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Unformatted text preview: The Accounting Information System Chapter 3 Chapter ISV Intermediate Accounting 12th Edition Update Kieso, Weygandt, and Warfield Chapter 3 -1 Pr epar ed by Coby H ar mon, Uni ver si ty of Cal i for ni a, Santa Bar bar a Learning Objectives 1. 2. 3. 4. Understand basic accounting terminology. Explain double-entry rules. Identify steps in the accounting cycle. Record transactions in journals, post to ledger accounts, Record and prepare a trial balance. and Explain the reasons for preparing adjusting entries. Prepare financial statement from the adjusted trial balance. Prepare closing entries. Explain how to adjust inventory accounts at year-end. 5. 6. 7. 8. Chapter 3 -2 Accounting Information System Accounting Information Accounting System System Basic terminology Debits and credits Basic equation Financial statements and Financial ownership structure ownership The Accounting Cycle Identification and recording Journalizing Posting Trial balance Adjusting entries Adjusted trial balance Preparing financial Preparing statements statements Closing Post-closing trial balance Reversing entries Chapter 3 -3 Financial statements for Financial merchandisers merchandisers Accounting Information System An Accounting Information System (AIS) collects and processes transaction data and disseminates the information to interested parties. Chapter 3 -4 Accounting Information System Helps management answer such questions as: How much and what kind of debt is outstanding? Were sales higher this period than last? What assets do we have? What were our cash inflows and outflows? Did we make a profit last period? Chapter 3 -5 LO 1 Identify the major financial statements and other means of financial reporting.. Basic Terminology Event Transaction Account Real Account Nominal Account Ledger Journal Posting Trial Balance Adjusting Entries Financial Statements Closing Entries Chapter 3 -6 LO 1 Understand basic accounting terminology. Debits and Credits An Account shows the effect of transactions on a Account given asset, liability, equity, revenue, or expense account. Double-entry accounting system (two-sided effect). Double-entry Recording done by debiting at least one account and crediting another. DEBITS must equal CREDITS. must Chapter 3 -7 LO 2 Explain double-entry rules. Debits and Credits Debits Account An arrangement that shows the effect of transactions on an account. Debit = “Left” Credit = “Right” An Account can An be illustrated in a T-Account form. T-Account Account Name Debit / Dr. Credit / Cr. Chapter 3 -8 LO 2 Explain double-entry rules. Debits and Credits Debits If Debit entries are greater than Credit entries, the greater account will have a debit balance. Account Name Debit / Dr. Credit / Cr. Transaction #1 Transaction #3 $10,000 8,000 $3,000 Transaction #2 Balance $15,000 Chapter 3 -9 LO 2 Explain double-entry rules. Debits and Credits Debits If Credit entries are greater than Debit entries, the greater account will have a credit balance. Account Name Debit / Dr. Credit / Cr. Transaction #1 $10,000 $3,000 8,000 Transaction #2 Transaction #3 Balance $1,000 Chapter 3-10 LO 2 Explain double-entry rules. Debits and Credits Summary Liabilit ies Normal Balance Debit Asset s Debit / Dr. Credit / Cr. Normal Balance Credit Equit y Debit / Dr. Chapter 3-24 Debit / Dr. Credit / Cr. Normal Balance Normal Credit / Cr. Normal Balance Normal Normal Balance Normal Chapter 3-23 Expense Debit / Dr. Credit / Cr. Chapter 3-25 Revenue Debit / Dr. Credit / Cr. Normal Balance Normal Normal Balance Normal Chapter 3-27 Chapter 3-26 Chapter 3-11 LO 2 Explain double-entry rules. Debits and Credits Summary Balance Sheet Asset = Liability + Equity Debit Income Statement Income Revenu - Expens = e e Credit Chapter 3-12 LO 2 Explain double-entry rules. Basic Accounting Equation Relationship among the assets, liabilities and Relationship stockholders’ equity of a business: Illustration 3-3 The equation must be in balance after every transaction. For every Debit there must be a Credit. Debit Credit Chapter 3-13 LO 2 Explain double-entry rules. Double-Entry System Exercise 1. Invested $32,000 cash and equipment valued at 1. $14,000 in the business. $14,000 Assets = Liabilities + Stockholders’ Stockholders’ Equity Equity + 32,000 + 14,000 + 46,000 Chapter 3-14 LO 2 Explain double-entry rules. Double-Entry System Exercise 2. Paid office rent of $600 for the month. 