4-1 Accounting Information Systems Chapter 4 Electronic Presentation by Douglas Cloud Pepperdine University

4-2 1.Describe the nature of business information systems. 2.Describe the nature of accounting information systems. 3.Describe and illustrate the basic elements of transaction processing systems. 4.Describe and illustrate the basic elements of a financial reporting system. Learning Goals After studying this chapter, you should be able to: ContinuedContinued

4-3 5.Describe and illustrate the computation and use of earnings before interest, taxes, depreciation, and amortization (EBITDA). Learning Goals

4-4 1 Learning Goal Describe the nature of business information systems.

4-5 A business information system collects and processes data and distributes information to users.

4-6 Business Information System Data Sources Data Collection Data Processing

4-7 Business Information System InformationUsers

4-8 Describe the nature of accounting information systems. 2 Learning Goal

4-9 An accounting information system processes financial and operating data into reports useful to internal and external stakeholders.

4-10 Accounting Information System Financial and Operational Data ACCOUNTING INFORMATION SYSTEMS Management Reporting System Transaction Processing System Financial Reporting System Stakeholders

4-11 Accounting Information System The management reporting system provides internal information to assist managers in making decisions. The transaction processing system records and summarizes the effects of financial transactions on a business. The financial reporting system produces financial statements and other reports for external stakeholders.

4-12 Describe and illustrate the basic elements of transaction processing systems. 3 Learning Goal

4-13 The Account The account has a title. Cash

4-14 The Account The left side of the account is the debit side. Cash Left side debit

4-15 The Account The right side of the account is the credit side. Cash Left side debit Right side credit

4-16 The Account Cash 3,750 4,300 2, , ,900 1,000

4-17 The Account Cash 3,750 4,300 2, , ,900 1,000 10,950 First, foot the debit side.

4-18 The Account Cash 3,750 4,300 2, , ,900 1,000 10,950 Next, foot the credit side. Next, foot the credit side. 6,850

4-19 The Account Cash 3,750 4,300 2, , ,900 1,000 10,950 6,850 Subtract total credits from total debits to obtain the account balance. 4,100

4-20 Rules of Debits and Credits Luca Pacioli Developer of Double-Entry Accounting Scale or Balance Receive DEBIT Give CREDIT T account Left Side Receive DEBIT Right Side Give CREDIT Assets

4-21 T account Left Side DEBIT Right Side CREDIT Stockholders’ Equity Capital Stock/Retained Earnings Rules of Debits and Credits T account Left Side DEBIT Right Side CREDIT Liabilities

4-22 T account Left Side DEBIT Right Side CREDIT Revenues Rules of Debits and Credits T account Left Side DEBIT Right Side CREDIT Dividends

4-23 Rules of Debits and Credits T account Left Side DEBIT Right Side CREDIT Expenses The normal balance is on the increase side of an account.

4-24 The Journal

4-25 Post. Ref. JOURNAL DateDescriptionDebitCredit Page 1 Nov Cash Capital Stock On November 1, 2004, Shannon Hughes deposits $25,000 in a bank account in the name of Online Solutions.

4-26 On November 5, Online Solutions bought land for $20,000, paying cash. 5Land Cash

4-27 On November 10, Online Solutions purchased supplies on account for $1, Supplies Accounts Payable

4-28 On November 18, Online Solutions received fees of $7,500 from customers for services provided. 18Cash Fees Earned

4-29 Throughout the month, Online Solutions incurred the following expenses that were paid in cash: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $ Wages Expense Rent Expense Utilities Expense Miscellaneous Expense Cash

4-30 On December 30, Online Solutions paid creditors on account, $ Accounts Payable Cash950 00

4-31 Online Solutions paid stockholder (Shannon Hughes) a dividend of $2, Dividends Cash

4-32 You should have noted that in every entry the sum of the debits always equaled the sum of the credits.

4-33 Posting to a Ledger Post. Ref. JOURNAL DateDescriptionDebitCredit Page 1 Nov Cash Capital Stock CASHCAPITAL STOCK 25,000Nov. 125,000Nov

4-34 Ledger for Online Solutions—November Cash Nov. 125,000Nov. 525,000 Rent Expense Nov ,500 Supplies Nov. 101,350 Utilities Expense Nov Miscellaneous Expense Nov , ,000 30Bal. 5,900 Land Nov. 520,000 Accounts Payable Nov Nov. 101,350 30Bal. 400 Capital Stock Nov. 125,000 Dividends Nov. 302,000 Wages Expense Nov. 302,125 Fees Earned Nov. 187,500

4-35 Online Solutions Trial Balance November 30, 2004 Cash5,900 Supplies1,350 Land20,000 Accounts Payable400 Capital Stock25,000 Dividends2,000 Fees Earned7,500 Wages Expense2,125 Rent Expense800 Utilities Expense450 Miscellaneous Expense 27532,900

4-36 Describe and illustrate the basic elements of a financial reporting system. 4 Learning Goal

4-37 On December 1, paid a premium of $2,400 for a comprehensive insurance policy covering liability, theft, and fire. The policy covers a two year period. Dec. 1Prepaid Insurance2,400 Cash2,400

4-38 On December 1, paid rent for December, $800. The company from which Online Solutions is renting its store space now requires the payment of rent on the first of each month rather than the end of the month. Dec. 1Rent Expense800 Cash800

4-39 On December 1, received an offer from a local retailer to rent the land purchased on November 5. The retailer plans to use the land as a parking lot for its employees and customers. Online Solutions agreed to rent the land to the retailer for three months, with rent payable in advance. Online Solutions received $360 for three months’ rent beginning December 1. Dec. 1Cash360 Unearned Rent360 This account is a liability!

