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Unformatted text preview: CHAPTER 3 THE ACCOUNTING THE INFORMATION SYSTEM INFORMATION Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 3- 1 Learning Objectives Learning Objectives 1. Understand basic accounting terminology. 2. Explain double­entry rules. 3. Identify steps in the accounting cycle. 4. Record transactions in journals, post to ledger accounts, and prepare a trial balance. 5. Explain the reasons for preparing adjusting entries. 6. Prepare financial statement from the adjusted trial balance. 7. Prepare closing entries. Chapter 3-2 Accounting Information System Accounting Information System Accounting Information System (AIS) Collects and processes transaction data. Even in a small business, many transactions occur on a daily basis that affect the accounting records – sales, payrolls, expenses, assets are bought and sold, inventory is bought and sold. The AIS is the tool that organizes and tracks all of the myriad transactions that occur. Chapter 3- 3 Accounting Information System Accounting Information System He lp s m a n a g e m e nt a ns we r s uc h q ue s tio ns a s : 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? Are any of our product lines or divisions operating at a loss? Can we safely increase our dividends to stockholders? Is our rate of return on net assets increasing? Chapter 3- 4 Let’s Look at that funny word again Let’s Look at that funny word again Accrual-basis accounting Correct timing of recording sales revenue and expenses is called accrual­basis accounting. Accrual­basis accounting allows us to recognize economic events regardless of when cash transactions occur. It is more important to match revenues and expenses when the transaction occurs rather than when cash is received or paid. Cash receipts and payments are not an accurate representation of revenue and expenses. Companies sell goods on credit and buy goods and supplies on credit. Cash flows take place too late or too early for correctly measuring profit for a period. Correct timing is needed to record sales revenue and expenses in the right period. Accrual basis accounting is necessary to determine the financial condition of a business – to record the assets and liabilities of the business. Chapter 3- 5 A couple of accrual based transactions A couple of accrual based transactions Accrual-basis accounting Sales on credit 1/26/11 Accounts Receivable $100,000 Sales Revenue $100,000 Purchase goods to resale on credit 1/26/11 Inventory Accounts Payable $50,000 $50,000 Note that in both cases above; at the time of the transaction there is no cash involved in the transaction. However, both transactions are important to determine the changes to the assets, liabilities and sales revenue during the month of January. Chapter 3- 6 Basic Terminology Basic Terminology Event Transaction Posting Account Trial Balance Real Account Adjusting Entries Nominal Account Financial Statements Ledger Chapter 3-7 Journal Closing Entries LO 1 Understand basic accounting terminology. Debits and Credits Debits and Credits An Account s h o ws th e e ffe c t o f tra n s a c tio ns o n a g ive n a s s e t, lia b ility, e q uity, re ve n ue , o r e xp e ns e a c c o un t. Double-entry a c c o un tin g s ys te m (two ­s id e d e ffe c t) . Double-entry R e c o rd in g d o n e b y d e b iting a t le a s t o ne a c c o un t a nd c re d iting a no th e r. De b it = Le ft. C re d it = R ig h t. DEBITS must equal CREDITS. must Chapter 3-8 LO 2 Explain double-entry rules. Debits and Credits Debits and Credits T h e Ac c o untin g Eq ua tio n As s e ts = Lia b ilitie s + O wne rs ’ Eq uity Y o u r S tu ff = Wh a t yo u o we + Wh a t yo u ke e p T h is e q ua tio n m u s t b e in b a la n c e a fte r e ve ry tra ns a c tio n th a t is re c o rd e d Chapter 3- 9 Correct format for a journal entry Correct format for a journal entry Jo urna l e n trie s m us t b e fo rm a tte d c o rre