2. Paid Assets = Liabilities + Stockholders’ Stockholders’ Equity Equity - 600 - 600 (expense) Chapter 3-15 LO 2 Explain double-entry rules. Double-Entry System Exercise 3. Received $3,200 advance on a management 3. consulting engagement. consulting Assets = Liabilities + Stockholders’ Stockholders’ Equity Equity + 3,200 + 3,200 Chapter 3-16 LO 2 Explain double-entry rules. Double-Entry System Exercise 4. Received cash of $2,300 for services completed for 4. Shuler Co. Shuler Assets = Liabilities + Stockholders’ Stockholders’ Equity Equity + 2,300 + 2,300 (revenue) Chapter 3-17 LO 2 Explain double-entry rules. Double-Entry System Exercise 5. Purchased a computer for $6,100. 5. Purchased Assets = Liabilities + Stockholders’ Stockholders’ Equity Equity + 6,100 - 6,100 Chapter 3-18 LO 2 Explain double-entry rules. Double-Entry System Exercise 6. Paid off liabilities of $7,000. 6. Paid Assets = Liabilities + Stockholders’ Stockholders’ Equity Equity - 7,000 - 7,000 Chapter 3-19 LO 2 Explain double-entry rules. Double-Entry System Exercise 7. Declared a cash dividend of $10,000. 7. Declared Assets = Liabilities + Stockholders’ Stockholders’ Equity Equity + 10,000 - 10,000 Note that the accounting equation equality is maintained after recording each transaction. Chapter 3-20 LO 2 Explain double-entry rules. Ownership Structure Ownership structure dictates the types of accounts that are part of the equity section. Proprietorship or Proprietorship Partnership Corporation Capital Account Account Common Stock Paid-in Declared Drawing Additional Capital Dividends Retained Earnings Chapter 3-21 LO 2 Explain double-entry rules. Corporation Ownership Structure Balance Sheet Stockholders’ Equity Common Stock (Investment by Common stockholders) stockholders) Illustration 3-4 Retained Earnings (Net income Retained retained in business) retained Net income or Net loss Dividends (Revenues less expenses) (Revenues Income Statement Statement of Retained Earnings Chapter 3-22 LO 2 Explain double-entry rules. The Accounting Cycle Illustration 3-6 Transactions 9. Reversing entries 1. Journalization 8. Post-closing trail balance 2. Posting 7. Closing entries Work Sheet 3. Trial balance 6. Financial Statements 4. Adjustments 5. Adjusted trial balance Chapter 3-23 LO 3 Identify steps in the accounting cycle. Transactions and Events What to Record? FASB states, “transactions and other events and circumstances that affect a business enterprise.” Types of Events: External – between a business and its environment. Internal – event occurring entirely within a business. Chapter 3-24 LO 3 Identify steps in the accounting cycle. Review “Transactions and Events” External Internal Not Recorded External External Not Recorded External Internal Not Recorded Internal 1. A supplier of a company‘s raw material is paid an amount owed on account. 2. A customer pays its open account. 3. A new chief executive officer is hired. 4. The biweekly payroll is paid. 5. Raw materials are entered into production. 6. A new advertising agency is hired. 7. The accountant determines the federal income taxes owed based on the income earned. Chapter 3-25 LO 3 Identify steps in the accounting cycle. 