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The Accounting Information System

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1 The Accounting Information System

2 Objectives of the Chapter
I. Learning the accounting process in preparing financial statements. II. Introduce the accrual accounting concept and the adjusting entries. III. Introduce the worksheet (including the trial balance, the adjustments and the adjusted trial balance, the I/S and the B/S columns), the preparation of financial statements from the worksheet and the closing entries. Accounting Cycle

3 I. Accounting Process 1. Identification and measurement of business transactions and other events; 2. Journalization (general or special journals); 3. Post (to ledger accounts and subsidiaries); 4. Prepare worksheet (including unadjusted T/B, adjustments; adjusted T/B, I/S, B/S…); 5. Prepare financial statements; Accounting Cycle

4 Accounting Process (contd.)
6. Prepare and post adjusting entries; 7. Prepare and post closing entries; 8. Prepare post-closing trial balance (T/B) (optional); 9. Prepare and post reversing entries. Accounting Cycle

5 The Accounting Cycle (Source: Kieso, et al., 14th E, Illustration 3-6)

6 1. Identifying Accounting Events
External Events: Purchase of assets, sales of goods, loss from flood, … Internal Events: Consumption of prepaid rent, use of depreciable assets, transfer of raw material to W-I-P, … Accounting Cycle

7 1. Identifying Accounting Events (contd.)
Events are recognized as accounting events and would be recorded if: a. have occurred; b. affect the financial position of the business; c. can be measured in monetary terms (measurable); d. relevant, reliable. Accounting Cycle

8 Examples 1. Two months of prepaid insurance expired.
2. Purchase of a machine. 3. Sales of merchandise. 4. Changes in managerial policies. 5. Value of human resources. 6. The development of a new product. 7. Sign a contract to buy a building. 8. Investment from owners. 9. Distribution to owners. Accounting Cycle

9 2. Journalization Introduction of the Double-Entry System and Journal Entries: A. Double-entry system; B. T-account; C. Increases and decrease in the accounts. Accounting Cycle

10 A. Double-Entry System Each transaction affects at least two accounts and the balance of the accounting equation must be maintained. Example: Purchases inventory and charges to accounts payable. Assets = Liabilities + Equity Inventory Accounts Payable  + + Accounting Cycle

11 A. Double-Entry System (contd.)
Accounting Cycle

12 B. Introduction of the T-account
Inventory Debit Credit Accounts Payable Debit Credit Accounting Cycle

13 C. Increases and Decreases in the Accounts
 Debit A  Credit  Credit Revenue  Debit  Credit L  Debit  Credit E  Debit  Debit Expense  Credit Accounting Cycle

14 Examples of the Journal Entries:
Accounting Cycle

15 Special Journals (Cash Disbursements and Receipts)
4/1/2017 Special Journals (Cash Disbursements and Receipts) Cash Disbursements Journal Accounting Cycle

16 Special Journals (Cash Disbursements and Receipts)
4/1/2017 Special Journals (Cash Disbursements and Receipts) Cash Receipts Journal Accounting Cycle

17 3. Posting (to ledger accounts and subsidiaries)
The Ledger: all individual accounts (assets, liability, and stockholder’s equity accounts) combined make up the ledger. Accounting Cycle

18 Another Example of Posting (Kieso, et al
Another Example of Posting (Kieso, et al., 14th edition, Illustration 3-8) Accounting Cycle

19 General Ledger (T-Account Format)
Accounts Receivable No. 3 20x1 Mar 31 Balance Apr 30 CR8 1,136.00 Apr 30 S6 2,662.00 Accounting Cycle

20 Examples of Posting using T-accounts (Kieso, et al
Examples of Posting using T-accounts (Kieso, et al., 14th edition, Illustrations 3-9 and 3-10) Accounting Cycle

21 Subsidiary Ledger Accounts Receivable SUBSIDIARY LEDGER Ellen Odom 202
20x1 Mar 31 Balance 520 Apr 2 S6 910 Nita Doty 204 Mar 31 Balance 30 Apr 18 CR8 750 Apr 6 S6 750 Joe Leo 206 Mar 31 Balance 122 Apr 16 CR8 200 Apr 4 S6 816 Rex Road 208 Apr 1 S Apr 7 CR8 186 Accounting Cycle 21