c tly Da te Ac c o u nt De s c rip tio n $ $ $ $ Ac c o un t De s c rip tio n $$$$ De s c rip tio n o f tra ns a c tio n 1/1/2011 Prepaid Insurance Cash Premium Payment for liability insurance $120,000 $120,000 Note: Poorly formatted or incorrect journal entries will lose points on any quiz or test. On a test, you can skip the description of the transaction unless I ask for it. You will always lose points for omitting the date. (this information is on pages 75 – 76 of the text as well) Chapter 3-10 T-Accounts are your friend T-Accounts are your friend T-Accounts Account An arrangement that shows the effect of transactions on an account. Debit = “Left” Credit = “Right” T-Accounts are T-Accounts very useful tools. T-Accounts can help simplify and solve seemingly complex problems. problems. Chapter 3-11 Account Name Debit / Dr. Credit / Cr. LO 2 Explain double-entry rules. Debits and Credits Summary Debits and Credits Summary Ba la n c e S h e e t Inc o m e S ta te m e nt Asset = Liability + Equity Revenu - Expens = e e Debit Credit Chapter 3-12 LO 2 Explain double-entry rules. The Accounting Equation The Accounting Equation Relationship among the assets, liabilities and 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. Chapter 3-13 LO 2 Explain double-entry rules. Financial Statements and Ownership Structure Financial Statements and Ownership Structure Ownership structure dictates the types of accounts that are part of the equity section. Proprietorship or Proprietorship or Partnership Partnership Capital Account Drawing Account Corporation Corporation Common Stock Additional Paid-in Capital Dividends Retained Chapter 3-14 Declared Earnings LO 2 Explain double-entry rules. The Accounting Cycle The Accounting Cycle Illustration 3­6 Transactions 9. Reversing entries 1. Journalization 8. Post­closing trail balance 2. Posting 7. Closing entries 3. Trial balance 6. Financial Statements Work Sheet 4. Adjustments 5. Adjusted trial balance Chapter 3-15 LO 3 Identify steps in the accounting cycle. 1. Journalizing 1. Journalizing General Journal – a chronological record of transactions. Journal Entries are recorded in the journal. September 1: Stockholders invested $15,000 cash in the corporation in exchange for shares of stock. Illustration 3-7 Chapter 3-16 LO 4 Record transactions in journals, post to LO ledger accounts, and prepare a trial balance. ledger 2. Posting 2. Posting Posting – Transferring amounts from journal to ledger. Posting Illustration 3-8 Chapter 3-17 LO 4 LO 3. Trial Balance 3. Trial Balance Illustration 3-19 Trial Balance – A list of each account and its balance; used to prove equality of debit and credit balances. Chapter 3-18 LO 4 Record transactions in journals, post to LO ledger accounts, and prepare a trial balance. ledger 4. Adjusting Entries 4. Adjusting Entries Revenues ­ re c o rd e d in th e p e rio d in wh ic h th e y a re e a rne d . Expenses ­ re c o g n ize d in th e p e rio d in wh ic h th e y Expenses ­ re a re inc urre d . Adjusting entries ­ ne e d e d to e ns u re th a t th e re ve nu e re c o g nitio n a nd m a tc h in g p rinc ip le s a re fo llo we d . Chapter 3-19 LO 5 LO Explain the reasons for preparing adjusting entries. Explain Types of Adjusting Entries Types of Adjusting Entries Illustration 3-20 Prepayments Accruals 1. Prepaid Expenses. Expenses paid in cash and recorded as assets before they are used or consumed. 3. Accrued Revenues. Revenues earned but not yet received in cash or recorded. 2. Unearned Revenues. Revenues received in cash and recorded as liabilities before they are earned. 4. