CHAPTER 3: The accounting information system

account

An individual accounting record of increases and decreases in a specific asset, liability, and/or shareholders’ equity (common shares, retained earnings, revenue, expense, and dividends declared) item.

accounting cycle

A series of nine steps used to account for, and report, transactions: analyze transactions (step 1), journalize transactions (step 2), post transactions (step 3), prepare a trial balance (step 4), journalize and post adjusting entries (step 5), prepare an adjusted trial balance (step 6), prepare financial statements (step 7), journalize and post closing entries (step 8), and prepare a post-closing trial balance.

accounting information system

The system of collecting and processing transaction data and communicating financial information to decision makers.

accounting transaction

An economic event that is recorded in the financial statements because it involves an exchange that affects assets, liabilities, and/or shareholders’ equity

chart of accounts

A list of a company’s accounts and account numbers that identify where the accounts are in the general ledger.

credit

The right side of an account.

debit

The left side of an account.

double entry accounting system

A system that records the dual effect of each transaction in appropriate accounts.

general journal

The book of original entry in which transactions are recorded in chronological (date) order.

general ledger

The book of accounts that contains a company’s asset, liability, and shareholders’ equity (common shares, retained earnings, revenue, expense, and dividends declared) accounts.

normal balance

The side of an account used to increase the account. Asset accounts have a normal debit balance. Liabilities and shareholders’ equity accounts have a normal credit balance. Individual components that make up shareholders’ equity have normal balances as follows: common shares, retained earnings, and revenue accounts have normal credit balances. Expense and dividends declared accounts have normal debit balances, as they reduce retained earnings.

posting

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

t account

The basic form of an account, with a debit (left) side and a credit (right) side showing the effect of transactions on the account.

trial balance

A list of general ledger accounts and their balances at a specific time, usually at the end of the accounting period. There are three kinds of trial balances: unadjusted trial balances (before adjusting entries are made), adjusted trial balances (after adjusting entries are made), and post-closing trial balances (after closing entries are made).