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ACC 110 (66)
Chapter 3

Chapter 3

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ACC 110
Brad Mac Master

Accounting Chapter 3 – The Accounting Cycle The Accounting Cycle - The process of entering transaction and economic event data into an accounting system and the processing, organizing, and using it to produce information, such as financial statements. Start of the fiscal period -> Transaction or economic event -> prepares journal entry in the general journal -> post journal entry to the general ledger. End of the fiscal period -> prepare and post adjusting journal entries -> prepare the trial balance -> prepare the financial statements -> record and pot the closing journal entry ->prepare the closing trial balance. Accrual Accounting – A system of accounting that measures the economic performance of an entity rather than just its cash flows. Under the accrual system, revenue is recognized when it is earned and expenses matched to revenue, regardless of when the cash is received or spent. - Provides more relevant information to stakeholders than cash accounting - Exchange of cash is not the critical event to trigger accounting - Transaction recorded when the related economic event occurs - Revenue and expenses can be recorded before, after, or at the same time cash changes hand - EX: Inventory purchased on credit listed as asset, obligation to pay the supplier is recorded as a liability. - Entities provide goods and services to customers on credit - Entities have assets that are paid for before they are used (Inventory, capital assets) - Entities purchase goods and service on credit - Customers pay for goods or services before they receive them - Advance payments - Certain changes in asset value - Long-term assets used over time - Matching of expenses to revenue earned Cash basic Accounting – A system of accounting when revenue is recognized when cash is received and expenses recognized when cash is spent. - Economic event only recorded when cash is exchanged, - Sales recorded when the customer pays cash - Expense when cash is paid to a supplier Journal Entry: The method used to enter information about economic events into the account system. Describes how a transaction or economic event affects the accounting equation - Particular accounts affect by transaction - Direction of effect (Debit or Credit – Increase/Decrease) - Monetary amount of entry to each account Debit Credit Assets Increase Asset (Up) + Decrease Asset (down) - Decrease liabilities Decrease liabilities (Down) Increase liabilities (Up) + - Decrease owner’s Equity Decrease Equity (Down) - Increase Equity (Up) + Decrease Revenue Decrease Revenue Increase Revenue (Up) + (Down)- Increase Expense Increase Expense (Up) + Decrease Expense (Down) - Dividend Dividend Increase (Up) + Dividend Decrease (Down)
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