1. Journalizing General Journal – a chronological record of transactions. Journal Entries are recorded in the journal. General Journal Date Account Title Jan. 3 Cash Common stock 10 Building Note payable Ref. 100 300 130 220 Debit 100,000 Credit 100,000 150,000 150,000 Chapter 3-26 LO 4 Record transactions in journals, post to LO ledger accounts, and prepare a trial balance. ledger 2. Posting Posting – the process of transferring amounts from the Posting journal to the ledger accounts. General Journal Dat e J an. 3 Account Tit le Cash Common st ock Ref . Debit 100,000 100,000 GJ1 Credit 100 General Ledger Cash Dat e Explanat ion Ref . Debit Acct . N o. 100 Credit Balance Jan. 3 Sale of stock GJ1 100,000 100,000 Chapter 3-27 LO 4 Record transactions in journals, post to LO ledger accounts, and prepare a trial balance. ledger 3. Trial Balance 3. Trial Balance – a list of each account and its balance; used to prove equality of debit and credit balances. Acct . N o. 100 105 110 130 2 00 2 20 3 00 3 30 400 5 00 Account Cash Account s r eceivable I nvent or y Building Account s payable Not e payable Common st ock Ret ained ear nings Sales Cost of goods sold Debit $ 140,000 35,000 30,000 150,000 $ 60,000 150,000 100,000 75,000 30,000 $ 3 85,000 $ 3 85,000 Credit Chapter 3-28 LO 4 Record transactions in journals, post to LO ledger accounts, and prepare a trial balance. ledger 4. Adjusting Entries Revenues - recorded in the period in which they are earned. earned Expenses - recognized in the period in which they Expenses are incurred. are Adjusting entries - needed to ensure that the revenue recognition and matching principles are revenue matching followed. followed. Chapter 3-29 LO 5 LO Explain the reasons for preparing adjusting entries. Explain Classes of Adjusting Entries Illustration 3-20 Prepayments 1. Prepaid Expenses. Expenses paid in cash and recorded as assets before they are used or consumed. 2. Unearned Revenues. Revenues received in cash and recorded as liabilities before they are earned. Accruals 3. Accrued Revenues. Revenues earned but not yet received in cash or recorded. 4. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded. Chapter 3-30 LO 5 LO Explain the reasons for preparing adjusting entries. Explain Adjusting Entries – “Prepaid Expenses” Payment of cash that is recorded as an asset because Payment service or benefit will be received in the future. service Cash Payment BEFORE Expense Recorded Prepayments often occur in regard to: insurance supplies advertising rent maintenance on equipment fixed assets Chapter 3-31 LO 5 LO Explain the reasons for preparing adjusting entries. Explain Adjusting Entries – “Prepaid Expenses” Adjusting Example: On Jan. 1st, Phoenix Corp. paid $12,000 for 12 On Phoenix months of insurance coverage. Show the journal entry to record the payment on Jan. 1st. record Jan. 1 Prepaid insurance Cash Prepaid Insurance Debit 12,000 Credit Debit Cash Credit 12,000 12,000 12,000 Chapter 3-32 LO 5 LO Explain the reasons for preparing adjusting entries. Explain Adjusting Entries – “Prepaid Expenses” Adjusting Example: On Jan. 1st, Phoenix Corp. paid $12,000 for 12 On Phoenix months of insurance coverage. Show the adjusting journal entry required at Jan. 31st. entry Jan. 31 Insurance expense Prepaid insurance Prepaid Insurance Debit 12,000 11,000 Chapter 3-33 1,000 1,000 Insurance expense Debit 1,000 Credit Credit 1,000 LO 5 LO Explain the reasons for preparing adjusting entries. Explain Adjusting Entries – “Unearned Revenues” Receipt of cash that is recorded as a liability because the Receipt revenue has not been earned. revenue Cash Receipt BEFORE Revenue Recorded Unearned revenues often occur in regard to: rent airline tickets school tuition magazine subscriptions customer deposits Chapter 3-34 LO 5 LO Explain the reasons for preparing adjusting entries. Explain Adjusting Entries – “Unearned Revenues” Example: On Nov. 1st, Phoenix Corp. received $24,000 from On Phoenix Arcadia High School for 3 months rent in advance. Show the journal entry to record the receipt on Nov. 1st. journal Nov. 1 Cash Unearned rent revenue Cash Debit 24,000 Credit 24,000 24,000 Unearned Rent Revenue Debit Credit 24,000 Chapter 3-35 LO 5 LO Explain the reasons for preparing adjusting entries. Explain Adjusting Entries – “Unearned Revenues” Example: On Nov. 1st, Phoenix Corp. received $24,000 from On Phoenix Arcadia High School for 3 months rent in advance. Show the adjusting journal entry required on Nov. 