle
46
Expenses
Debit Increase Credit Decrease Debit normal blance Temporary account - closed at the end of each cycle
47
Assets
Debit increase Credit Decrease Normal balance Something that provides future benefit for the company permanent account
48
Normal Balance
Always on the increase side of the account
49
Trial balance
- list of account balances at a given time - in order of general ledger accounts - proves only that debit balances = credit balances - "$" on 1st item in the column and on column totals
50
Trial Balance Error checks
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
Expanded Accounting Equation
Assets = Liabilities + Owners capital - Owner's drawing + revenues - expenses Retained earnings = revenue - expenses - owner drawings Owner's capital = common stock + retained earnings
52
Adjusting Entries
- 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
Depreciation
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
Contra Account
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
Residual value
Expected value of a depreciable asset at the end of its natural life
56
Book Value
The difference between the cost of an asset and its accumulated depreciation (remaining value)
57
Worksheet
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
Cash-Basis accounting
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
Accrual Accounting
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
If Accrued Expenses not adjusted
Expenses understated Liabilities understated Income statement: expenses understated, net income overstated Balance sheet: liabilities understated, equity overstated
61
Adjusting Entry, Accrued Expenses
Debit (increase) expense account Credit (increase) liability account If not adjusted - expenses understated, liabilities understated expenses incurred but not paid for
62
Accrued Expenses
Expenses accrued but not yet paid liability account payables, accrued interest permanent account
63
If Accrued revenues are not adjusted
Assets understated Revenue understated Income statement: revenues understated, net income understated Balance Sheet: Assets understated, equity understated
64
Adjusting Entry, Accrued Revenue
Debit (increase) asset account Credit (increase) revenue account If not adjusted: assets understated, revenue understated revenues earned but not yet received payment for
65
Accrued Revenues
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
If unearned revenue NOT adjusted
Liabilities overstated Revenues understated Income statement: revenues understated, net income overstated balance sheet: liabilities overstated, equity understated
67
Adjusting entry, unearned revenues
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
Adjusting Entry, Accumulated Depreciation
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
Property, plant & equipment
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
If prepaid expenses not adjusted
Assets overstated Expenses understated income statement effect: expenses understated, net income overstated Balance sheet effect: assets overstated, equity overstate
71
Adjusting Entry, prepaid expenses
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
Unearned Revenue
Aka deferred Revenue - considered a liability (deferral) Payment collected in advance of services Debit (increase) cash Credit (increase) liability (unearned revenue) Permanent account
73
Prepaid expense
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
adjusted Trial balance
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
Depreciation on balance sheet
Under assets section Asset less accumulated depreciation = net asset
76
Straight-line method of depreciation
Depreciation formula Straight line depreciation = (cost - residual value) / useful life Usually measured in years
77
Interest
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
Closing Process
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
Accounting Cycle
``` 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
Reversing Entry
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
Income Summary Account
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
Closing the books: Revenues & Expenses
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
Closing the books: Owners Drawing
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
Closing Entries
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
Temporary vs Permanent Accounts
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
Post Closing Trial balance
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
Classified balance sheet
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
Balance Sheet Accounts
All assets, liabilities & stockholders' equity - assets + contra assets - liabilities (payables) - Equity/ common stock all permanent accounts
89
Merchandising company income formula
``` Sales revenue less cost of goods sold = gross profit less operating expenses = net income ```
90
Multi-step income statement
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
Percentage of receivables method of estimating allowance for doubtful accounts
- 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
Uncollectable Accounts Receivable
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
Recording Payroll
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