Chapter 3 - The Accounting Information System Flashcards
Basic Accounting Equation
Assets = Liabilities + Stockholder’s Equity
What falls under stockholder’s equity?
Common stock and retained earnings
What falls under retained earnings?
Revenues, Expenses, and Dividends
Accounting transactions
Economic events that require recording in the financial statements
How to keep the accounting equation in balance?
For each transaction, debits and Credits must equal each other
Debits
Increase Debits and decrease credits
Credits
Increase credits and decrease debits
On October 1, Sierra issued common stock in exchange for $10,000 cash:
Debit cash and credit common stock
On October 1, Sierra borrowed $5,000 by signing a note:
Debit cash and credit notes payable
On October 2, Sierra purchased equipment for $5,000:
debit equipment and credit cash
General Ledger
contains all the asset, liability, stockholders’ equity, revenue, and expense accounts
What are examples of assets
Cash, accounts receivable, supplies, prepaid insurance, equipment
What are examples of liabilities?
Notes payable, accounts payable, interest payable, unearned service revenue, salaries and wages payable
What are examples of stockholder’s equity
Common stock, retained earnings, dividents
What are examples of revenues
Service revenue, rent revenue, interest revenue
Purpose of transaction analysis
first to identify the type of account involved and then to determine whether a debit or a credit to the account is required.
Purpose of a trail balance sheet
to prove the mathematical equality of debits and credits after posting.
Order of a trial balance sheet
Assets, Liabilities, Stockholder’s equity, revenues and expenses
Analyze the effect of business transactions on the basic accounting equation.
Each business transaction must have a dual effect on the accounting equation. For example, if an individual asset is increased, there must be a corresponding (a) decrease in another asset, or (b) increase in a specific liability, or (c) increase in stockholders’ equity.
Explain how accounts, debits, and credits are used to record business transactions.
An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders’ equity items.
The terms debit and credit are synonymous with left and right. Assets, dividends, and expenses are increased by debits and decreased by credits. Liabilities, common stock, retained earnings, and revenues are increased by credits and decreased by debits.
Indicate how a journal is used in the recording process.
The basic steps in the recording process are (a) analyze each transaction in terms of its effect on the accounts, (b) enter the transaction information in a journal, and (c) transfer the journal information to the appropriate accounts in the ledger.
The initial accounting record of a transaction is entered in a journal before the data are entered in the accounts. A journal (a) discloses in one place the complete effect of a transaction, (b) provides a chronological record of transactions, and (c) prevents or locates errors because the debit and credit amounts for each entry can be readily compared.
Explain how a ledger and posting help in the recording process.
The entire group of accounts maintained by a company is referred to collectively as a ledger. The ledger provides the balance in each of the accounts as well as keeps track of changes in these balances.
Posting is the procedure of transferring journal entries to the ledger accounts. This phase of the recording process accumulates the effects of journalized transactions in the individual accounts.
Prepare a trial balance.
A trial balance is a list of accounts and their balances at a given time. The primary purpose of the trial balance is to prove the mathematical equality of debits and credits after posting. A trial balance also uncovers errors in journalizing and posting and is useful in preparing financial statements.
Double entry system
a system that records the two sided effect of each transaction in appropriate accounts
Journalizing must occur…
in chronological order
T- account
the basic form of an account
The effects on the basic accounting equation of performing services for cash are to:
( Increase assets and increase SE) When services are performed for cash, assets are increased and stockholders’ equity is increased. The other choices are therefore incorrect.
Genesis Company buys a $900 machine on credit. This transaction will affect the:
(Balance sheet only) When equipment is purchased on credit, assets are increased and liabilities are increased. These are both balance sheet accounts. The other choices are incorrect because neither the income statement nor the retained earnings statement is affected.
Which of the following events is not recorded in the accounting records?
Termination of an employee is not a recordable event in the accounting records.
Paying an account payable with cash affects the components of the accounting equation in the following way:
When paying an account payable with cash, the asset cash decreases. Accounts payable, a liability, decreases as well.
Which is not part of the recording process?
Preparing an income statement is not part of the recording process. Choices (a) analyzing transactions, (c) entering transactions in a journal, and (d) posting transactions are all steps in the recording process.
Posting:
Posting transfers journal entries to ledger accounts.
A Trial Balance
A trial balance is a list of accounts with their balances at a given time.
T account Acroymn?
(Increase w Debits) DEA / LOR (increase with credit) (DEALOR)
“sold items”
Revenue
“Paid”
credit cash
received cash
Debit cash
