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4
Accounting Records and Systems
McGraw-Hill/Irwin
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The Account
Device used for calculating net change Simplest form is T-account. Increases listed on one side; decreases listed on other side. Balanced periodically.
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Permanent Accounts
= real accounts = balance sheet accounts. Reported on balance sheet. Carried forward into next period:
In this sense, they are permanent.
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Temporary Accounts
Revenue and expense accounts. Details of income statement and changes in retained earnings (RE). Helps summarize operating activity. Avoids cluttering RE account. At end of accounting period, amounts are totaled, combined and transferred to RE.
Balances at beginning of each period are 0.
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General Ledger
General ledger contains all accounts. Some accounts may be in summary form.
E.g. accounts receivable, inventory, fixed assets. Detail or subsidiary ledgers kept for above.
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Chart of Accounts
List of all accounts. Numbers assigned to accounts to make summaries for Balance Sheet and Income Statement easier. Minimum # is # of BS and IS lines.
Usually many more.
Management determines # of accounts based on information needs. May be several levels of detail. Can view as building blocks summarized in various ways.
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Expense accounts
Increases on LHS (Dr.) Decreases on RHS (Cr.)
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Transaction Analysis
Assets = Liabilities + Owners Equity Dr. = Cr. Record which ever half of entry is more obvious. Example entry for Owner contributing $5,000 cash for stock:
Cash Paid-in-capital 5,000 5,000
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Trial balance.
List of all accounts & amounts; separate columns for dr. and cr.
Shows equality of dr. and cr.
Still could be errors.
Convenient for making adjusting entries and preparing financial statements (BS & IS).
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Cash
(1) 5,000 (2) 750
Prepaid Expense
(2) 750
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Adjusting Entries
Modifies account balances at end of period. Types:
Recorded costs to be apportioned among 2 or more periods. Unrecorded expenses. Recorded revenues to be apportioned over 2 or more periods. Unrecorded revenues.
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Closing Entries
Temporary or IS accounts are closed out to the clearing account Income Summary (= Profit & Loss Summary = Expense and Revenue Summary).
Close out = zero out = transfer balance to another account
Income summary account is closed out to RE. Only Permanent Accounts remain open.
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Journal
All transactions are originally recorded or entered in a journal (hence book of original entry). Journal:
Contains accounts and amounts to be debited and credited. Device for reclassifying and summarizing.
Amounts are transferred or posted from the journal to the ledger (i.e. T account).
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Accounting System
Consists of:
Journals. Ledgers. Rules for using them.
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Reconciliations.
Bank accounts. Detail ledgers to control accounts in general ledger.
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Inputs
Data entry clerk using a keyboard. Point of origin: Factory time records, inventory counts, receiving records. Scanning device reading bar codes. Purchase orders from customer transmitted electronically.
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Outputs
Reports including tables and graphs.
Routine or customized.
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Modules
Interconnected software programs. Examples:
Order entry. Processes sales orders, records shipments, and related accounts receivable. Purchasing: Issues purchase orders. Personnel and Payroll: Keeps employee records and issues paychecks.
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Chapter
End of Chapter 4
McGraw-Hill/Irwin