CHAPTER 3

THE ACCOUNTING INFORMATION SYSTEM

OVERVIEW

Accounting information must be accumulated and summarized before it can be communicated and analyzed. In this chapter, we will discuss the steps involved in the accounting cycle. We will emphasize the subject of adjusting entries. Throughout an accounting period, cash receipts and cash disbursements are recorded. At the end of the accounting period, adjusting entries are required so that revenues and expenses are reflected on the accrual basis of accounting. Adjusting entries are simply entries required to bring account balances up to date. The failure to record proper adjustments will cause errors on both the income statement and the balance sheet.

SUMMARY OF LEARNING OBJECTIVES

  1. Understand basic accounting terminology. Understanding the following eleven terms helps in understanding key accounting concepts: (1) Event. (2) Transaction. (3) Account. (4) Real and Nominal accounts.(5) Ledger. (6) Journal. (7) Posting. (8) Trial Balance. (9) Adjusting entries. (10) Financial statements. (11) Closing entries.
  2. Explain double-entry rules. The left side of an account is the debit side; the right side is the credit side. All asset and expense accounts are increased on the left or debit side and decreased on the right or credit side. Conversely, all liability and revenue accounts are increased on the right or credit side and decreased on the left or debit side. Stockholders' equity accounts, Common Stock and Retained Earnings, are increased ...

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