ACCT 201 Chapter 3 Summary: The Accounting Information System
ACCT 201 Chapter 3 Summary: The Accounting Information System ACCT 201
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This 5 page Study Guide was uploaded by Amend on Tuesday August 23, 2016. The Study Guide belongs to ACCT 201 at Towson University taught by Raymond Kitson Walters in Fall 2016. Since its upload, it has received 5 views. For similar materials see Principles of Financial Accounting in Accounting (ACCT) at Towson University.
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ACCT 201 Chapter 3 Summary: The Accounting Information System The Effect of Business Transactions on the Basic Accounting Equation Accounting Information System collects and processes transactions. communicates financial information to decision makers. Factors that shape the Accounting Information System include: o nature of the company’s business o types of transactions o company size o the volume of data o information demands of management and others. Most businesses use computerized accounting systems, sometimes referred to as electronic data processing (EDP) systems. Accounting Transactions economic events that require recording in the financial statements occur when assets, liabilities, or stockholders’ equity items change as a result of some economic event Analyzing TransactionsTransaction analysis the process of identifying the specific effects of economic events on the accounting equation The accounting equation must always balance Each transaction has a dual effect on the equation Summary of Transactions Each transaction is analyzed in terms of its effect on assets, liabilities, and stockholders’ equity. The two sides of the equation must always be equal. The cause of each change in stockholders’ equity must be indicated. An Account…and How it Helps in the Recording Process Account an individual accounting record of increases and decreases in a specific asset, liability, or stockholders’ equity item. An account consists of three parts: (1) the title of the account, (2) a left or debit side, and (3) a right or a credit side. 1 ACCT 201 Chapter 3 Summary: The Accounting Information System In its simplest form it is referred to as a T account because the alignment of the parts of the account resembles the letter T. Debits and Credits,,,How they are Used to Record Business Transactions Debits and CreditsThe term debit means left, and credit means right. They DO NOT mean increase or decrease. Debit is abbreviated Dr. and credit is abbreviated Cr. The act of entering an amount of the left side of an account is called debiting. Making an entry on the right side is called crediting. When the totals of the two sides are compared, an account will have a debit balance if the left side (dr. side) is greater. Conversely, the account will have a credit balance if the right side (cr. side) is greater. Debit and Credit ProceduresEach transaction must affect two or more accounts to keep the basic accounting equation in balance. Under the doubleentry system the equality of debits and credits keeps the equation balanced. The twosided effect of each transaction is recorded in appropriate accounts. This helps to ensure the accuracy of the recorded amounts and helps to detect errors. Dr./Cr. Procedures for Assets and Liabilities o Debits increase assets and decrease liabilities. o Credits decrease assets and increase liabilities. Dr./Cr. Procedures for Stockholders’ Equity o Debits Decrease Common Stock, Retained Earnings, and Revenue, but Increase Dividends and Expenses. o Credits Increase Common Stock, Retained Earnings, and Revenue, but decrease Dividends and Expenses. The normal balance of an account is on its increase side o The normal balance for Assets, Dividends, and Expenses is a debit balance. o The normal balance for Liabilities, Common Stock, and is a credit balance. Stockholders’ Equity Relationships 2 ACCT 201 Chapter 3 Summary: The Accounting Information System o Common stock and retained earnings: in the stockholders’ section of the balance sheet. o Dividends: on the retained earnings statement. o Revenues and expenses: on the income statement. The Basic Steps in the Recording Process Steps in the Recording ProcessThe basic steps in the accounting process are used by most businesses in the recording process. The steps are: Analyze each transaction in terms of its effect on the accounts. A source document, such as a sales slip, a check, a bill, or a cash register tape provides evidence of the transaction. Enter the transaction information in a journal. Transfer the journal information to the appropriate accounts in the ledger (book of accounts). The Journal…and How it Helps in the Recording Process The JournalTransactions are initially recorded in chronological order in journals before they are transferred to the accounts. The journal shows the debit and credit effects on specific accounts for each transaction. Companies may use various types of journals, but every company has the most basic form of journal, a general journal. Entering transaction data in the journal is known as journalizing. The journal makes three significant contributions to the recording process: ○ The journal discloses in one place the complete effect of a transaction. ○ The journal provides a chronological record of transactions. ○ The journal helps prevent or locate errors because the debit and credit amounts for each entry can be readily compared. 3 ACCT 201 Chapter 3 Summary: The Accounting Information System The Ledger…and How it Helps in the Recording Process The LedgerThe entire group of accounts maintained by a company is referred to as the ledger. The general ledger contains all of the asset, liability and stockholders’ equity accounts. Information in the ledger provides management with the balances in various accounts. Chart of accounts—Is a list of the accounts used by a company. They are typically listed in the following order: assets, liabilities, stockholders’ equity, revenues, and expenses. Learning Objective 7 Explain What Posting is and How it Helps in the Recording Process Postingthe process of transferring journal entries to the ledger accounts. Posting accumulates the effects of journal transactions in the individual ledger accounts. It involves these steps. o In the ledger, enter in the appropriate columns of the debited account(s) the date and debit amount shown in the journal. o In the ledger, enter in the appropriate columns of the credited account(s) the date and credit amount shown in the journal. The Purposes of a Trial Balance The trial balancelist accounts and their balances on a specific date.The primary purpose of the trial balance is to prove the mathematical equality of debits and credits after posting. A trial balance uncovers errors in journalizing and posting. is useful in the preparation of financial statements. is limited in that it will balance but not uncover errors when: o A transaction is not journalized. o A correct journal entry is not posted. o A journal entry is posted twice, 4 ACCT 201 Chapter 3 Summary: The Accounting Information System o Incorrect accounts are used in journalizing or posting, or o Offsetting errors are made in recording the amount of a transaction. Learning Objective 9 – Classify Cash Activities as Operating, Investing, or Financing. Keeping An Eye On Cash—The Statement of cash flows categorizes the inflows and outflows of cash during in a given period into three types of activities. Operating activities are the types of activities the company performs to generate profits. These can include cash received or spent to directly support the company’s operations, like cash used to pay an accounts payable or cash spent to purchase inventories. Investing activities include the purchase or sale of longlived assets used in operating the business, or the purchase or sale of investment securities (like stocks and bonds of other companies). Financing activities include borrowing money, issuing shares of stock and paying dividends. 5
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