Module 4 - The Accounting Cycle and Accounting Information Systems
A manual system often includes the following journals and ledgers:
1. A sales journal to record all credit sales 2. A purchases journal to record all credit purchases 3. A cash receipts journal to record all cash receipts 4. A cash disbursements journal to record all cash payments
What are the "eight steps of the accounting cycle"?
1. Analyze business transactions by examining source documents 2. Journalize transaction in the General Journal 3. Post GJ entries to the respective accounts in the General Ledger 4. Prepare a trial balance of the unadjusted accounts and start the worksheet 5. Journalize and post adjusting entries, prepare the adjusted trial balance, complete worksheet 6. Prepare the financial statements 7. Journalize and post the closing entires 8. Prepare the post-closing trial balance
The four basic steps of closing the books:
1. Closing the revenue accounts - Transfer balance to income summary 2. Closing the expense accounts - Transfer balance to income summary 3. Closing the income summary account - Transfer balance to retained earnings 4. Closing the dividends account - Transfer balance to retained earnings
What are the most common adjustments?
1. Prepaid expenses 2. Depreciation 3. Accrued expenses 4. Accrued revenues 5. Deferrals
What is the "worksheet"?
A columnar sheet of paper or computer spreadsheet on which accountants summarize information needed to make the adjusting and closing entries and to prepare financial statements.
What is the "accounting cycle"?
A series of steps performed during the accounting period to analyze, record, classify, summarize, and report useful financial information for the purpose of preparing financial statements.
What are "accounts receivable"?
Amounts owed to a business by customers.
What are "accounts payable"?
Amounts owed to suppliers for purchases made on credit, b2b. Generally due in 30 or 60 days.
What is a "note"?
An unconditional written promise to pay another party the amount owed.
What are "current assets"?
Assets that a business is able to convert to cash within the next year or next operating cycle, whichever is shorter.
What are "long-term assets"?
Assets that will be held for a relatively long time such as, property, plant, equipments, long-term investments, can be intangible assets.
What is "closing the books"?
At the year's end, reducing revenue, expense, and dividend accounts to zero.
What are "current liabilities"?
Debts due within one year or one operating cycle, whichever is longer.
What are "long-term liabilities"?
Debts such as a mortgage and bonds payable that are not due for more than a year.
What is "interest receivable"?
Earned interest that has not been collected by the balance sheet date.
What is a "compound journal entry"?
Entries that evolve more than one debit and/or credit.
What is a "simple journal entry"?
Entries that involve one debit and one credit.
What is a "source document"?
Evidence that a business transaction has occurred like a payroll time card, check, receipt, invoice, etc.
What are "prepaid expenses"?
Expenses such as rent, insurance, and supplies that have been purchases but no fully utilized.
What are "cash equivalents"?
Highly liquid, short-term investments easily converted into cash. Example: treasury bills, 90 day notes, CDs, money market funds.
What is "cash"?
Includes deposits and cash on hand such as undeposited checks, drafts, and money orders.
What is the "matching concept"?
Matching expenses to revenues when revenues are recorded.
What are "business transactions"?
Measurable events that affect the financial condition of a business. Events that affect the solvency and profitability of the business.
What are "unearned revenues"?
Received payments for goods or services before earning them.
What is "accrual basis of accounting"?
Recording revenue when the company makes the sale or service, regardless of when payment is received. Expense accounts are to be matched to the revenue account at the same time.
What are "accounting information systems"?
Systems to organize financial data.
What are "marketable securities"?
Temporary investments in stocks and bonds.
What is "journalizing"?
The process of entering the effects of a business transaction in a journal.
What is "cross-indexing"?
The process of placing the account number of the ledger account in the journal and the journal page number in the ledger account.
What is an "operating cycle"?
The time it takes to start with cash, buy necessary items to produce revenues, and sell services or goods.
What is a "classified balance sheet"?
These statements divide the three major categories to provide useful information and analysis by users of financial statements.
What is an "unclassified balance sheet"?
These statements include three major categories: assets, liabilities, and stockholders' equity.
What are "adjustments"?
They bring accounts to their proper balances before preparing the income statement, statement of stockholders' equity, and balance sheet.
What are "special journals"?
They group together similar recurring transactions.
What is "posting"?
Transferring journal entries to the respective account in the GL.
What is the "accounting equation"?
assets = liabilities + stockholders' equity
