Chapter 3 - The Accounting Information System Flashcards
Real vs. Nominal Accounts
Real accounts: assets, liabilities, equity
Nominal accounts: revenue, expense, dividends (closed periodically)
Adjusting Entries vs Closing Entries
Adjusting Entries: bring all accounts up-to-date at the end of a period on accrual basis
Closing Entries: formal process in which all nominal accounts reduced to zero and transfers net income/loss to SRE
Paid-In Capital in Excess of Par Value - Common Stock
The SE acct. that represents the amount paid to a corporation for its common stock that was in excess of the common stock’s par value.
Impairment Test
Expected cash flow of an asset is periodically compared to assets’ book value. If BV is higher EFCF, then difference is written off and value of asset declines on B/S
General Ledger vs. General Journal
General Ledger: contains all asset, liability, and SE accounts
General Journal: chronological list of all transactions
Trial Balance
List of accounts and their balances at a given time; can contain numerous errors - thus, it is called a trial
Adjusting Entries
In order for revenues to be recorded in the period in which services are performed and for expenses to be recognized in the period in which they are incurred, companies make adjusting entries
Common Prepaid Expenses
Rent, insurance, advertising, supplies
Contra Asset Account
Offsets an asset account on the balance sheet; allows to show original cost (historical) minus (depreciation). Better representation than simply crediting the asset.
Unearned Revenue
When cash is received before services/goods are rendered; cr unearned rev/dr cash
Accrued Expenses
Expenses incurred by not yet paid; taxes, interest, salaries
Adjusted Trial Balance
Prove the equality of the total debit balances and the total credit balances in the ledger after all adjustments
Closing Process
Reduce the balance of the nominal accounts to zero in order to prepare the accounts for the next period’s transactions
Income Summary has a _________ balance.
Credit
