Chapter 3: The Accounting Information System

Vocabulary flashcards covering the fundamental concepts, recording process, debit and credit rules, accounts, and trial balance from Chapter 3 of Financial Accounting: Tools for Business Decision-Making.

Accounting Information System (AIS)

The system of collecting and processing transaction data and communicating financial information to decision-makers, varying by business type, size, data volume, and reporting requirements.

Accounting Transaction

An economic event that alters assets, liabilities, or shareholders' equity, requiring it to be recorded and reported in the financial statements.

Basic Accounting Equation

The core balance relationship stated as $\text{Assets} = \text{Liabilities} + \text{Shareholders' Equity}$, which must remain balanced after every transaction.

Dual Effect

The double-sided impact that every business transaction has on the accounting equation, ensuring total debits equal total credits and the equation stays in balance.

Expanded Accounting Equation

The breakdown of the basic accounting equation stating: $\text{Assets} = \text{Liabilities} + \text{Common Shares} + \text{Retained Earnings}$, where Retained Earnings equals Revenues minus Expenses minus Dividends Declared.

The Recording Process (Steps 1 to 4)

The first four sequential phases of the accounting cycle: 1. Analyze business transactions, 2. Journalize the transactions, 3. Post to ledger accounts, and 4. Prepare a trial balance.

Account

An individual accounting record of increases and decreases in a specific asset, liability, or shareholders' equity item.

T-Account

The basic visual representation of an account consisting of three components: 1) the title of the account, 2) a left or debit side, and 3) a right or credit side.

Debit (Dr.)

The left side of an account.

Credit (Cr.)

The right side of an account.

Debit Balance

An account balance that occurs when the sum of debit entries is greater than the sum of credit entries, calculated as total debits minus total credits.

Credit Balance

An account balance that occurs when the sum of credit entries is greater than the sum of debit entries, calculated as total credits minus total debits.

Normal Balance

The side of an account (debit or credit) where increases are recorded according to the rules of debit and credit.

Accounts with Normal Debit Balances

Accounts that are increased by debits and decreased by credits: Assets, Expenses, and Dividends Declared.

Accounts with Normal Credit Balances

Accounts that are increased by credits and decreased by debits: Liabilities, Common Shares, Retained Earnings, and Revenues.

Double-Entry System

An accounting standard where each transaction affects at least two accounts, maintaining equilibrium so that total debits always equal total credits.

General Journal

The book of original entry where transactions are first recorded in chronological order, displaying the complete debit and credit impact in one place to prevent and locate errors.

General Ledger

The entire group of accounts maintained by an entity showing individual balances and activity, arranged in financial statement order (Assets, Liabilities, Equity, Revenues, Expenses).

Posting

The procedure of transferring journal entries from the general journal to the appropriate accounts in the general ledger.

Chart of Accounts

A complete list of account titles and their associated numbers, typically listed in financial statement order (Assets, Liabilities, Equity, Revenues, Expenses).

Trial Balance

A list of accounts and their balances at a specific point in time, prepared to verify that total debits mathematically equal total credits.