22 Examples of Controlling Accounts
General Ledger Controlling Acct. Type of Subsidiary Record Accounts Receivable Accounts Payable Capital Stock Notes Receivable Individual customers’ ledger accounts, or a file of uncollected sales invoices. Individual ledger accounts, or a file of unpaid purchase invoices. A record of the stock certificates and number of shares held by each shareholder. A file of uncollected N/R, or a “register” or book in which the notes are listed. Accounting Cycle

23 Examples of Controlling Accounts (contd.)
General Ledger Controlling Acct. Type of Subsidiary Record Raw Material on Hand Equipment Land Separate record card for each item of material used in manufacturing. Separate record card for each item of equipment. This is often known as a plant ledger. Separate record card for each parcel of land owned. Accounting Cycle

24 The Flows of Accounting Data
Transaction Occurs Source Documents Prepared Transaction Analysis Takes Place Amounts Posted to Ledger Transaction Entered in Journal Accounting Cycle

25 XYZ Corp. Trail Balance 4/30/20x1
Cash 33,300 Accounts receivable 2,000 Office supplies 500 Land 18,000 Accounts payable 100 Common Stock 50,000 Dividends 2,100 Service revenue 8,500 Rent Expense 1,100 Salary Expense 1,200 Utilities Expense Total 58,600 58,600 . Accounting Cycle 25

26 II. Accrual Accounting The time-period concept, the revenue recognition and matching principles. Accrual versus cash basis accounting. Adjusting entries. Accounting Cycle

27 The Time-Period Concept, the Revenue Recognition & Matching Principles
Income and financial position of a business are reported periodically, not until the end of life of a business. Accounting Cycle

28 Revenue Recognition Principle (SFAS No. 5) (-An Accrual Basis)
Revenue is recognized when it is earned and realized or realizable (SFAC 5, par. 83). Earned : the entity has substantially accomplished what it must do to be entitled to compensation. Realized: goods are exchanged for cash or claims. Realizable: assets received as compensation are readily convertible into cash or claims to cash. In general, these conditions are met at time of sale (delivery) or when services are rendered regardless whether cash is collected or not (SFAC 5, par. 84). . Income Measurement And Profit Analysis

29 Revenue Recognition Principle
Other conditions for revenue recognition (Staff Accounting Bulletin No. 101(1999)): Persuasive evidence of a sale. Price is fixed or determinable. Collectibility is reasonably assured. Delivery has occurred or services have been rendered. Income Measurement And Profit Analysis

30 The Expense Recognition (Matching) Principle
If revenues are recognized in a period, all related expenses should be recognized in the same period regardless whether expenses are paid or not. The related expenses include traceable costs (e.g. product costs), period costs, (e.g. interest and rent expenses) and estimated expenses (e.g. depreciation expense and bad debt expense). Accrual Accounting and the Financial Statements

31 Accrual vs. Cash Basis Accounting
Accrual-basis accounting: Revenues are recognized based on revenue recognition principle (i.e., recognized when realized and earned regardless whether cash is collected or not). Expenses are recognized based on matching principle (i.e., recognized when incur regardless whether they are paid or not). Note: revenue and expense recognize before cash settlement. Accrual Accounting and the Financial Statements

32 Accrual vs. Cash Basis Accounting (contd.)
The accountant does not record a transaction until cash is received or paid. Cash-basis accounting is NOT acceptable for financial reporting. Accrual Accounting and the Financial Statements

33 Accrual Accounting and the Financial Statements
Adjusting Entries Due to the periodicity concept, financial reports are prepared periodically. Based on revenue recognition principle, adjusting entries are prepared at the end of a period to recognize revenues earned during the period but not yet recorded (i.e., accrued revenues). Accrual Accounting and the Financial Statements

34 Adjusting Entries (contd.)
Based on the matching principle, the accrued expenses (i.e., expenses incurred but not yet paid/recorded) and estimated expenses (i.e., depreciation expense and bad debt expense) are recorded at the end of a period. Accrual Accounting and the Financial Statements

35 Types of Adjusting Entries (Kieso, et al
Types of Adjusting Entries (Kieso, et al. textbook, 14th edition, illustration 3-20) Accounting Cycle

