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Flashcards in Chapter 3 Deck (51):
1

Accounting infomation system

The system of collecting and processing transaction data and communicating financial info to decision makers

factors: nature of business

Types of transactions

size of company

amount of data

2

Accounting transactions

Economic events that require recording in the financial statements

When assets, liabilities, or stockholders' equity change as a result of an economic event

3

Transaction analysis

The process of identifying the specific effects of economic events on the accounting equation

4

Unearned service revenue

A revenue that often occurs through prepay processes when a company gets money (asset) but has not yet delivered the service (liability)

ex. airlines

5

Revenue's effect on stockholder's equity

Revenue increases stockholder's equity

adds cash to assets

increase stockholder's equity (rev-exp-div)

6

Services on acount

Company performs service but allows it to be paid later 

Company receives an asset (accounts receivable) and receives service revenue because the service has been provided

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Expenses effect on stockholder's equity

Decreases revenue so decreases total stockholder's equity

8

Prepaid expenses or prepayments

Payments of expenses that will benefit more than one accounting period

9

Hiring of new employees

Does not affect accounting equation until employees are paid

10

Dividends (accounting equation relevance)

A reduction of stockholder's equity but not an expense

11

Fannie Mae troubles

Announced a series or large accounting errors

mortgage company market depends on them

12

Bank One Corporation

Fined 1.8 billion dollars because of unreliable accounting

13

Waste Management Company

10,000 employees received error pay slips

14

Account

An individual accounting record of increases and decreases in a specific asset, liability, stockholder's equity, revenue, or expense item

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Three parts of account

Title of account

Left or debit side

Right or credit side

= T account

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Debit (Dr.)

Indicates the left side of an account

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Credit (Cr.)

Indicates the right side

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Debiting

The act of entering an amount on the left side of an account

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Crediting

Making an entry on the ride side of the account

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Debit balance

Account shows a debit balance if the total of the debit amount exceeds the credits

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Credit balance

Shows a credit balance if the credit amounts exceed the debits

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For each transaction

Debits must equal credits

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Double-entry system

The two-sided effect of each transaction is recorded in appropriate accounts

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International Note: double-entry system

Europeans rely less on historical cost and more on fair value

However, double-entry accounting system is the basis of accounting systems worldwide

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Debits include:

increase in assets

Decrease in liabilities

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Credits include:

Decrease in assets

Increase in liabilities

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Asset accounts...

Normally show debit balances

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Liability accounts

Normally show credit balances

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Retained earings is...

Decreased by debits

increased by credits

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Dividends...

recoreded in debits

dividends account normally has a debit balance

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Revenues and expenses

Debits: decrease venue, increase expenses

Credits: increase revenue. decrease expenses

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Revenue accounts show

Credit balances

33

Expense accounts show

Debit balances

34

Source document

Evidence of the transaction such as a sales slip, a check, a bill, or a cash register tape

35

Journals

Transactions are intitially recorded in chronological order in journals before transferred to accounts

shows debit/credit effects

36

General journal

the most basic form of a journal

every company has one

37

Three contributions of a journal

1. Discloses in one place the complete effect of a transaction

2. Provides a chronological record of transactions

3. Helps to prevent or locate errors because the dr. and cr. amounts for each entry can be compared

38

Journalizing

Entering trnsaction data in the journal

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A complete journal entry

1. date of transaction

2. accounts and amounts to be debited and credited

3. Brief explanation of the transaction

*Debit listed on first and left line, Credit on second and right

*Brief explanation of transaction

40

Ethics note: International Outsourcing Services

International Outsourcing Services was accused of submitting fradulent documents (coupons) for Kraft Foods and PepsiCo for 250 million. 

Ensuring that all recorded transactions are backed up by proper business documents reduces the likelihood of fraud activity (provide evidence that transactions occured)

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Ledger

The entired group of accounts maintained by a company

Keeps in once place all the information about changes in specific account balances

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General ledger

Contains all the assets, liabilities, stockholders' equity, revenue, and expense accounts

Every company has one

43

Chart of accounts

A list of all accounts a company has

44

Posting

The procedure of transferring journal entry amounts to ledger accounts

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Purpose of transaction analysis

First- identify the type of account involved

Then - determine whether a debit or a credit to the account is required

46

Trial balance

Lists accounts and their balances at a given time

Prepared at the end of an accounting period

proves mathematical equality of debits and credits after posting

useful in the prepatation of financial statements

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Preparing a trial balance

1. list the account titles and their balances

2. Total the debit column and total the credit column

3. Verify the equalityof the two columns

 

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Order of trial balance

Assets

Liabilities

Stockholder's Equity

Revenues

Expenses

49

Error

50

Irregularity

An intentional misstatement

Viewed as unethical

51

Order of trial balance

order in which they appear on the ledger