Essay about Balance Sheet and Trial Balance

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Chapter 3
The Accounting Information
System

Prepared by:
Dragan Stojanovic, CA
Rotman School of Management, University of Toronto

The Accounting Information
System
Accounting
Information System
•Basic terminology
•Debits and credits

Accounting Cycle
•Identifying and recording •Journalizing

•Accounting equation •Posting
•Financial statements •Trial balance and ownership
•Adjusting entries structure •Adjusted trial balance
•Closing
•Post-closing trial balance •Reversing entries
•The accounting cycle

Using a
Worksheet
•Adjustments entered •Work sheet columns •Preparing financial statements from a work sheet
•Closing entries

Appendix 3AUsing
Reversing
Entries
•Accruals
•Prepayments
•Summary of reversing entries

•Monthly statements, yearly closing 2

The Accounting Information
System
Accounting
Information System
•Basic terminology
•Debits and credits

Accounting Cycle
•Identifying and recording •Journalizing

•Accounting equation •Posting
•Financial statements •Trial balance and ownership
•Adjusting entries structure •Adjusted trial balance
•Closing
•Post-closing trial balance •Reversing entries
•The accounting cycle

Using a
Worksheet
•Adjustments entered •Work sheet columns •Preparing financial statements from a work sheet
•Closing entries

Appendix 3AUsing
Reversing
Entries
•Accruals
•Prepayments
•Summary of reversing entries

•Monthly statements, yearly closing 3

Basic Terminology
• Event: The cause of changes of assets, liabilities, and equity
• Transaction: A transfer or exchange between two or more entities or parties
• Account: Where transactions are recorded
– A separate account is used for each asset, liability, revenue, expense, gain, loss and capital (owner’s equity)
4

Basic Terminology
Permanent accounts (or “real” accounts)
• Asset, liability, and equity accounts
• Appear on the balance sheet
• Permanent accounts are not closed at year end
Temporary accounts (or “nominal” accounts)
• Revenue, expense, and dividend accounts
• Revenue and expenses are on the income statement; dividends are on the equity statement
• Temporary accounts are closed at year end
5

Basic Terminology
Journalizing and Posting
• A Journal is a book of original entry for all transactions • The General Journal is a chronological listing of transactions expressed as debits and credits to particular accounts (known as a journal entry)
• Special Journals are used to summarize transactions with common characteristics
(e.g. cash receipts, sales, purchases)
• Posting: when the transaction information entered in the journal is transferred to the general ledger
6

Basic Terminology
Ledger
• Book (electronic database) containing all accounts • Each account has a separate page
• General ledger contains all asset, liability, and all equity related accounts (capital, revenue, and expenses)
• Subsidiary ledger contains details related to a specific general ledger account (example: accounts receivable subsidiary ledger)
7

Basic Terminology
Trial balance
• Listing of all accounts and their balances from the general ledger at a given point in time • Objective: prove the mathematical equality of debits and credits after posting (i.e. to ensure general ledger is in balance)
• Prepared after end of period adjustments
(called Adjusted Trial Balance) and possibly after closing entries (called Post-closing
Trial Balance)
8

Basic Terminology
Adjusting entries
• Entries made at the end of an accounting period
• Brings all accounts up to date on an accrual accounting basis
• Ensures that revenue recognition principle are followed and that proper matching occurs
• Four classifications of adjusting entries:
Prepayment
Accruals
1. Prepaid expenses
2. Accrued revenues
3. Unearned revenues 4. Accrued expenses
9

Basic Terminology
Financial statements
•
•

Final summaries of the accounting data for a specific time period
Four statements:
• Balance Sheet - shows financial condition at a specific date
• Income Statement - measures the results of
operations
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