36 Adjusting Entries and Reversing Entries
Accounting Cycle

37 Adjusting Entries for Accruals (Kieso, et al
Adjusting Entries for Accruals (Kieso, et al. 14th edition, illustration 3-27) Accounting Cycle

38 1. Accruals: Unrecorded Revenue or Expenses
a. Accrued expense: A one-year note payable was issued on 11/1/x1 to purchase an equipment. The face amount of the note is $2,400. The annual interest rate is 10% and interests are paid on 4/30/x2 and 11/1/x2. 11/1/x1 Equipment 2,400 Notes Payable 2,400 Adj. Entry 12/31/x1 Accounting Cycle

39 Accruals: (contd.) b. Accrued revenue:
A one year note was received from a credit sale with a face amount of $3,000 and an annual interest rate of 12% on 9/1/x1. Interests are received on 3/1/x2 and 9/1/x2. 9/1/x1 N/R 3,000 Sales 3,000 Adj. Entry 12/31/x1 Accounting Cycle

40 Adjusting Entries for Deferrals (Kieso, et al
Adjusting Entries for Deferrals (Kieso, et al. textbook, 14th edition, illustration 3-21) Accounting Cycle

41 2. Deferrals: Postponing the Recognition of Revenues or Expenses
a. Unearned revenues Receiving $2,400 for one-year advanced rent payment from tenant on 12/1/x1 (B/S Approach) (I/S Approach) 12/1/x1 Cash 2400 Unearned Rent 2400 12/1/x1 Cash 2400 Rent Revenue 2400 12/31/x1 Unearned Rent 200 Rent Revenue 200 12/31/x1 Rent Revenue 2200 Unearned Rent Accounting Cycle

42 Deferrals (contd.) b. Prepaid expenses
Prepaid 12 month insurance of $1,200 on 11/1/x1 (B/S Approach) (I/S Approach) 11/1/x1 Prepaid Ins. 1200 Cash 1200 11/1/x1 Ins. Exp. 1200 Cash 1200 12/31/x1 Ins. Exp. 200 Prepaid Ins. 200 12/31/x1 Prepaid Ins Ins. Exp Accounting Cycle

43 3. Estimated Expenses (no reversing entry except for I/T)
Examples - Depreciation Exp.: 12/31 Depreciation Exp. XXX Accumulated Depr. XXX Bad Debt Exp.: 12/31 B/D Exp. XXX Allowance for B/D XXX Income Tax 12/31 Income Tax Exp. XXX Income Tax Payable XXX Accounting Cycle

44 III. Worksheet Example A. The adjusting entries information for the worksheet example. B. Preparing financial statements from a worksheet. C. Closing and reversing entries. Accounting Cycle

45 A. Adjusting Entries Information
The following items are the adjusting entries information for the worksheet example (source: Kieso, et al. textbook): (a) Furniture and equipment is depreciated at the rate of 10% per year based on original cost of $67,000. Depreciation Expense --Furniture and Equipment 6,700 Accumulated Depreciation --Furniture and Equipment 6,700 Accounting Cycle

46 A. Adjusting Entries Information (contd.)
(b) Estimated bad debts, one-quarter of 1% of sales ($400,000). Bad Debts Expense 1,000 Allowance for Doubtful Accounts 1,000 (c) Insurance expired during the year, $360. Insurance Expense 360 Prepaid Insurance 360 Accounting Cycle

47 A. Adjusting Entries Information (contd.)
(d) Interest accrued on notes receivable as of December 31, $800. Interest Receivable 800 Interest Revenue 800 (e) The Rent Expense account contains $500 rent paid in advance, which is applicable to next year. Prepaid Rent Expense 500 Rent Expense 500 Accounting Cycle

48 A. Adjusting Entries Information (contd.)
(f) Property taxes accrued December 31, $2,000. Property Tax Expense ,000 Property Tax Payable ,000 (g) Income taxes accrued December 31, $3,440 Income tax expense ,440 Income tax payable ,440 Accounting Cycle