30th. adjusting Nov. 30 Unearned rent revenue Rent revenue Rent Revenue Debit Credit 8,000 8,000 8,000 Unearned Rent Revenue Debit 8,000 Credit 24,000 16,000 Chapter 3-36 LO 5 LO Explain the reasons for preparing adjusting entries. Explain Adjusting Entries – “Accrued Revenues” Revenues earned but not yet received in cash or Revenues recorded. recorded. Adjusting entry results in: Revenue Recorded BEFORE Cash Receipt Accrued revenues often occur in regard to: rent interest services performed Chapter 3-37 LO 5 LO Explain the reasons for preparing adjusting entries. Explain Adjusting Entries – “Accrued Revenues” Example: On July 1st, Phoenix Corp. invested $300,000 in On Phoenix securities that return 5% interest per year. Show the journal entry to record the investment on July 1st. entry July 1 Investments Cash Investments Debit 300,000 Credit Debit Cash Credit 300,000 300,000 300,000 Chapter 3-38 LO 5 LO Explain the reasons for preparing adjusting entries. Explain Adjusting Entries – “Accrued Revenues” Example: On July 1st, Phoenix Corp. invested $300,000 in On Phoenix securities that return 5% interest per year. Show the adjusting journal entry required on July 31st. journal July 31 Interest receivable Interest revenue Interest Receivable Debit 1,250 Credit 1,250 1,250 Interest Revenue Debit Credit 1,250 Chapter 3-39 LO 5 LO Explain the reasons for preparing adjusting entries. Explain Adjusting Entries – “Accrued Expenses” Expenses incurred but not yet paid in cash or recorded. Adjusting entry results in: Expense Recorded BEFORE Cash Payment, if any* Accrued expenses often occur in regard to: rent interest taxes Chapter 3-40 salaries bad debts* LO 5 LO Explain the reasons for preparing adjusting entries. Explain Adjusting Entries – “Accrued Expenses” Example: On Feb. 2nd, Phoenix Corp. borrowed $200,000 at a On Phoenix rate of 9% per year. Interest is due on first of each month. Show the journal entry to record the borrowing on Feb. 2nd. the Feb. 2 Cash Notes payable Cash Debit 200,000 Credit 200,000 200,000 Notes Payable Debit Credit 200,000 Chapter 3-41 LO 5 LO Explain the reasons for preparing adjusting entries. Explain Adjusting Entries – “Accrued Expenses” Example: On Feb. 2nd, Phoenix Corp. borrowed $200,000 at a On Phoenix rate of 9% per year. Interest is due on first of each month. Show the adjusting journal entry required on Feb. 28th. adjusting Feb. 28 Interest expense Interest payable Interest Expense Debit 1,500 Credit 1,500 1,500 Interest Payable Debit Credit 1,500 Chapter 3-42 LO 5 LO Explain the reasons for preparing adjusting entries. Explain 5. Adjusted Trial Balance 5. Shows the balance of all accounts, after adjusting entries, at the end of the accounting period. Chapter 3-43 LO 5 LO Explain the reasons for preparing adjusting entries. Explain 6. Preparing Financial Statements Financial Statements are prepared directly from the Adjusted Trial Balance. Balance Sheet Income Statement Statement of Retained Earnings Statement of Cash Flows Chapter 3-44 LO 6 Prepare financial statement from the adjusted trial balance. 6. Preparing Financial Statements 6. Assume the following Adjusted Trial Balance Adj ust ed Trial Balance Cash A ccount s r eceivable Building N ot e payable Common st ock Ret ained ear nings Dividends declar ed Sales I nt er est income Cost of goods sold Salar y expense Depr eciat ion expense Debit $ 140,000 35,000 190,000 $ 150,000 100,000 38,000 185,000 17,000 47,000 25,000 43,000 $ 4 90,000 Credit Balance Sheet Balance Sheet Asset s Cash A ccount s r eceivable Building T ot al asset s Liabilit ies Not e payable St ockholders' equit y Common st ock Ret ained ear nings T ot al liab. & equit y 150,000 100,000 115,000 $ 365,000 $ 140,000 35,000 190,000 $ 365,000 10,000 $ 4 90,000 Chapter 3-45 LO 6 Prepare financial statement from the adjusted trial balance. 