Ch.3 - The Accounting Information System

Question 1

Accounting Information System

Answer 1

System used to collect and process transaction data and communicate financial information

Question 2

Accounting Cycle

Answer 2

Analyze Transactions -> Journalize -> Post -> Trial Balance -> Journalize and Post Adjusting Entries -> Adjusted Trial Balance -> Prepare Financial Statements -> Journalize Post Closing Entries -> Post-Closing Trial Balance

Question 3

Accounting Transactions

Answer 3

Business transactions of an economic nature are the raw data of accounting.

Transactions are economic events (changes the financial position of the company) that must be recorded in the financial statements.

Ex. purchasing computer, discussing product design with potential customers, paying rent.

Question 4

Accounts

Answer 4

-It is the basic component used to classify and summarize business transactions.
-After a transaction, it must be recorded in appropriate accounts.
-Each account has name and account number

Question 5

5 Account Classifications

Answer 5

-Assets
-Liabilities
-Shareholder’s Equity
-Revenues
-Expenses

Question 6

Chart of Accounts

Answer 6

-Lists all account names and numbers
-Provides accountants a guide on where to record business transactions
-Accounts are numbered and separated according to their classification

Question 7

Debits and Credits

Answer 7

Left Side: Debit (DR)
Right Side: Credit (CR)

An account’s balance is the difference between total debits and total credits.

T account: every account can be expressed in this format.

Question 8

Normal Balance

Answer 8

Type of balance (DR or CR) that a given account should normally have.

Assets (DR)
Liabilities (CR)
Shareholder’s Equity (CR)
Revenues (CR)
Expenses (DR)

Question 9

Normal Balance: Contra Accounts

Answer 9

Contra Accounts have a normal balance opposite of the account it is related to.

Contra-Assets (CR)
Contra-Liabilities (DR)
Contra-Shareholder’s Equity (DR)
Contra-Revenues (DR)
Contra-Expenses (CR)

Question 10

Recording Transactions

Answer 10

-To increase an account, record the amount on the same side as the account’s normal balance.
-To decrease an account, record the amount on the opposite side of the account’s normal balance.

Ex.
-Cash is an assets, assets have normal DR balance, therefore:
–> to increase cash = DR cash, to decrease cash = CR cash

Question 11

Recording Transactions: Double Entry Accounting

Answer 11

-Accounting is biased on the double entry system
-There is a DR side and a CR side to every accounting transaction
-Total DR must equal total CR in every transaction

Question 11

Recording Transactions: Journalize

Answer 11

Journalize: recording a business transaction in a journal.
-Transactions in a journal (ex. journal entry) are recorded in chronological order.

Types:
-General Journal
-Cash Receipts
-Cash Disbursements
-Sales
-Purchases

Two sides (ex. double entry accounting)
-DR and CR side
-To balance, total DR must = total CR

Question 12

Posting to the General Ledger (Post)

Answer 12

General Journal: used to record transactions and organized chronologically.

Posting: process of transferring transactions recorded in the journals to the general ledger.

General Ledger (GL): tabulates the effects of transactions by account, organized by account

Question 13

Trial Balance

Answer 13

-Accounting worksheet that lists the DR and CR balances of all accounts before adjusting entries and closing entries,
-Total DR must = Total CR to balance

Note: a trial balance doesn’t necessarily indicate that all transactions in an accounting periods have been recorded properly.
ex. missing transactions, incorrect amount(s), duplicate postings