49 Allow. for double Accounts Inventory, 1/1/12 Prepaid insurance
Uptown Cabinet Corp.(source: Kieso, et al. Illu. 3C-1) TEN-COLUMN WORK SHEET (with Periodic Inventory System) For the Year Ended December 31, 2010 Accounts Cash N/R A/R Allow. for double Accounts Inventory, 1/1/12 Prepaid insurance Furniture & equip. Accu. Depr. -- furniture & equip. Dr Cr Dr Cr Dr Cr. 2000 (b) 900 (c) (a) Adjusted Trial Balance Adjustments Trial Balance Accounting Cycle 49

50 TEN-COLUMN WORK SHEET (contd.)
Accounts N/P A/P B/P Common stock R/E, 1/1/12 Sales Purchases Sales Salaries exp. Advertising exp. Traveling exp. Office Sal. exp. T&T exp. Dr Cr Dr Cr Dr Cr. Trial Balance Adjustments Adj. T-B Accounting Cycle 50

51 TEN-COLUMN WORK SHEET (contd.)
Accounts Rent exp. Property tax exp. Interest exp. Totals Dep. Exp-fur. & equ. Bad debts exp. Insurance exp. Int. receivable Int. revenue Prepaid rent exp. Property tax pay. Dr Cr Dr Cr Dr Cr. (e) 3300 (f) (a) (b) (c) (d) (d) (e) (f) Trial Balance Adjustments Adj. T-B Accounting Cycle 51

52 TEN-COLUMN WORK SHEET (contd.)
Accounts Inv., 12/31/12 Totals Income bef. I/T Income tax exp. Income tax payable Net income Dr Cr Dr Cr Dr Cr. (g) 3440 Trial Balance Adjustments Adj. T-B Accounting Cycle 52

53 TEN-COLUMN WORK SHEET (contd.)
Uptown Cabinet Corp. TEN-COLUMN WORK SHEET (contd.) Accounts Cash N/R A/R Allow. for double Accounts Inventory, 1/1/12 Prepaid insurance Furniture & equip. Accu. Depr. -- furniture & equip. Dr Cr Dr Cr Dr Cr. Adjusted Income Trial Balance Statement Balance Sheet Accounting Cycle 53

54 TEN-COLUMN WORK SHEET (contd.)
Accounts N/P A/P B/P Common stock R/E, 1/1/12 Sales Purchases Sales Salaries exp. Advertising exp. Traveling exp. Office Sal. exp. T&T exp. Dr Cr Dr Cr Dr Cr Adj. T-B I/S B/S Accounting Cycle 54

55 TEN-COLUMN WORK SHEET (contd.)
Accounts Rent exp. Property tax exp. Interest exp. Totals Dep. Exp-fur. & equ. Bad debts exp. Insurance exp. Int. receivable Int. revenue Prepaid rent exp. Property tax pay. Dr Cr Dr Cr Dr Cr. Adj. T-B I/S B/S Accounting Cycle 55

56 TEN-COLUMN WORK SHEET (contd.)
Accounts Inv., 12/31/12 Totals Income bef. I/T Income tax exp. Income tax payable Net income Dr Cr Dr Cr Dr Cr 15640 3440 Adj. T-B I/S B/S Accounting Cycle 56

57 B. Preparing Financial Statements from a Worksheet
(Source: Illustration 3-39 of Kieso, et al. 14th edition) Uptown Cabinet Corp. INCOME STATEMENT For the Year Ended December 31, 2012 Net sales $400,000 Cost of goods sold Inventory, 1/1/x2 $ 36,000 Purchases ,000 Cost of goods avail. for sale 356,000 Subtract inv., 12/31/x ,000 Cost of goods sold ,000 Gross profit on sales 84,000 Accounting Cycle

58 INCOME STATEMENT (contd.)
Selling expenses Sales salaries exp. 20,000 Adv. exp. 2,200 Traveling exp ,000 Total selling exp. 30,200 Administrative exp. Office Salaries exp. $19,000 T&T exp. 600 Rent exp. 4,300 Property tax exp. 5,300 Depr. exp.-fur. & equip. 6,700 Bad debts exp. 1,000 Insurance exp Total administrative exp ,260 Accounting Cycle 58

59 INCOME STATEMENT (contd.)
Total selling & admin. exp ,460 Income from operations 16,540 Other revenues and gains Interest revenue 17,340 Other exp. And losses Interest exp ,700 Income bef. income taxes 15,640 Income taxes 3,440 Net income $12,200 Earnings per share $1.22 Accounting Cycle 59

