CH3 - Notes


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CHAPTER 3 ACCOUNTING INFORMATION SYSTEM BASIC TERMINOLOGY : Event Transaction - a transfer or exchange between 2+ entities or parties Account - where transactions are recorded A separate account is used for each asset, liability, revenue, expense, gain, Permanent Accounts (aka Real Accounts): Appear on the BS These accounts are NOT closed at year end Temporary Accounts (aka Nominal Accounts): Revenue & expenses are on the IS; dividends are on the equity statement These accounts ARE closed at year end Ledger: Book (electronic database) containing all accounts Each account has a separate page General Ledger - contains all asset, liability, and all equity related accounts Subsidiary Ledger - contains details related to a specific general ledger ac- count (example: accounts receivable subsidiary ledger) Trial Balance: Listing of all accounts and their balances from the general ledger at a given point in time Objective: prove the mathematical equality of debits and credits after posting (i.e. to ensure general ledger is in balance) Prepared after end of period adjustments (called Adjusted Trial Balance) and possibly after closing entries (called Post-closing Trial Balance) Adjusting Entires: Entries made at the end of an accounting period Brings all accounts up to date on an accrual accounting basis Ensures that revenue recognition principle are followed and that proper match- ing occurs Four classifications of adjusting entries: Prepayment Accruals 1. Prepaid expenses 2. Accrued revenues 3. Unearned revenues 4. Accrued expenses Financial Statements: Final summaries of the accounting data for a specific time period Four statements:
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Balance Sheet - shows financial condition at a specific date Income Statement - measures the results of operations during a period of time Statement of Cash Flows - shows sources and uses of cash Statement of Retained Earnings Optional: Statement of Comprehensive Income (or as part of Income State- ment) : DEBIT CREDIT To record or enter an amount on the left side of a general ledger account To record or enter an amount on the right side of a general ledger account This system of recording transactions is referred to as the double-entry accounting system; the two-sided effect of each transaction is recorded in appropriate ac- counts When a transaction is “in balance”, the debits equal the credits Debits and credits do not mean “increases” and “decreases” THE ACCOUNTING EQUATION : Assets = Liabilities + Shareholders’ Equity Assets = Liabilities + [Capital + Retained Earnings*] Assets = Liabilities + [Capital + (Revenues - Expenses - Dividends)]
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