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60 Cards in this Set
- Front
- Back
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The Accounting Information System |
The system of collecting and processing transaction data andcommunicating financial information to decision-makers Canvary widely based on factors such as: •Type of business and its transactions •Size of company •Amount of data •Information requirements |
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Parts of the Accounting Information System |
1.AccountingTransactions 2.TheAccount 3.Steps inthe Recording Process 4.The TrialBalance |
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1.AccountingTransactions |
-Economic events that cause changes in assets,liabilities, or shareholders’ equity are recorded as accounting transactions(i.e. you do not need to record that a new employee was hired in the accountingrecords) |
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Transaction Identification Process |
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Analyzing Transactions |
-Transaction analysis determines impact onthe accounting equation: -Assets = Liabilities + Shareholders’Equity -The accounting equation mustalways balance -Therefore,each transaction has a dual (double-sided) effect on the equation |
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Transaction 1 |
o Studentinvest $50,000 to begin Tara Inc., and the business issues common shares o Asset(cash)–> increases $50,000, and Shareholders’ Equity(common shares) –> increases$50,000 |
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Transaction 2 |
o Tara Inc.purchases land and pays $40,000 in cash o Asset(cash)–> decreases $40,000, and Asset(land) –> increases $40,000 |
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Transaction 3 |
o Thebusiness buys stationery and other office supplies on account agreeing to pay$3,700 within 30 days. o Asset(supplies)– increases $3,700, and Liabilities (accounts payable) – increases $3,700 |
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Transaction 4 |
o Tara Inc.earns service revenue of $7,000 and collects this amount in cash. o Assets(cash)– increases $7,000, and Shareholders Equity (revenue)– increases $7,000 |
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Transaction 5 |
o TaraInc., performs service on account and Charged the customer $3,000. o Asset(accountsreceivable) – increase $3,000, and Shareholders Equity (revenue) – increases$3,000 |
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Transaction 6 |
o Tara Inc.pays $2,700 for the following expenses: office rent $1,100, employee salary$1,200 and utilities $400 o Asset(cash)– decreases $2,700, and Shareholders’ Equity(retained earnings) – decrease$2,700 |
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Transaction 7 |
o Tara pays$1,900 on account for supplies purchased in Transaction 3. o Asset(cash)– decrease $1,900, and Liabilities(accounts payable) – decrease $1,900 |
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Transaction 8 |
o Ashareholder pays for the remodelling of his home at a cost of $30,000. o Thisevent is a transaction of the personal entity, not the business entity.– no transaction |
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Transaction 9 |
o Thebusiness collects $1,000 from a customer on account. o Asset(cash)– increase $1,000, and Asset(receivable) – decrease $1,000 |
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Transaction 10 |
o Tara Inc.sells part of the land purchased in Transaction 2 for $22,000 in cash. o Asset(cash) – increase $22,000, andAsset(land) – decrease $22,000 |
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Transaction 11 |
o The corporation declares a dividend and pays $2,100 cash to the shareholders. o Asset(cash) – decrease $2,100, Shareholders’ Equity – decrease $2,100 |
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Summary of transactions |
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Summary of transactions |
-This illustration showsthat: o Each transaction must beanalyzed for its effect on the three primary components (assets, liabilities,and shareholders’ equity) o The two sides of theequation must always be equal |
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Debits and Credits |
- Describe where entriesare made in the accounts: • Debit (DR)•Credit (CR) -If debit amounts exceed credit amounts, account has adebit balance - If credit amounts exceed debit amounts, account has a credit balance -T-Account: o Debit refers to the LEFT side o Credit to the RIGHT side -Debit and Credit are neutral terms (neither is“good” or “bad”) |
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ACCOUNT |
-An individual accountingrecord of increases and decreases in a specific asset, liability, orshareholders’ equity item Three parts: 1. The title of the account 2. A left or debit side 3. A right or credit side |
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The Title of Account (The T-Account) |
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The T-Account: Debit Balance |
Totalthe entries to each side. If the greater sum is on the left, the account has a debit balance |
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The T-Account: Credit Balance |
Totalthe entries to each side. If the greater sum is on the right, the account has acredit balance |
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Summary of debit and credit effects |
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DEBIT – DEAL(increased by) |
Dividends Expenses Assets Losses(incidentals) |
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CREDITS – GRLS(increased by) |
Gains Revenues Liabilities Shares |
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Normal Balances (Credit and Debit) Summary |
-Debit will increase a debit account -Credit will increase a credit account -Shareholders Equity (Common Shares + RetainedEarnings) –> increased by credits -Retained Earnings = Revenue – Expenses – Dividends o Expensesand Dividends decrease retained earnings (increase in the account recorded bydebits), Revenue increases retained earnings (increase in this account recordedby credits) |
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Accounting Cycle (Steps) |
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Steps in the recording process |
Step 1: Analyze each transaction to determine itseffect on accounts (if any) – evidence comes from a source document Step 2:Record transaction as a journal entry in the general journal Step 3:Transfer information to appropriate accounts in the general ledger |
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General Journal: Step 2 of Accounting cycle |
-Aka -Book of original entry -Accountingrecord where the transactions are recorded in chronological order -General journal is most common. -Other journals caninclude: Cash receipts, Cashdisbursements, Sales, and Purchases -Thegeneral journal makes several contributions to the recording process: oDiscloses complete effect of a transaction in oneplace, including explanation, and identification of the source document o Provides a chronological record of transactions o Helps to prevent and locate errors, because of quickcomparison |
