Financial Accounting - Chapter 2 Review

what is an account

used to record all of the transactions affecting a particular asset, liability, or element of shareholder's equity

what is a receivable

- amount that will be received in the future

- always an asset

payable

- amount that will be paid in the future

- always a liability

3 components of information systems

1. inputs

- accounting transactions = any event that has a financial impact on a company and can be reliably measured

2. a process

- recording of accounting transactions by applying what is outlined by the IFRS

- big 5: concepts, principles, methods, assumptions, guidelines

3. outputs

- financial reports

- big 4: income statement, SRE, balance sheet, SCF

business transaction

- only promises are exchanged

- doesnt affect elements of financial statements

ex. hiring an employee, signing sales contract

accounting transaction

- more than promises are exchanged

- affects elements of the financial statements

ex. buying office supplies, putting down a deposit on a sale

what is the accounting cycle

process where we identify and analyze, process, summarize, and present accounting transactions in financial statements

8 steps of the accounting cycle

1. transaction analysis

2. journal entries

3. posting to ledger

4. trial balance

5. adjusting entries

6. adjusted trial balance

7. financial statements

8. closing entries

1. 4 steps to do a transaction analysis

1. determine the affected accounts and which component of A + L = E they will affect

2. identify the amount of change in each account

3. did the change increase or decrease

4. check work by making sure total A = total L + total E

example of transaction analysis

june 3rd: provided services for 3k, customers paid 2k, remaining balance due in 30 days

1. service revenue (impacts NI which impacts RE->E), cash(A), & A/R(A)

2 + 3. service revenue +3k, cash +2k, A/R +1k

4. (A=L+E)->>(2k + 1k=0+3k)->>(3k=3k)

2. recording business transactions in journal entries

*journal is a daily record of all accounting transactions

- 2 sides, left debit and right credit

- assets, expenses+losses, and dividends have normal debit balances (debited when increased)

- liabilities, equity, and revenues+gains normally have credit balances (credited when increased)

1. enter debited acounts first on left with the changed amnt

2. enter credited acocunts on right with changed amnt

3. total debits = total credits

4. close w/ a description of a transaction (ex. provided services for cash on account)

3. posting journal entries to the ledger

*ledger = book of accounts and their balances, each account has own page

1. each account has its own T-account; has debits on left, credits on right, and account name as title

2. beginning balance listed with date on the side depending on the account's normal balance

3. other transactions for that account listed with dates according to whether it was debit or credit

4. ending balance listed with date on side which had a higher total

* ending balance = total debits - total credits OR total credits - total debits

4. creating a trial balance

- list all of the ledger accounts with their balances, debits on left and credits on right

- ensure that total debits = total credits

errors in the accounting cycle that wont be caught in trial baalnce

- not posting a journal entry->debits and credits equally understated

- posting a journal entry twice->debits and credits equally overstated

- recording wrong amount on both sides of the journal entry->debits and credits wrong by the same amount

- debiting or crediting the wrong account->debits and credits still balances

preparing a trial balance

1. prepare blank statement with 3 columns: account title, debit, & credit

2. list accounts in following order: current A, long term A(include contra assets), current L, long term L, equity, dividends, revenues, gains, expenses, losses

3. post balances to the trial balance next to their respective accounts, debit or credit decided by _________

4. calculate total debits and total credits, should be equal

ways to detect a single error in an unbalanced trial balance

- first calculate difference between total debits and credits

1. # divided by 2 will be the value of a debit posted as a credit and vice verse, make sure it is listed under right column

2. # divided by 9 will be the value of an account missing 0s or w/ too many 0s

3. # divided by 9 will be the difference between 2 adjacent switched digits in an account entry

2 reasons for overstatements and understatements

1. wrong accounts

2. wrong amounts

how to calculate over and understatements

wrong entry amount - correct entry amount = difference

- if difference is negative, understatement by that amount

- if difference is positive, overstatement by that amount

- do accounting equation check