Chapter 3 Class Notes

Chapter 3 Class Notes - Chapter 3 THE ACCOUNTING...

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Chapter 3 THE ACCOUNTING INFORMATION SYSTEM An accounting information system (AIS) collects and processes transaction data and disseminates the information to interested parties This information helps management to answer such questions as: How much and what kind of debt is outstanding? Were sales higher this period than last? What assets do we have? What were our cash inflows and outflows? Did we make a profit last period? The basic terminology used in collecting accounting is: 1. Event 2. Transaction 3. Account 4. Real/Permanent Accounts 5. Nominal/Temporary Accounts 6. Ledger 7. Journal 8. Posting 9. Trial Balance 10. Adjusting Entries 11. Financial Statements 12. Closing Entries An account shows the effect of transactions on a given asset, liability, equity, revenue or 1
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expense account. An account may be illustrated in a T-account form. We have a Double Entry accounting system (two-sided effect) where recording is done by debiting at least one account and crediting another. At all times DEBITS must equal CREDITS. The basic accounting equation sets forth the relationship among assets, liabilities and stockholders’ equity of a business. The equation must be in balance after every transaction. For every debit there must be a credit. Assets have normal Debit balances while Liabilities and Equities have normal Credit balances. Expenses have normal Debit balances and Revenues have normal Credit balances. The ownership structure of an entity dictates the types of accounts that are part of the equity section. For example, in a proprietorship or partnership the equity section will have a Capital Account and a Drawing Account. In a Corporation, Common Stock, Additional Paid in Capital, Dividends Declared and Retained Earnings are a part of the equity section. The stockholders’ equity section of the Balance Sheet reports common stock and retained earnings. The Income Statement reports revenues and expenses.
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