Ch. 2 The Accounting Information System Flashcards
The Accounting Information System
External transactions
- Transactions the firm conducts with a separate economic entity.
- Selling products to a customer.
- Purchasing supplies from a vendor
- Paying salaries to an employee
- Borrowing money from a bank
Internal transactions
- Events that affect the financial position of the company but do not include an exchange with a separate economic entity.
- Using supplies on hand.
- Earning revenues after having received cash in advance from a customer (Unearned Revenue).
Account
A summary of the effects of all transactions related to a particular item over a period of time.
- Asset accounts
- cash account
- supplies account
- equipment account
- Liabilities accounts
- Stockholders’ Equity accounts
- Revenue accounts
- Expense accounts
- rent expense account
- utilities expense account
- insurance expense account
Chart of accounts
A list of all account names used to record transactions of a company.
T-account
A simplified form of a general ledger account with space at the top for the account title and 2 sides for recording debits and credits.
Journal
A chronological record of all transactions affecting a firm.
General ledger
- All accounts used to record the company’s transactions.
- Since we post all transactions to the general ledger, each account provides in one location a collection of all transactions that affect that account.
Posting
- The process of transferring the debit and credit info from the journal to individual accounts in the general ledger.
- Computerized systems automatically and instantly post info. from the journal to the ledger.
Trial balance
- A list of all accounts and their balances at a particular date, showing that total debits equal total credits. For internal use only.
- Also, it assists us in preparing adjusting entries (for internal transactions)
6 Steps in Measuring External Transactions
- Use source documents to identify accounts affected by an external transaction.
- Analyze the impact of transaction on the accounting equation.
- Assess whether the transaction results in a debit or credit to the account balance.
- Record the transaction (Journal entry).
- Post transactions to the T-account in the general ledger.
- Prepare a trial balance.
Source Documents/Accounts
- Sales invoices
- Bills from suppliers
- Signed contracts
- They usually identify the date and nature of each transaction, the participating parties, and monetary terms.
- Record the effects of transactions in accounts.
Accounting Equation (Effects)
- Each transaction will have a dual effect
- If an economic event increases one side of the equation, then it also increases the other side of the equation by the same amount.
- Sometimes though, a transaction will not affect the total of either side (one asset-equipment-goes up while another asset-cash-goes down)
- At least 2 accounts will be affected by every transaction or economic event.
- However sometimes more than 2 accounts will be affected (Transaction of making a salaries payment, recording sales discounts).
Prepaid Expenses
- Recorded as an asset
- Because rent paid is for occupying space in the future, we don’t want to record it as an expense immediately. We’ll report this amount as an expense over the next 12 months, as the time we’ve prepaid expires.
Debits/Credits
Assets = Liabilities + S/E
(Debit) (Credit)
- Total debits must equal total credits
D E A L O R
Dividends Liabilities
Espenses Owners equity
Assets Revenues
Effects on Account Balances in the expanded Accounting Equation
- Revenues increases retained earnings
- Retained earnings is a credit account, so we increase revenues with a credit.
- A debit to an expense is essentially a debit to retained Earnings, decreasing the account
