Week 2 Flashcards
The accounting information system
An accounting information system is about recording information to produce financial statements that are used as a basis for decisions; it is like an athlete recording their performance so they can try ways to improve it. Accounting information system identifies, records, summarises and communicates the various transactions of a company.
the Accounting Equation
Assets = Liabilities + Equity
The Effects of Transactions on the Accounting Equation
- Transactions result in changes in assets, liabilities and owners equity
- Every accounting transaction must affect at least two accounts. This requirement is known as the dual nature of accounting.
- After each transaction is recorded the accounting equation must remain balance
Debit and Credit Rules
•Assets are debit in nature
•Debits = Credits
•Accounting equation: A = L + E
–Therefore, Liabilities and Equity must be credit in nature
•Income increases Equity; credit increases Equity
–Therefore Income must be credit in nature
•Expenses decreases Equity; debit decreases Equity
–Therefore Expenses must be debit in nature
Debit versus Credit
The left side of the account is the debit side and the right side of the account is the credit side.
A debit indicates:
- an increase in an asset
- a decrease in a liability
- a decrease in a shareholders’ equity item.
A credit indicates:
- a decrease in an asset
- an increase in a liability
- an increase in a shareholders’ equity item.
T-account Normal Balances: assets
Increases in assets appear on the left side of T-accounts
Decreases in assets appear on the right side of
T-accounts
T-account Normal Balances: liabilities
Decreases in liabilities appear on the left side of T-accounts
Increases in liabilities appear on the right side of T-accounts
T-account Normal Balances: Retained Earnings
Decreases in equity appear on the left side of T-accounts
Increases in equity appear on the right side of T-accounts.
Can t-accounts be used on their own
While T-accounts are useful to help analyse how individual transactions flow and accumulate within various accounts, journal entries formalise the reasoning that supports the transaction.
General Journal
General journal is where transactions are first recorded into the accounting system.
General journal has the following advantages:
–Complete record of all transactions
–Presented in chronological order
–Useful for locating and reducing errors as debits and credits shown together
General Ledger
- A ledger is a collection of accounts and their balances.
- Companies have various types of ledgers containing different accounts, but the most basic type is the general ledger.
- The general ledger is really nothing more than a collection of T-accounts, which means that it contains both the activity and balances of all company accounts.
Recording Transactions into the Accounting System
•When an accounting transaction is recorded in the general journal or journalised, the amounts recorded in the debit and credit columns are transferred to the debit and credit columns of the respective
T-accounts in the ledger.
•The process of copying or transferring the information from the journal to the ledger is called posting. Posting results in up-to-date account balances.
•Companies look to the ledger for balances in their accounts.
Write a brief explanation of the terms debit and credit and how they are used in an accounting information system. Explain why debit and credit cannot mean good and/or bad.
For accounting, debit simply means the left side of an account, while credit simply means the right side of an account. All accounts have either a debit or a credit balance, and when recording an accounting transaction, journal entries will either debit or credit the account. After all entries are made, the debits and credits are added up separately, and then the smaller amount is subtracted from the larger. The difference is the account balance. Because debit means left and credit means right, they cannot mean good or bad, because they affect different accounts in different ways.
Borrowed $30 000 from bank) credit account
Notes payable
Issued $10 000 shares in exchange for cash. Credit account
Ordinary shares