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Recording Transactions |
-Each transaction always affects at least two different accounts. o One account has a debit effect, and the second account has a credit effect. o This methodology was named “double entry” accounting system |
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Journal Entries- Journalizing |
Features of a Journal Entry: -Date of transaction -Debited account entered first, at the left -Credited account entered on the next line, indented -Amounts are entered in appropriate columns -Brief explanation of accounts are given -Total debits must equal total credits -Ensure there are specific account titles created,so all related costs are in the same account |
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Journal Entries |
On January 1, 2013, Caldwell Company borrows $10,000 from the bank. |
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Journal Entries |
On January 15, 2013, Caldwell Companypurchases a truck for $9,500 cash. |
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Journal Entries |
On January 20, 2013, Caldwell Co. paysthe $400 electric bill for January. |
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GeneralLedger: Step 3 of Accounting Cycle |
-Entire group of accounts maintained by acompany -Listof accounts is called a chart of accounts -Contains all the asset, liability, andshareholders’ equity accounts -Postingis the process of transferring information from the general journal to thegeneral ledger accounts |
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The General Ledger |
-It is a complete collection of all theaccounts of a company
-Accounts are individually numbered foreasy reference -It is used to collect the informationabout all of the transactions affecting a specific account |
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Posting to the GL example 1 |
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Posting to the GL example 2 |
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Posting to the GL example 3 |
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Posting to the GL example 4 |
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TrialBalance: Step 4 of Accounting Cycle |
-List of all the accounts and theirbalances at a specific time -Serves to prove the mathematical equalityof debits and credits after posting -Sum ofdebits = sum of credits -Aids in the preparation of financialstatements |
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Trial Balance |
-Used to periodically test whether theGeneral Ledger is in balance. -Consists of a listing of each accountwith its balance as of a specific date. •AllDebit balances are in one column. •AllCredit balances are in another column. |
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Trial Balance-Example |
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AdjustingEntries |
-Adjusting entries are made to adjust orupdate accounts at the end ofthe accounting period -Required because the trial balance maynot contain complete and up-to-date data:
•Someitems are not recorded daily •Somecosts are not recorded during the accounting period, as they expire due to thepassage of time •Someitems may be unrecorded |
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Types of Adjusting Entries |
Prepayments: •Prepaidexpenses •Unearnedrevenues Accruals: •Accruedrevenues •Accruedexpenses |
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Prepaid Expenses |
-Costs that are paid for in cash beforethey are used -Whenthe cost is incurred, an asset (prepaid) is increased (to show the futureservice or benefit) and cash is decreased -Expire with the passage of time orthrough use
-Notpractical to record this expiration on a daily basis, so done when statementsare prepared -Adjusting entry increases an expenseaccount and decreases the asset (prepaid) account |
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Unearned Revenue |
-Cash that has been received beforerevenue is earned -Whenthe cash is received, a liability account (unearned revenue) is increased andcash is increased -The opposite of prepaid expenses -Adjusting entry decreases the liability(unearned revenue) account and increases a revenue account -Reflectsthe amount of revenue earned in the period and the remaining liability at theend of the period |
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Accruals |
-Accruals have not been recognizedat all until an adjustment is made -Revenues that have been earned, but notreceived in cash (accrued revenues) -Adjustingentry results in an increase to both an asset and a revenue account -Expenses that have been incurred, but notyet paid or recorded (accrued expenses) -Adjustingentry results in an increase to both an expense and a liability account |
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Summaryof Basic Relationships |
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Adjusted Trial Balance |
-Prepared after all adjusting entries havebeen journalized andposted -Shows the balances of all accounts at theend of the accounting period -Includingthose accounts that have been adjusted -Proves the equality of total debitbalances and total credit balances after the adjusting entries have been made -The main source for preparation offinancial statements |
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Closing the Books |
-Revenue and expense accounts aresubdivisions of retained earnings •Consideredto be temporary accounts -Statement of financial position accountscarry forward into the future •Consideredto be permanent accounts -Closing entries •Temporaryaccount balances are transferred to Retained Earnings •Producea zero balance in the temporary accounts to prepare them for the next period’sactivity |
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Temporary and Permanent Accounts |
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The Closing process |
1.Close revenue accounts: –Debiteach revenue account for its balance and credit Income Summary 2.Close expense accounts: –DebitIncome Summary and credit each expense account for its balance 3.Close Income Summary: –Debit(or credit) Income Summary for the balance in the account and credit (debit)Retained Earnings 4.Close Dividends account: –DebitRetained Earnings and credit Dividends account for the balance |
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The closing process illustrated |
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General Ledger (image) |
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Post-Closing trial balance |
-Lists all permanent accounts and theirbalances •Afterall closing entries are journalized and posted -Proves the equality of total debitbalances and total credit balances after the closing entries have been made |
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Summary of the Accounting Cycle |
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