6. Preparing Financial Statements 6. Assume the following Adjusted Trial Balance Adj ust ed Trial Balance Cash A ccount s r eceivable Building N ot e payable Common st ock Ret ained ear nings Dividends declar ed Sales I nt er est income Cost of goods sold Salar y expense Depr eciat ion expense Debit $ 140,000 35,000 190,000 $ 150,000 100,000 38,000 185,000 17,000 47,000 25,000 43,000 $ 4 90,000 Credit Income Statement I ncome St at ement Revenues: Sales I nt er est income T ot al r evenue Expenses: Cost of goods sold Salar y ex pense Depr eciat ion ex pense T ot al ex penses N et income $ 185,000 17,000 202,000 47,000 25,000 43,000 115,000 87,000 10,000 $ $ 4 90,000 Chapter 3-46 LO 6 Prepare financial statement from the adjusted trial balance. 6. Preparing Financial Statements 6. Assume the following Adjusted Trial Balance Adj ust ed Trial Balance Cash A ccount s r eceivable Building N ot e payable Common st ock Ret ained ear nings Dividends declar ed Sales I nt er est income Cost of goods sold Salar y expense Depr eciat ion expense Debit $ 140,000 35,000 190,000 $ 150,000 100,000 38,000 185,000 17,000 47,000 25,000 43,000 $ 4 90,000 Credit Statement of Retained Earnings St at ement of Ret ained Earnings Beginning balance + N et income - Dividends Ending balance $ 38,000 87,000 (10,000) 115,000 10,000 $ 4 90,000 Chapter 3-47 LO 6 Prepare financial statement from the adjusted trial balance. 7. Closing Entries To reduce the balance of the income statement To (revenue and expense) accounts to zero. expense accounts To transfer net income or net loss to owner’s equity. To Balance sheet (asset, liability, and equity) accounts liability and equity accounts are not closed. are Dividends are closed directly to the Retained Dividends Earnings account. Earnings Chapter 3-48 LO 7 Prepare closing entries. 7. Closing Entries Example: Assume the following Adjusted Trial Balance Acct . N o. 100 105 130 2 20 3 00 3 30 3 80 4 00 4 30 5 00 5 20 5 50 Account Cash Account s r eceivable Building Not e payable Common st ock Ret ained ear nings Dividends declar ed Sales I nt er est income Cost of goods sold Salar y ex pense Depr eciat ion ex pense Debit $ 140,000 35,000 190,000 $ 150,000 100,000 38,000 185,000 17,000 47,000 25,000 43,000 $ 4 90,000 Credit 10,000 $ 4 90,000 Chapter 3-49 LO 7 Prepare closing entries. 7. Closing Entries Example: Prepare the Closing journal entry from the adjusted Closing trial balance on the previous slide. trial Sales Interest income Income summary Income summary Cost of goods sold Salary expense Depreciation expense Income summary Retained earnings Retained earnings Dividends declared Chapter 3-50 185,000 17,000 202,000 115,000 47,000 25,000 43,000 87,000 87,000 10,000 10,000 LO 7 Prepare closing entries. 8. Post-Closing Trial Balance Example continued: Example continued: Acct . N o. 100 105 130 2 20 3 00 3 30 3 80 4 00 4 30 5 00 5 20 5 50 Account Cash Account s r eceivable Building Not e payable Common st ock Ret ained ear nings Dividends declar ed Sales I nt er est income Cost of goods sold Salar y ex pense Depr eciat ion ex pense Debit $ 140,000 35,000 190,000 $ 150,000 100,000 115,000 $ 3 65,000 Credit - $ 3 65,000 Chapter 3-51 LO 7 Prepare closing entries. 9. Reversing Entries Reversing entries is an optional step that a Reversing optional company may perform at the beginning of the next accounting period. the Chapter 3-52 LO 7 Prepare closing entries. Perpetual Inventory System Inventory account increased with each purchase. Inventory account reduced and Cost of Goods Sold Inventory account increased with each sale. account Balance in Inventory account should equal inventory Balance amount on hand. amount No Adjusting Entries should be needed. Physical inventory performed to confirm balance in Physical Inventory account. Inventory Chapter 3-53 LO 8 Explain how to adjust inventory accounts at year-end. Periodic Inventory System Inventory account remains unchanged during period. Purchases account increased with each purchase. At end of accounting period: Purchases account closed. Inventory account adjusted to physical count. Chapter 3-54 LO 8 Explain how to adjust inventory accounts at year-end. Questions? Chapter 3-55 ...
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