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded. Chapter 3-20 LO 5 LO Explain the reasons for preparing adjusting entries. Explain Adjusting Entries for “Unearned Revenues” Adjusting Entries for “Unearned Revenues” Unearned Revenue. Pioneer Advertising received $12,000 on October 2 from KC for advertising services expected to be completed by December 31. Show the journal entry to record the receipt on Oct. 2nd. Oct. 2 Cash 12,000 Unearned advertising revenue Cash Debit Unearned Rent Revenue Credit 12,000 Chapter 3-21 12,000 Debit Credit 12,000 LO 5 LO Explain the reasons for preparing adjusting entries. Explain Adjusting Entries for Accruals Adjusting Entries for Accruals Illustration 3-27 Accruals a re e ith e r accrued revenues or accrued expenses. Chapter 3-22 LO 5 LO Explain the reasons for preparing adjusting entries. Explain Adjusting Entries for “Accrued Revenues” Adjusting Entries for “Accrued Revenues” R e ve nue s e a rne d b ut n o t ye t re c e ive d in c a s h o r re c o rd e d . Ad ju s tin g e n try re s ults in : R e ve nue R e c o rd e d BEFORE C a s h R e c e ip t Ac c rue d re ve nue s o fte n o c c u r in re g a rd to : rent interest services performed Chapter 3-23 LO 5 LO Explain the reasons for preparing adjusting entries. Explain Adjusting Entries for “Accrued Expenses” Adjusting Entries for “Accrued Expenses” Exp e n s e s inc u rre d b u t no t ye t p a id in c a s h o r re c o rd e d . Adjusting entry results in: Expense Recorded BEFORE C a s h P a ym e nt, if any* Ac c rue d e xp e n s e s o fte n o c c ur in re g a rd to : rent interest taxes Chapter 3-24 salaries bad debts* LO 5 LO Explain the reasons for preparing adjusting entries. Explain 6. Preparing Financial Statements 6. Preparing Financial Statements Fin aanc ia l S ta te m eents a re p re ppaare dd d ire cctly fro m th ee Fin nc ia l S ta te m nts a re p re re d ire tly fro m th Ad jus te dd T ria l Ba la n ccee. Ad jus te T ria l Ba la n . Inc o m e S ta te m e n t Chapter 3-25 S ta te m e n t o f R e ta ine d Ea rning s Ba la n c e S he e t LO 6 Prepare financial statement from the adjusted trial balance. 6. Preparing Financial Statements 6. Preparing Financial Statements Illustration 3-34 Chapter 3-26 LO 6 6. Preparing Financial Statements 6. Preparing Financial Statements Illustration 3-35 Chapter 3-27 LO 6 7. Closing Entries 7. Closing Entries C lo s in g e n trie s a re m a d e to re d uc e th e b a la nc e o f a ll no m in a l ( revenue a nd expense) a c c o u nts to ze ro . T o tra ns fe r n e t inc o m e o r n e t lo s s to o wne r’s e q uity. R e a l ( asset, liability, a nd equity) a c c o unts a re no t c lo s e d . Divid e n d s a re c lo s e d d ire c tly to th e R e ta ine d Ea rning s a c c o u nt. Chapter 3-28 LO 7 Prepare closing entries. Scheme of Closing Entries Ret. Earnings Dividends Income Summary 3 4 Expense Chapter 3-29 Revenue 1 2 7.. Closing 7. Closing 7 7. Entries Entries Entries Entries Illustration 3-37 Chapter 3-30 LO 7 Prepare closing entries. 8. Post-Closing Trial Balance 8. Post-Closing Trial Balance Illustration 3-38 Chapter 3-31 LO 7 Prepare closing entries. 9. Reversing Entries 9. Reversing Entries After preparing the financial statements and closing the books, a company may reverse some of the adjusting entries before recording the regular transactions of the next period. Chapter 3-32 LO 7 Prepare closing entries. Accounting Cycle Summarized Accounting Cycle Summarized 1. Enter the transactions of the period in appropriate journals. 2. Post from the journals to the ledger (or ledgers). 3. Take an unadjusted trial balance (trial balance). 4. Prepare adjusting journal entries and post to the ledger(s). 5. Take a trial balance after adjusting (adjusted trial balance). 6. Prepare the financial statements from the second trial balance. 7. Prepare closing journal entries and post to the ledger(s). 8. Take a trial balance after closing (post­closing trial balance). 9. Prepare reversing entries (optional) and post to the ledger(s). Chapter 3-33 LO 7 Prepare closing entries. ...
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This note was uploaded on 03/02/2012 for the course AICS 3115 taught by Professor Lynnalmond during the Spring '11 term at Virginia Tech.

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