Chapter Three: The Accounting Information System Flashcards
Double-Entry System
Debits and credits equal each other
Debits
left-hand side, increase assets and expense accounts (debit balance), decrease liabilities, equity, and revenue
Credits
right hand side, increase liabilities, equity, and revenue (credit balance), decrease assets and expenses
Types of Accounts
Assets, Liabilities, Stockholder’s/Owner’s Equity, Revenues, and Expenses
Accounting equation
Assets = Liabilities + Owner’s Equity
Profit Equation
Revenues - Expenses = Net Income
Accounting Cycle
Identify events or transactions, Record transaction in journal, Posting, Prepare a Trial Balance, Adjusting Entries (Accruals and Deferrals), Prepare an Adjusted Trial Balance, Prepare the Financial Statements, Closing Process, and Post-Closing Trial Balance
What types of transactions are recorded?
internal and external
Transaction
event between organization and something outside organization (external)
Journal
original book of entry, use general journal
Accrued revenue
revenues that have been earned but payment has not been received
Accrued expense
expense incurred this period but have not made an expenditure
Deferred (unearned) revenue
revenue where payments have been received but earning process is not complete
Deferred (prepaid) expenses
made expenditure but not properly matched in this period (still have asset on hand)
Balance Sheet
composed of permanent accounts, will reflect company’s financial position and accounting equation (assets = liabilities + owner’s equity)
Income Statement
composed of nominal accounts, reflects company’s profitability over time, shows results of profit equation
Statement of Cash Flows
reports cash transactions during period, financing, investing, and operating activities
Statement of Retained Earnings
not money, retained earnings is owner’s equity account which represents profit which has been left in business by owners
Closing Process
results of profit equation added to retained earnings
Describe the closing process
1) Introduce new account, Income Summary, into the system
2) Force all expenses to 0, making corresponding entry to Income Summary (credit)
3) Force all revenues to 0, making corresponding entry to Income Statement (debit)
4) Force income summary to 0, making corresponding entry to retained earnings
