REA Account Study Set

Accounting's role in business

To add value to the organization.

How does accounting add value?

By providing information for internal decisions, preparing financial statements, helping reduce the cost of capital, and helping the organization comply with tax laws.

Management Accounting

Producing and analyzing information that managers use for internal operations and decision-making.

Financial Accounting

Preparing financial statements that summarize the organization's financial activities for outside users.

Create Value

Perform activities that increase the usefulness or worth of the organization to customers, managers, owners, or other stakeholders.

Specialization

Dividing work so individuals or departments concentrate on specific tasks or activities.

Integration

Connecting different business activities, departments, data, or systems so they work together.

Business Process

A set of related activities performed to accomplish a business objective.

Revenue Cycle

The business process involving selling goods or services to customers and collecting payment.

Revenue Cycle Step 1

Receive and accept the customer's order.

Revenue Cycle Step 2

Pick or produce the goods and ship or deliver them to the customer.

Revenue Cycle Step 3

Bill the customer.

Revenue Cycle Step 4

Receive and record the customer's payment.

Customer Order

A request from a customer to purchase goods or services.

Credit Check

Determining whether a customer should be allowed to buy on credit and whether the purchase is within the customer's credit limit.

Picking

Retrieving inventory needed to fill a customer's order.

Pick Ticket / Pick Slip

A document authorizing or identifying inventory that should be picked for a customer order.

Packing Slip

A document included with a shipment that identifies the goods being delivered.

Shipping Notice

A record or notification showing that goods have been shipped.

Bill of Lading

A shipping document that identifies the goods being transported and provides evidence of the shipment.

Post-Billing

Billing a customer after the goods have been shipped or the service has been provided.

Pre-Billing

Billing a customer before the goods are shipped or before the service is completed.

Open-Item System

A system in which individual unpaid invoices remain separately identified until they are paid.

Balance-Forward System

A system in which previous activity is combined into an account balance shown on a periodic statement.

Sales Return Authorization

Approval allowing a customer to return merchandise.

Credit Memo

A document reducing the amount a customer owes, usually because of a return, allowance, or correction.

Cash Receipt

Money received from a customer.

Remittance Advice

Information accompanying a customer payment that identifies the customer and the invoices being paid.

Lockbox

A bank-controlled location where customer payments are sent so the bank can process deposits directly.

EFT

Electronic Funds Transfer; electronically moving money between accounts.

Effect of Customer Payment on Accounting

Cash increases and Accounts Receivable decreases.

Expenditure Cycle

The business process used to purchase goods and services and pay suppliers.

Expenditure Cycle Step 1

Determine what the organization needs.

Expenditure Cycle Step 2

Order what the organization needs.

Expenditure Cycle Step 3

Receive the goods or services.

Expenditure Cycle Step 4

Record the liability for the goods or services received.

Expenditure Cycle Step 5

Pay for the goods or services received.

Purchase Requisition

A document requesting that goods or services be purchased.

Determine What You Need

Decide the required quantity, specifications, and timing of a purchase.

Threats When Determining Needs

Over-ordering, under-ordering, requesting the wrong quality or specifications, or ordering at the wrong time.

Purchase Order

A formal document sent to a vendor specifying the goods or services being ordered.

Order What You Need

Choose an appropriate vendor and order the correct quality at an appropriate price and time.

Threats During Ordering

Paying too much, receiving low quality, using unauthorized suppliers, and kickbacks.

Receiving Report

A document recording goods received from a supplier.

Debit Memo

A document used to record a reduction in the amount owed to a vendor, such as when goods are returned.

Receive Goods or Services

Verify the quantity, quality, and authorization of goods or services received.

Threats During Receiving

Unauthorized receipts, incorrect quantities, fake receipts, poor quality, and theft.

Vendor Invoice

A bill from a supplier showing the amount the organization owes.

Three-Way Match

Comparing the purchase order, receiving report, and vendor invoice before recording or paying a liability.

