1. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 1 Financial Accounting Belverd E. Needles, Jr. Marian Powers - - - - - - - - - - - Multimedia Slides by: Dr. Howard A. Kanter, CPA DePaul University Milton M. Pressley University of New Orleans

2. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 2 LEARNING OBJECTIVES 1.Identify the principles of accounting systems design. 2.State all the steps in the accounting cycle. 3.Describe how general ledger software and spreadsheet software are used in accounting.

3. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 3 LEARNING OBJECTIVES 4.Identify the basic elements of computer systems, and describe microcomputer accounting systems. 5.Explain how accountants use the Internet. 6.Explain the purposes of closing entries and prepare required closing entries.

4. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 4 LEARNING OBJECTIVES 7. Prepare the post-closing trial balance.

5. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 5 Principles of Accounting Systems Design OBJECTIVE 1 Identify the principles of accounting systems design.

6. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 6 Design Principles u Accounting systems summarize financial data about a business and organize them in useful forms. u Most businesses use computerized accounting systems to provide timely information to decision makers. u Accountants must have an understanding of computer systems.

7. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 7 Design Principles u Four general principles of systems design: 4 Cost-benefit principle. 4 Control principle. 4 Compatibility principle. 4 Flexibility principle.

8. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 8 Cost-Benefit Principle u The cost-benefit principle holds that the benefits derived from an accounting system and the information it generates must be equal to or greater than the system’s cost. u Costs may either be tangible or intangible. u Tangible costs include personnel, forms, and equipment. u Intangible costs include the costs of wrong decisions.

9. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 9 Control Principle u The control principle requires that an accounting system provide internal control features in order to protect a firm’s assets and ensure that data are reliable.

10. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 10 Compatibility Principle u The compatibility principle states that the design of an accounting system must be in harmony with the organizational and human factors of the business.

11. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 11 Flexibility Principle u The flexibility principle holds that an accounting system must be flexible enough to allow the volume of transactions to grow and organizational changes to be made.

12. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 12 Overview of the Accounting Cycle OBJECTIVE 2 State all the steps in the accounting cycle.

13. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 13 Steps in the Accounting Cycle 1.Analyze business transactions from source documents. 2.Record the entries in the journal. 3.Post the entries to the ledger and prepare a trial balance.

14. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 14 Steps in the Accounting Cycle 4.Adjust the accounts and prepare an adjusted trial balance. 5.Close the accounts and prepare a post- closing trial balance. 6.Prepare financial statements.

15. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 15 Computer Software for Accounting OBJECTIVE 3 Describe how general ledger software and spreadsheet software are used in accounting.

16. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 16 General Ledger Software u General ledger software is a group of integrated programs that an accountant uses to perform major functions such as sales and accounts receivable, purchases and accounts payable, and payroll. u Most software is Windows® based and operates with a graphical user interface (GUI).

17. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 17 Accounting Software u Widely used general ledger software programs include: 4 Peachtree Complete Accounting TM. 4 General Ledger Software. 4 QuickBooks®. u Spreadsheet software is often used in addition to general ledger software. These include such programs as: 4 Windows® Excel. 4 Lotus 1-2-3.

18. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 18 OBJECTIVE 4 Identify the basic elements of computer systems, and describe microcomputer accounting systems. Computerized Accounting Systems

19. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 19 Elements of a Computer System u Hardware is the equipment needed to operate a computer system. 4 Central processing unit (CPU). 4 Input devices (e.g., keyboards). 4 Storage devices (e.g., disks). 4 Output devices (e.g., printers).

20. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 20 Elements of a Computer System u Software is the set of instructions and steps that bring about the desired results in a computer system. u Computer systems may be linked together by means of local area networks (LANs) or wide area networks (WANs).

21. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 21 Elements of a Computer System u Computer personnel consist of systems programmers, analysts, and operators. u Accountants work closely with computer personnel to design and operate an efficient computer accounting system.

22. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 22 Microcomputer Accounting Systems u Most businesses purchase commercial accounting software. u Most software consists of modules. 4 Sales/accounts receivable. 4 Purchases/accounts payable. 4 Cash receipts. 4 Cash disbursements. 4 Payroll. 4 General journal.

23. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 23 Microcomputer Accounting Systems u Modules should work together to form an integrated accounting program. u Each transaction that enters the system should be supported by a source document. u Source documents verify the validity of a transaction and provide necessary details.

24. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 24 Microcomputer Accounting Systems u After transactions are processed, a procedure is followed to post them to and update the ledgers and to prepare a trial balance. u The final step is the preparation of financial statements and other accounting reports.

25. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 25 Microcomputer Accounting Systems u Computerization typically results in: 4 Reduced processing time. 4 Improved arithmetic accuracy. 4 Increased data dependability.

26. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 26 OBJECTIVE 5 Explain how accountants use the Internet. Accountants and the Internet

27. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 27Internet u World’s largest computer network. u Access to the Internet requires a communication device (modem) with a connection to an Internet service provider (ISP).

28. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 28 Closing Entries OBJECTIVE 6 Explain the purposes of closing entries and prepare required closing entries.

29. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 29 Types of Accounts and Closing Entries u Balance sheet accounts are known as permanent or real accounts. u Revenue and expense accounts are temporary or nominal accounts. u Closing entries are journal entries made at the end of an accounting period.

30. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 30 Purposes of Closing Entries 1.To clear the revenue, expense, and dividends accounts of their balances and prepare the accounts for the next accounting period.

31. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 31 Purposes of Closing Entries 2.To summarize a period’s revenues and expenses. 4 The balance of the Income Summary account equals the net income or loss for the period. 4 The net income or loss is transferred to the Retained Earnings account.

32. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 32 The Four Steps to Close the Accounts 1.Close the credit balances from income statement accounts to the Income Summary account. 4 Sets the balances of the revenue accounts to zero. 4 Transfers the total revenues to the credit side of the Income Summary account.

33. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 33 The Four Steps to Close the Accounts 2.Close the debit balances from income statement accounts to the Income Summary account. 4 Reduces the expense account balances to zero. 4 Transfers the total expenses to the debit side of the Income Summary account.

34. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 34 3.Close the Income Summary account balance to the Retained Earnings account. 4 Closes the Income Summary account. 4 Transfers the balance, income or loss, to the Retained Earnings account. The Four Steps to Close the Accounts

35. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 35 4.Close the Dividends account balance to the Retained Earnings account. 4 Closes the Dividends account. 4 Transfers the balance to the Retained Earnings account. The Four Steps to Close the Accounts

36. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 36 The Accounts After Closing u Accounts are ready for next period. u Revenue, expense, and dividends (temporary accounts) have zero balances.

37. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 37 The Accounts After Closing u The Retained Earnings account has been increased to reflect the company’s net income and decreased for dividends. u The balance sheet accounts (permanent accounts) show the correct balances, which are carried forward to the next period.

38. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 38 The Post-Closing Trial Balance OBJECTIVE 7 Prepare the post-closing trial balance.

39. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 39 The Post-Closing Trial Balance u A post-closing trial balance is prepared to determine that: 1.All temporary accounts have a zero balance. 2.Debits equal credits. u Only balance sheet accounts should show a balance.

40. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 40 Reversing Entries: The Optional First Step in the Next Accounting Period SUPPLEMENTAL OBJECTIVE 8 Prepare reversing entries as appropriate.

41. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 41 Reversing Entries u Reversing entries simplify the bookkeeping for accrued revenues and accrued expenses. u Deferrals cannot be reversed.

42. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 42 The Work Sheet: An Accountant’s Tool SUPPLEMENTAL OBJECTIVE 9 Prepare a work sheet.

43. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 43 Working Papers u In order to prepare financial reports, accountants must collect data in various forms to determine what should be included. u The data collected make up the accountants’ working papers.

44. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 44 Working Papers u Working papers are important for two reasons. 1.They help accountants organize their work and avoid omitting important data or steps. 2.They provide evidence of past work so that accountants or auditors can retrace their steps and support the information in the financial statements.

45. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 45 The Work Sheet u The work sheet, a special kind of working paper, is often used as a preliminary step in the preparation of financial statements. u A work sheet lessens the possibility of leaving out an adjustment. u A work sheet helps check the arithmetical accuracy of the accounts.

46. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 46 The Work Sheet u A work sheet facilitates the preparation of financial statements. u A work sheet is not a published financial statement. u A work sheet is often prepared using a computer.

47. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 47 Preparing the Work Sheet 1.Enter and total the account balances in the Trial Balance columns. 2.Enter and total the adjustments in the Adjustments columns. 3.Enter and total the adjusted account balances in the Adjusted Trial Balance columns.

48. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 48 Preparing the Work Sheet 4.Extend the account balances from the Adjusted Trial Balance columns to the Income Statement columns or the Balance Sheet columns. 5.Total the Income Statement columns and the Balance Sheet columns. Enter the net income or net loss in both pairs of columns as a balancing figure, and recompute the column totals.

49. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 49 Using the Work Sheet SUPPLEMENTAL OBJECTIVE 10 Use a work sheet for three different purposes.

50. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 50 Tasks of the Work Sheet u The completed work sheet aids the accountant in three principal tasks: 1.Recording the Adjusting Entries. Adjusting entries are copied to the general journal and then posted to the general ledger.

51. Copyright©2001 by Houghton Mifflin Company. All rights reserved. 51 Tasks of the Work Sheet 2. Recording the Closing Entries. Closing entries are entered in the journal and posted to the ledger. All accounts that need closing, except for Dividends, may be found in the Income Statement columns of the work sheet. 3.Preparing the Financial Statements. Account balances have been sorted into Income Statement and Balance Sheet columns.