Flashcards in Ch 3 Deck (55):
Accounting information system
Collects and processes transaction data and disseminates
the financial info to interested parties
4 factors that shape financial accounting systems of companies?
1 nature of the business
2 size of the firm
3 volume of data handled
4 informational demands that management and others require
4 basic concepts of financial accounting?
4 interpreting transactions
A happening of consequence
A source or cause of changes in assets, liabilities
An external event involving transfer or exchange btw
2 or more entities
Systematic arrangement that shows the effect of transactions
And other events on a specific element (asset, liability, etc.)
Permanent accounts appear on balance sheet
Include asset, liability and equity accounts
Temporary accounts appear on the income statement
and are closed periodically
Include revenue, expense, dividend (statement or retained earnings)
Book or printout containing accounts
General ledger, subsidiary ledger?
General ledger is a collection of asset, liability,
Owners' equity, revenue and expense accounts
Subsidiary ledger includes details related to
General ledger account
Book of original entry where company
records transactions (journalizing)
transferring amounts from journal to ledger
List of all open accounts in ledger and their balances
Adjusted trial balance, post-closing trial balance?
Adj TB = trial balance taken immediately after adjustments
Primary basis for preparation of financial statements
PC TB = TB taken immediately after closing entries have
Proves equality of permanent account balances
Entries made at end of accounting period to bring
All accounts up to date on an accrual basis to
Prepare correct financial statements
Statements that reflect the collection, tabulation and
Final summarization of accounting data
Shows financial condition of enterprise at end of
Measures results of operations during period
Statement of cash flows
Reports cash provided and used by operating, investing
And financing activities during period
Statement of retained earnings
Reconciles the balance of retained earnings account
From the beginning to end of the period
Formal process where enterprise reduces all nominal accounts
To zero and determines transfers of net income or loss
To owners' equity account
Debit and credit, debit balance, credit balance?
Left and right respectively
Comparing a total on the left side is a debit balance
(exceeds right side)
Comparing a total on the right side is a credit balance
(exceeds left side)
Double entry accounting system
Company records two-sided effect of each transaction
In appropriate accounts
External events, 3 examples
Involve interaction between an entity and it's environment
Ex 1 Change in price of good or service an entity buys or sells
Ex2 flood or earthquake
Ex 3 improvement in technology by competitor
Internal events, 2 examples, define?
Occur within an entity
Ex 1using buildings and machinery in operations
Ex 2 transferring or consuming raw materials in production process
Company records as many events as possible that
Affect its financial position
Chronologically lists transactions or other events
Expressed in terms of debits or credits
4 parts of general journal entry?
1 Accounts and amounts to be debited
2 accounts and amounts to be credited
Summarize transactions processing a common characteristic
(cash receipts, sales, purchases, cash payments)
Reduce bookkeeping time
4 steps of posting?
1 in ledger enter date, journal page and amount shown
in journal for debit
2 in reference column of journal write account # to which
Debit amount was posted
3 in ledger enter date, journal page and amount shown
in journal for credit
4 in reference column of journal write account # to which
Credit amount was posted
Standard account form AKA 3-column form of account
Has 3 money columns debit, credit and balance
What 2 things does the posting reference number column represent?
1 indicates ledger account number involved
2 indicates completion of posting for particular item
2 purposes of transaction analysis?
1 identify the type of account involved
2 determine whether a debit or credit is required
3 procedures for preparing a trial balance?
1 list account titles and balances to appropriate debit
Or credit column
2 total the debit and credit columns
3 prove equality of 2 columns
3 main reasons for preparing adjustment entries?
1 Some events aren't recorded daily b/c its not efficient
Ex. Use of supplies, earnings by employees
2 some costs are not recorded during accounting period
B/c these costs expire with the passage of time
Ex. Depreciation, rent, insurance
3 some items may be unrecorded
Ex. Utility service bill that won't be received til next
Categories of adjusting entries?
Deferrals and accruals
2 types of deferrals?
Prepaid expenses: expenses paid in cash before used or consumed
Unearned revenues: cash received before services are
2 types of accruals:
Accrued revenues: revenues for services performed but not
Yet received in cash or recorded
Accrued expenses: expenses incurred but not yet paid in
Cash or recorded
Expenses or revenues that are recognized at a date
Later than the point when cash was originally exchanged
What happens if company doesn't make an adjustment for its deferrals?
The asset or liability is overstated
What does an adjusting entry to a prepaid expense account result in?
Debit to the expense account and credit to asset account
How long asset is expected to be productive
Process of allocating the cost of an asset to
Expense over its useful life in a systematic manner
Estimate of expired cost
Contra asset account
Offsets an asset account on a balance sheet as a credit
Difference between assets cost and it's accumulated
Depreciation as an allocation concept?
Not a valuation concept, so doesn't report fair value
Allocates an asset's cost to periods which it is used
Depreciation does not attempt to report actual change
In the value of the asset
How is unearned revenue treated in accounting?
Unearned revenue is a credited liability account
During adjustments unearned revenue is debited
And the revenue account is credited
The adjustment for accruals will...
Increase the balance sheet and income statement accounts
An adjusting entry to accrued revenue results in?
Debit increase to assets and credit increase to revenue
Bad debt expense
Uncollectible accounts are recorded as bad debt expense
Allowance for doubtful accounts
Contra asset account of estimated uncollectible accounts
Account used to close revenues and expenses into
Reverse affects of adjustment entry made at
Beginning of next accounting period
8 steps in accounting cycle?
1 identify and measure transactions
4 preparing unadjusted trial balance
5 make adjustment entries
6 prepare adjusted trail balance
7 prepare financial statements
8 closing entries