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Intermediate Accounting I-Kieso-Chapter 3
1. Accounting Information System: Collects and processes transaction data and then disseminates the financial information to the
interested parties.
2. Factors that shape the accounting information system: 1)The nature of business
2) The transactions in which the business engages
3) The size of the firm
4) The volume of data to be handled
5) The informational demands that management and others require.
3. Event: A happening or consequence, generally the source or cause of changes in assets, liabilities, and equity. Can be external or internal.
4. Transaction: An external event involving a transfer or exchange between two or more entities.
5. Account: A systematic arrangement that shows the effect of transactions and other events on a specific element (asset, liability, etc.)
6. T-account: Because the format of an account resembles the letter T it is often called T-account.
7. Real Accounts: Assets, liabilities, and equity accounts Appear on the
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8. Nominal or Temporary Accounts: Revenue, expense, and dividend accounts Except for dividends they
appear on the income statement
9. General Ledger: A collection of all of the asset, liability, owners equity, revenue, and expense accounts.
10. Subsidiary Ledger: Contains the details related to a given ledger account.
11. Journal: The book of original entry, where the company initially records transactions and other selected events.
12. Posting: The process of transferring the essential facts and figures from the book of original entry to the ledger accounts.
13. Adjusted Trial Balance: The list of all open accounts in the ledger and their balances taken immediately after all adjustments have
been posted.
14. Post-closing trial balance: A trial balance taken immediately after closing entries have been posted.
15. Adjusting entries: Entries made at the end of an accounting period to bring all accounts up to date on an accrual basis.
16. Financial Statements: Balance Sheet
Income Statement Statement of Cash Flows Statement of
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26. Internal event: Occurs within an entity, such as using buildings and machinery in operations, or transferring or consuming raw
materials in production processes.
27. Transactions: Types of external events
28. Accounting Cycle-Step 2: Post from the journal to the ledgers
29. General Journal: Chronologically lists the transactions and other events, expressed in terms of debuts and credits to accounts.
30. Four parts of a general journal entry: 1)Accounts and amounts to be debited
2)Accounts and amounts to be credited 3)Date 4)An explanation
31. Special journals: Summarize transactions possessing a common characteristic, such as cash receipts, sales, purchases, cash
payments.
32. Posting: The procedure of transferring journal entries to the ledger accounts
33. Three-Column form of account: Called this because it has three money columns-debit, credit, and balance.
34. Accounting Cycle-Step 3: Unadjusted Trial Balance
35. Trial Balance: Lists accounts and their balances at a given time, usually prepared at the end of an accounting period.
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36. Steps to preparing trial balance: 1)List the account titles and balances
2) Total the debits and credits columns
3) Prove the equality in the two columns
37. Account Cycle-Step 4: Adjusting Entries
38. Adjusting Entries: Made at the end of the accounting period so that revenues can be recorded in the period in which they earned
and to recognize expenses in the period in which they are incurred.
39. Why is the trial balance not typically up to date?: 1)Some events are not journalized daily.
2) Some costs are not journalized during the accounting period because these costs expire with the passage or time rather than as a result of daily
transactions.
3) Some items may be unrecorded.
40. Types of adjusting entries: Deferrals
Accruals
41. Deferrals: Prepaid
Expenses Unearned Revenues
7 / Will increase a balance sheet and an income statement account.
50. Accrued Revenues: Revenues earned but not yet received in cash or recorded at the statement date. Accrued with the passage
of time, ex. interest or rent revenue
51. Accrued Expenses: Expenses incurred but not yet paid or recorded at the statement date. Ex.-interest, rent, taxes, salaries
52. Bad Debts: Should be recognized in the period in which a company earned revenue instead of the period in which the company
writes off the accounts or notes. Expressed as a percent of revenue for the period.
53. Accounting Cycle-Step 5: Adjusted Trial Balance
54. Adjusted Trial Balance: Shows the balance of all accounts, including those adjusted, at the end of the accounting period.
55. Accounting Cycle-Step 6: Prepare financial statement
56. Accounting Cycle-Step 7: Closing process
57. Closing Process: Reduces the balance of nominal (temporary) accounts to zero in order to prepare the accounts for the next
period's transactions.
58. Income Summary: Matches revenues and expenses
Represents net income or net loss for the period Transfers to the owners equity account
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59. Closing Entries: Prepared at the end of the annual accounting period
60. What is the order for closing entries?: 1)Close revenues to Income Summary
2) Close expenses to Income Summary
3) Close Income Summary to Retained Earnings
4) Close Dividends to Retained Earnings
61. Cautions about closing entries: 1)Avoid unintentionally doubling the revenue and expense balances rather than zeroing
2)Do not close dividends thru Income Summary
62. Accounting Cycle-Step 8: Post Closing Trial Balance
63. Post Closing Trial Balance: Consists of only assets, liabilities, and equity accounts Shows that the
accounting equation is in balance
64. Accounting Cycle-Step 9: Prepare reversing entries (optional)
65. Reversing Entries: Optional step in accounting cycle performed at the beginning of the next period
66. Strict Cash Basis: Companies record revenue only when they receive cash and record expenses only when they disperse cash.
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67. What two principle does cash basis accounting ignore?: Revenue recognition principle Expense recognition
principle
68. Modified Cash Basis: Mixture of cash basis and the accrual basis
Based on strict cash basis but with modifications such as the use of capitalizing and depreciating plant assets or recording inventory. Used by professional services such as lawyers or doctors.
69. What two types of adjusting entries are most often reversed?: Accrued revenues Accrued expenses
70. Guidelines for reversing entries: 1)All accruals should be reversed
2) All deferrals for which a company debited or credited the original cash transaction to an expense or revenue account should be reversed.
3) Adjusting entries for depreciation and bad debt not reversed.
