Chapter 3: The Accounting Information System

Question 1

What is the accounting cycle?

Answer 1

1. Id and measure event
2. Journalize the event
3. Post to ledger
4. Create unadjusted trial balance
5. Enter adjusting entries
6. Create adjusted trial balance
7. Create financial statements
8. Close temporary accounts
9. Create post-closing trial balance
10. Reversal entries (if needed)

Question 2

What are economic events?

Answer 2

Events that directly affects the economic position of the company and are external or internal.

Question 3

What is the accounting equation?

Answer 3

Summarizes all accounts in terms of the sources of assets.

Assets = Liabilities + Contributed Capital + Retained Earnings

Question 4

What are adjusting entries?

Answer 4

Reflect the effect of internal events and update the accounts at the end of the period.

Specifically:

• Affect one balance sheet account and one income statement account
• Never affect cash
• Adjust the books for the pasage of time

Question 5

What are accruals?

What are these items, typically?

Answer 5

Adjusting entries that recognize revenue (expense) before cash is exchanged.

They are typically payables and receivables.

Question 6

What are deferrals?

What items are these, typically?

Answer 6

Cash is exchanged before revenue or expense is recognized.

Typically prepaid expense, unearned revenue, depreciation.

Question 7

What are real (permanent) accounts?

Answer 7

Balance sheet accounts that are never closed.

Question 8

What are nominal (temporary) accounts?

Answer 8

Income statement accounts that are closed at year end.

Question 9

What are the steps to closing temporary accounts?

Answer 9

1. Close revenue accounts to Income Summary or Retained Earnings (both have normal credit balances)
2. Close the expense accounts to Income Summary or Retained Earnings
3. Close the Income Summary Account to Retained Earnings
4. Close the Dividend Account to Retained Earnings

Question 10

What are the general rules on reversals?

Answer 10

• All accruals could be reversed
• All deferrals where the original entry was to an expense or revenue account can be reversed
• Adjusting entries for depreciation and bad debt expense are not reversed