60 B. Preparing Financial Statements from a Worksheet (contd.)
(Source: Illustration 3-40 of KWW textbook, 14th edition) Uptown Cabinet Corp. STATEMENT OF RETAINED EARNINGS For the Year Ended December 31, 2012 Retained earnings, Jan. 1, 2012 $14,200 Add net income for 20x ,200 Retained earnings, Dec. 31, 2012 $26,400 Accounting Cycle 60

61 B. Preparing Financial Statements from a Worksheet (contd.)
(Source: Illustration 3-41 of KWW textbook, 14th edition) Uptown Cabinet Corp. BALANCE SHEET As of December 31, 2012 Assets Current assets Cash $ 1,200 Notes receivable $16,000 Accounts receivable 41,000 Interest receivable $57,800 Less allow. for doub. acct ,000 54,800 Merchandise inv. on hand 40,000 Accounting Cycle 61

62 Liabilities and Stockholders’ Equity
BALANCE SHEET (contd.) Prepaid insurance 540 Prepaid rent Total current assets 97,040 Property, plant & equip. Furniture & equipment 67,000 Less accu. Depr ,700 Total property, plant & equip ,300 Total assets $145,340 Liabilities and Stockholders’ Equity Current liabilities Notes payable $ 20,000 Accounts payable 13,500 Property tax payable 2,000 Income taxes payable ,440 Accounting Cycle 62

63 BALANCE SHEET (contd.) Total current liabilities 38,940
Long-term liabilities B/P, due June 30, 20x ,000 Total liabilities ,940 Stockholders’ equity Common stock, $5.00 par value, issued & outstanding, 10,000 shares $50,000 Retained earnings 26,400 Total stockholders’ equity ,400 Total liabilities & stockholders’ equity $145,340 Accounting Cycle 63

64 C. Closing and Reversing Entries Closing Entries
(Source: p. 98 of Kieso, et al., textbook, 13th edition) General Journal December 31, 2012 Inventory (12/31) 40,000 Cost of Goods Sold 316,000 Inventory (1/1) 36,000 Purchases 320,000 (To record ending inv. bal. & to determine CGS) Interest Revenue 800 Sales 400,000 CGS 316,000 Sales Sal. Exp. 20,000 Adv. Exp. 2,200 Accounting Cycle 64

65 Closing Entries (contd.)
Traveling Exp. 8,000 Office Salaries Exp. 19,000 T&T Exp. 600 Rent Exp. 4,300 Property Tax Exp. 5,300 Depr. Exp. - Fur. & Equip. 6,700 Bad Debts Exp. 1,000 Insurance Exp. 360 Interest Exp. 1,700 Income Tax Exp. 3,440 Income Summary 12,200 (To close revenues and expenses to Income Summary) Income Summary 12,200 Retained Earnings 12,200 (To close Income Summary to Retained Earnings) Accounting Cycle 65

66 C. Closing and Reversing Entries Reversing Entries (Optional)
January 1, 2012 (D) Interest Revenue 800 Interest Receivable 800 (E) Rent Expense 500 Prepaid Rent Expense 500 (F) Property Tax Payable 2,000 Property Tax Expense 2,000 (G) Income Tax Payable 3,440 Income Tax Expense 3,440 Accounting Cycle 66

67 Closing Entries for Periodic Inventory System( with Purchase Returns and Allow): An Example
Inventory & Related Accounts Inventory Purchases Pur. R&A B.B 12, , ,700 Freight-In Income Summary 4, CGS Assuming Ending Inv. = 17,200 CGS= Beg. Inv + Net Purchases - Endings Inv. Net Purchases = Pur. -Pur. R&A - Pur. Dis + Freight-In Accounting Cycle

68 IFRS Insights (Source: Kieso, etc. 14th e, p153-155)
Companies around the world use the same accounting process as shown in this chapter. Despite some differences in standards between IFRS and GAAP, the double entry accounting system is the basis of accounting systems worldwide. IFRS is growing in acceptance around the world. Approximately 40% of Global Fortune 500 companies use IFRS. Accounting Cycle


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