Accounting chapter 3 study

What is an accounting information system?

A system that collects transaction data processes it and communicates financial information to decision makers

What factors affect an accounting information system?

Nature of the business types of transactions company size volume of data and information demands

What is the accounting cycle?

The series of steps used to record and process accounting information

What are accounting transactions?

Economic events that require recording in the financial statements

Do all economic events count as accounting transactions?

No only events that affect assets liabilities or stockholders equity

What is the basic accounting equation?

Assets = liabilities + stockholders equity (ALE)

Why must the accounting equation always balance?

Because every transaction has a dual effect

What is transaction analysis?

Identifying the effects of transactions on the accounting equation

What is the expanded accounting equation?

What is tabular analysis?

A method used to show the effects of transactions on the accounting equation

What affects retained earnings?

Revenues expenses and dividends

What happens when stockholders invest cash?

Cash increases and common stock increases

What happens when a note payable is issued for cash?

Cash increases and notes payable increase

What happens when equipment is purchased for cash?

Equipment increases and cash decreases

What is unearned service revenue?

Cash received before services are performed

What happens when services are performed for cash?

Cash increases and service revenue increases

What does on account mean?

Payment will be received at a later date

When is revenue recorded?

When services are performed

What happens when rent is paid?

Cash decreases and rent expense increases

What is prepaid insurance?

An asset representing insurance paid for in advance

What happens when supplies are purchased on account?

Supplies increase and accounts payable increase

Is hiring employees an accounting transaction?

No because no economic exchange has occurred

What are dividends?

Distributions of cash or assets to stockholders

What effect do dividends have on equity?

They decrease stockholders equity

What is an account?

An individual accounting record of increases and decreases in a specific item

What are the three parts of an account?

Title debit side and credit side

What does debit mean?

An entry on the left side of an account

What does credit mean?

An entry on the right side of an account

What is the normal balance of an asset?

Debit

What is the normal balance of a liability?

Credit

What is the normal balance of common stock?

Credit

What is the normal balance of retained earnings?

Credit

What is the normal balance of dividends?

Debit

What is the normal balance of revenue?

Credit

What is the normal balance of expenses?

Debit

What is double entry accounting?

A system where each transaction affects at least two accounts

Why must debits equal credits?

To keep the accounting equation in balance

What is a journal?

A chronological record of transactions

What is journalizing?

Recording transactions in the journal

Which account is listed first in a journal entry?

The account being debited

What is a ledger?

A collection of all accounts used by a company

What is posting?

Transferring journal entries to ledger accounts

What is a chart of accounts?

A list of all accounts used by a company

What is a trial balance?

A list of accounts and their balances used to prove debits equal credits

When is a trial balance prepared?

At the end of an accounting period

What is the purpose of a trial balance?

To verify debits equal credits and help prepare financial statements

Does a trial balance guarantee no errors?

No

Which error causes a trial balance to be out of balance?

Omitting a debit or credit

Can a trial balance balance even if errors exist?

Yes