Chapter 3 Notes Accounting Information System accounting information system collects and processes transaction data then disseminates the financial information to interested parties things that shape a system o nature of the business o nature of the transactions the business engages in o size of the firm o volume of data to be handled o informational demands that management others require Basic Terminology event a happening of consequence o source of cause of changes in assets liabilities and equity o can be internal or external transaction an external event involving a transfer or exchange between two or more entities account a systematic arrangement that shows the effect of transactions and other events on a specific element o separate accounts are kept for each asset liability revenue and expense and for capital o referred to as a T account real permanent accounts asset liability and equity accounts o appear on the balance sheet nominal temporary accounts revenue expense and dividend accounts o except for dividends all appear on the income statement o nominal accounts are periodically closed real accounts are not ledger the book or computer printouts containing the accounts o general ledger a collection of all the asset liability owners equity revenue and expense accounts o subsidiary ledger contains the details related to a given general ledger account journal book where the company initially records transactions and selected other events o book of original entry o journalizing entering transaction data in the journal posting process of transferring the essential facts and figures from the book of original entry to the ledger accounts trial balance list of all open accounts in the ledger and their balances o adjusted trial balance taken immediately after all adjustments have been posted o post closing trial balance taken immediately after closing entries adjusting entries entries made at the end of an accounting period to bring all accounts up to date on an accrual basis o allows companies to prepare correct financial statements financial statements statements that reflect the collection tabulation and final summarization of the accounting data o balance sheet shows the financial condition of the enterprise at the end of a period o income statement measures the results of operations during the period o statement of cash flows reports the cash provided and used by operating investing and financing activities during the period o statement of retained earnings reconciles the balance of retained earnings account from the beginning to the end of the period closing entries formal process by which the enterprise reduces all nominal accounts to zero and determines and transfers the net income or net loss to an owners equity account o aka closing the ledger closing the books or closing Debits and Credits debit o when a company enters an amount on the left side of an account o debit balance when the total of the debit amounts exceeds the credits credit o when a company enters an amount on the right side of an account o credit balance when the total of the credit amounts exceeds the debits double entry accounting when a company records to dual effect of each transaction in the appropriate accounts o provides a means of proving accuracy of the recorded amounts the sum of all the debits must equal the sum of all the credits The Accounting Equation Assets Liabilities Stockholders Equity Financial Statements and Ownership Structure stockholders equity section of balance sheet reports common stock and retained earnings income statement reports revenues and expenses statement of retained earnings reports dividends The Accounting Cycle accounting cycle steps normally used to record transactions and prepare financial statements Identifying and Recording Transactions and Other Events 2 types of events o external events involve interaction between an entity and its environment i e transaction w another entity change in the price of a good or service that an entity buys or sells flood or earthquake improvement in technology by a competitor o internal events occur w in an entity i e using buildings and machinery in operations transferring or consuming raw materials in production processes o many events have both external and internal elements transactions types of external events o an exchange between 2 entities where each receives and sacrifices value i e purchases and sales of goods services investments by owners distributions to owners Journalizing company records in accounts transactions and events that affect its assets liabilities and equities general ledger contains all the asset liability and stockholders equity accounts general journal chronologically lists transactions and other events in terms of debits and credits 4 parts to a journal entry o the accounts and amounts to be debited o the accounts and amounts to be credited o a date o an explanation sometimes special journals are used o summarize the transactions possessing a common characteristic i e cash receipts sales purchases cash payments Posting posting transferring journal entries to the ledger accounts involves the following steps o 1 the appropriate columns of the accounts is debited enter the date journal page and debit amount shown in the journal o 2 in the reference column in the journal write the account number to which the debit was posted o 3 do the same for the credit s in the three column form of accounting there is a debit credit and balance column the reference column serves 2 purposes o 1 indicates the ledger account number of the account involved o 2 indicates the completion of posting for the particular item An Expanded Example purpose of transaction analysis o 1 to identify the type of account involved o 2 to determine whether a debit or a credit is required Trial Balance trial balance a list of accounts and their balances at a given time o usually prepared at the end of an accounting period uses o proves the mathematical equality of debits and credits after posting o uncovers errors in journalizing and posting o helpful in preparing financial statements procedures for preparing a trial balance o list the account titles and their balances in either the debit or credit column o total the debit and credit columns o prove the equality of the 2 columns does not prove that a company recorded all transactions or that the ledger is correct o trial balance can still be even when a company 1 fails to journalize a