Intermediate Accounting 1A

Chapter 1

The Accounting Process

    • The accounting cycle represents the steps or procedures used in recording transactions and preparing financial statements.
    • Journal (book of original entry) is a formal record where transactions are initially recorded. Journal entries are then posted to the ledger (book of final entry).
    • The ledger is a systematic compilation of a group of accounts.
    • Journals are used only under the double-entry system; however, subsidiary ledgers are used under both double and single-entry systems. Cash basis and accrual basis of accounting can be used under both the double and single-entry systems.
    • Account is the basic storage of information in accounting.
    • Debit is simply the left side of an account; credit is the right side.
    • Chart of accounts is a list of all the accounts used by the entity.
    • Trial balance is a list of accounts and their balances. It is used to check the equality of total debits and credits in the accounts.
    • Errors revealed by a trial balance are those that have caused the total debits and total credits to be unequal.
    • All adjusting entries involve at least one statement of financial position account and one statement of comprehensive income account. Adjusting entries are used to update the balances of accounts prior to the preparation of the financial statements.
    • Financial statements are the means by which the information accumulated and processed in financial accounting is periodically communicated to the users.
    • Income is initially recorded using either the (a) liability method or (b) income method. Expenses are initially recorded using either the (a) asset method or (b) expense method. Regardless of which method is used, assets, liabilities, equity, income, and expenses presented in the financial statements are the same.
    • Reversing entries may be made on the following:
    1. all accruals,
    2. prepayments initially recorded using the expense method, and
    3. unearned income initially recorded using the income method.