Chapter Two Vocab

Chapter Two

Accounting Information System

Collects and processes transaction data and communicates financial information to decision-makers

General Ledger Accounting Systems

Software programs that integrate the various accounting function

Enterprise Resource Planning (ERP) Systems

An ERP system integrates all aspects of the organization, including accounting, sales, human resource management, and manufacturing.

Accounting Cycle

Procedures that companies use to record transactions and prepare financial statements.

External Transactions

Involve economic events between the company and some outside enterprise

Internal Transfers

Are economic events that occur entirely within one company

Journal

Referred to as the book of original entry

Journal’s contributions to the recording process

1) Discloses the complete effects of a transaction in one place

2) Chronological record of transactions

3) Helps prevent or locate errors

Ledger

The entire group of accounts maintained by a company, containing all asset, liability, and stockholders’ equity accounts

Posting

The process of transferring the information from the journal to the ledger

Trial Balance

A list of accounts and their balances at a given time

Does a trial balance prove that a company recorded all transactions or that the ledger is correct

No

Deferrals

Are expenses or revenues that are recognized at a date later than the point when cash was originally exchanged. The two types of deferrals are prepaid expenses and unearned revenues.

Adjusting entry for a prepaid expense

A debit to an expense account and a credit to an asset account.

Contra Asset

Offsets an asset account on the balance sheet. Ex: Accumulated Depreciation

Accruals

Record revenues for services performed and expenses incurred in the current accounting period. Will increase both a balance sheet and an income statement account

Adjusting entry for accrued revenues

A debit to an asset account and a credit to a revenue account

What happens when accrued revenue isn’t adjusted

Assets and stockholders’ equity on the balance sheet are understated

Adjusting entry for accrued expenses

A debit to the appropriate expense account and a credit to a liability account

What happens when accrued expenses aren’t adjusted

Both liabilities and expenses are understated

What happens when interest accrued isn’t adjusted

Liabilities and interest expense are understated, and both net income and stockholders’ equity are overstated.

Closing Process

Reduces the balance of nominal (temporary) accounts to zero in order to prepare the accounts for the next period’s transactions

Temporary Accounts

Revenues, expenses, and dividends

Contra Revenue Accounts

Subtracted from sales revenue. Ex: Sales Discounts, Sales Returns and Allowances (Also both Temporary accounts with Dr balance )