Voucher Package

A collection of documents supporting a payment, commonly including the purchase order, receiving report, and vendor invoice.

Accounts Payable

The amount an organization owes its suppliers.

Threats When Recording Accounts Payable

Recording fake or duplicate invoices or recording an incorrect amount payable.

Cash Disbursement

A payment made by the organization.

Cash Disbursements Journal

A record of payments made by an organization.

Threats When Paying Vendors

Paying unauthorized items, paying the wrong amount, paying too early or late, paying the wrong vendor, or theft of blank checks.

Database

One or more related files or tables used to store organized data.

Data Hierarchy

Bit → Byte → Field → Record → File → Database.

Field

A single data item or attribute in a database.

Record

A collection of related fields describing one instance of something.

File

A collection of related records.

Data Redundancy

Storing the same data unnecessarily in multiple locations.

Data Fragmentation

Related data being separated among different locations or systems.

Data Integrity

The accuracy, consistency, and reliability of stored data.

Normalization

The process of organizing database tables to reduce redundancy and improve data integrity.

Bottom-Up Database Design

Starting with existing data fields and reorganizing them efficiently through normalization.

Top-Down Database Design

Starting with a logical or conceptual model of the business and then translating it into database tables.

First Normal Form (1NF)

Eliminates repeating groups and requires each row to have a unique identifier.

1NF Rule

"The key." Create a table with no repeating groups and identify a primary key.

Second Normal Form (2NF)

Requires 1NF and removes fields that depend on only part of a composite primary key.

2NF Rule

"The whole key." Non-key fields should depend on the entire primary key.

Third Normal Form (3NF)

Requires 2NF and removes fields that depend on other non-key fields instead of directly on the primary key.

3NF Rule

"Nothing but the key." Non-key attributes should depend on the key, the whole key, and nothing but the key.

Calculated Field

A value that can be determined from other stored data, such as a total or tax amount.

Why might calculated fields not be stored?

Because they may be recalculated when needed, reducing redundant data and storage.

Trade-off of removing calculated fields

It reduces storage requirements but may require additional processing when values must be calculated.

Primary Key

A field or combination of fields that uniquely identifies each record in a table.

Primary Key Rule

A primary key must be unique and cannot be null.

Composite Primary Key

A primary key made from two or more fields.

Composite Primary Key Example

Invoice Number plus Item Number in an invoice detail table.

Foreign Key

A field in one table that refers to the primary key of another table.

Secondary Key

In these course notes, another term used for a foreign key that links tables.

Entity Integrity

The rule that every table's primary key must be unique and cannot be null.

Referential Integrity

The rule that a foreign key must either be null when allowed or match an existing primary-key value in the related table.

Database Anomaly

A problem caused by poorly organized data, such as difficulties inserting, updating, or deleting information consistently.

Insertion Anomaly

A problem where information cannot be added without also adding unrelated information.

Update Anomaly

A problem where the same fact appears in multiple places and must be changed everywhere to remain consistent.

Deletion Anomaly

A problem where deleting one record unintentionally removes other useful information.

Relational Database

A database made of related tables connected through keys.

Entity

A real-world physical or conceptual thing about which the organization wants to store data.

Entity Instance

One individual example of an entity, such as one particular customer.

Attribute

A characteristic or piece of information stored about an entity.

Simple Attribute

An attribute that cannot usefully be broken into smaller parts for the system's purpose.

Composite Attribute

An attribute that can be broken into smaller components.

Composite Attribute Example

Address can be divided into street, city, state, and ZIP code.

REA Model

A conceptual data model organized around Resources, Events, and Agents.

REA

Resource-Event-Agent.

Resource

In REA, an economically valuable item that the organization controls or wants to track.

Economic Event

In REA, a business activity that increases or decreases an economic resource.

Agent

In REA, a person or organization participating in a business event.

Internal Agent

A person or unit inside the organization participating in or responsible for an event.