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Rotman Commerce (1,103)
RSM220H1 (38)

CHAPTER 3 TEXTBOOK REVIEW A 6 page summary of the entire third chapter of the RSM220 textbook (Intermediate Accounting)

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Rotman Commerce
Dragan Stojanovic

THE ACCOUNTING INFORMATION SYSTEMDefinition The system of collecting and processing transaction data and making financial information available to interested partiesBasic terminologyused in collecting accounting dataoEvent A happening of consequence An event generally is the source or cause of changes in assets liabilities and equity Events can be external or internaloTransaction A transaction is an external event involving a transfer or exchange between two or more entities or partiesoAccount A systematic arrangement that accumulates transactions and other events A separate account is kept for each asset liability revenue and expense and for gains losses and capital owners equityoPermanent and temporary accounts Permanent real accounts are asset liability and equity accounts they appear on the balance sheet Temporary nominal accounts are revenue expense and dividend accounts except for dividends they appear on the income statement Temporary accounts are periodically closed permanent accounts are left openoLedger The book or electronic database containing the accounts Each account usually has a separate page A general ledger is a collection of all the asset liability owners equity revenue and expense accounts A subsidiary ledger contains the details of a specific general ledger accountoJournal The book of original entry where transactions and other selected events are first recorded Various amounts are transferred to the ledger from the book of the original entry the journaloPosting The process of transferring the essential facts and figures from the book of original entry the ledger accountsoTrial balance A list of all open accounts in the ledger and their balances A trial balance that is taken immediately after all adjustments have been posted is called an adjusted trial balance A trial balance taken immediately after closing entries have been posted is known as a postclosing or afterclosing trial balance A trial balance can be prepared at any timeoAdjusting entries Entries that are made at the end of an accounting period to bring all accounts up to date on an accrual accounting basis so that correct financial statements can be preparedoFinancial statements Statements that reflect the collecting tabulating and final summarizing of the accounting data Four financial statements are involved1 The balance sheet which shows the enterprises financial condition at the end of a period2 Thewhich measures the results of operations during the periodincome statement3 The statement of cash flows which reports the cash provided and used by operating investing and financial activities during the period4 Theor statement of changes in shareholders equity which statement of retained earningsreconciles the balance of the retained earnings and other equity accounts from the beginning to the end of the period Comprehensive income is generally shown in a separate statementthe statement of comprehensive income starting with net incomeor as part of the income statement oClosing entries The formal process for reducing temporary accounts to zero and then determining net income or net loss and transferring it to an owners equity account Using closing entries is also known as closing the ledger closing the books or merely closingDEBITS AND CREDITSDebitcreditrefer to the left and right sides of a general ledger account respectivelyoDrDebit CrCreditAct of entering an amount on the left side of an account is called debiting the accountMaking an entry on the right side is crediting the account When the total of the two sides are compared the account will have a debit balance if the total of the debit amounts is more than the credit an account will have a credit balance if the credit amounts exceed the debitsEquality of debits and credits is the basis for the doubleentry system of recording transactions doubleentry bookkeepingUnder the doubleentry accounting system which is used everywhere the twosided dual effect of each transaction is recorded in appropriate accountsIf every transaction is recorded with equal debits and credits then the sum of all the debits to the accounts must
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