4-40 On December 4, purchased office equipment on account from Executive Supply Co. for $1,800. Dec. 4Office Equipment1,800 Accounts Payable1,800

4-41 On December 6, paid $180 for a newspaper advertisement. Dec. 6Miscellaneous Expense180 Cash180

4-42 On December 11, paid creditors, $400. Dec. 11Accounts Payable400 Cash400 On December 13, paid a receptionist and a part- time assistant $950 for two week’s wages. Dec. 13Wages Expense950 Cash950

4-43 On December 16, received $3,100 from fees earned for the first half of December. Dec. 16Cash3,100 Fees Earned3,100 On December 16, earned fees on account totaling $1,750 for the first half of December. Dec. 16Accounts Receivable1,750 Fees Earned1,750

4-44 On December 20, paid $1,800 to Executive Supply Co. on the debt owed from the December 4 transaction. Dec. 20Accounts Payable1,800 Cash1,800 On December 21, received $650 from customers in payment of their accounts. Dec. 21Cash650 Accounts Receivable650

4-45 On December 23, purchased $1,450 of supplies by paying $550 cash and charging the remainder of account. Dec. 23Supplies1,450 Cash550 Accounts Payable900 On December 27, paid the receptionist and the part-time assistant $1,200 for two weeks’ wages Dec. 27Wages Expense1,200 Cash1,200

4-46 On December 31, paid $310 telephone bill for the month. Dec. 31Utilities Expense310 Cash310 On December 31, paid $225 electric bill for the month. Dec. 31Utilities Expense225 Cash225

4-47 On December 31, received $2,870 from fees earned for the second half of December. Dec. 31Cash2,870 Fees Earned2,870 On December 31, earned fees on account totaling $1,120 for the second half of December. Dec. 31Accounts Receivable1,120 Fees Earned1,120

4-48 On December 31, paid dividend of $2,000 to stockholder (Shannon Hughes). Dec. 31Dividends2,000 Cash2,000

4-49

4-50 Online Solutions Trial Balance December 31, 2004 Cash2,065 Accounts Receivable2,220 Supplies2,800 Prepaid Insurance2,400 Office Equipment1,800 Land20,000 Accounts Payable900 Unearned Rent360 Capital Stock25,000 Dividends4,000 Fees Earned16,340 Wages Expense4,275 Rent Expense1,600 Utilities Expense985 Miscellaneous Expense 45542,600

4-51 Online Solutions Trial Balance December 31, 2004 Cash2,065 Accounts Receivable2,220 Supplies2,800 Prepaid Insurance2,400 Office Equipment1,800 Land20,000 Accounts Payable900 Unearned Rent360 Capital Stock25,000 Dividends4,000 Fees Earned16,340 Wages Expense4,275 Rent Expense1,600 Utilities Expense985 Miscellaneous Expense 45542,600 Some of these supplies have been used. On December 31, a count reveals that $760 of supplies are on hand. The Supplies account has a balance of $2,800 on the December 31 trial balance.

4-52 Supplies on hand at December 31, $760. Dec. 31Supplies Expense2,040 Supplies2,040 Adjusting Entries $2,800 – 780 $2,040

4-53 Online Solutions Trial Balance December 31, 2004 Cash2,065 Accounts Receivable2,220 Supplies2,800 Prepaid Insurance2,400 Office Equipment1,800 Land20,000 Accounts Payable900 Unearned Rent360 Capital Stock25,000 Dividends4,000 Fees Earned16,340 Wages Expense4,275 Rent Expense1,600 Utilities Expense985 Miscellaneous Expense 45542,600 Of this prepayment, $100 of it expired during December. Prepaid Insurance has a balance of $2,400 on the December 31 trial balance.

4-54 Insurance premiums expired during December, $100. Dec. 31Insurance Expense100 Prepaid Insurance100 Adjusting Entries

4-55 Online Solutions Trial Balance December 31, 2004 Cash2,065 Accounts Receivable2,220 Supplies2,800 Prepaid Insurance2,400 Office Equipment1,800 Land20,000 Accounts Payable900 Unearned Rent360 Capital Stock25,000 Dividends4,000 Fees Earned16,340 Wages Expense4,275 Rent Expense1,600 Utilities Expense985 Miscellaneous Expense 45542,600 Unearned Rent has a balance of $360 on the December 31 trial balance. Of this amount, $120 was earned during December for the use of the land owned by Online Solutions.

4-56 Unearned rent earned during December, $120. Dec. 31Unearned Rent120 Rent Revenue120 Adjusting Entries The liability is being reduced. Revenue is being “recognized.”

4-57 Online Solutions Trial Balance December 31, 2004 Cash2,065 Accounts Receivable2,220 Supplies2,800 Prepaid Insurance2,400 Office Equipment1,800 Land20,000 Accounts Payable900 Unearned Rent360 Capital Stock25,000 Dividends4,000 Fees Earned16,340 Wages Expense4,275 Rent Expense1,600 Utilities Expense985 Miscellaneous Expense 45542,600 Wages Expense does not reflect that $250 is owed to the employees at December 31.

4-58 Wages accrued, but not paid at December 31, $250. Dec. 31Wages Expense250 Wages Payable250 Adjusting Entries An additional expense is recorded. The books now show that employees are owed $250.

4-59 Cash2,065 Accounts Receivable2,220 Supplies2,800 Prepaid Insurance2,400 Office Equipment1,800 Land20,000 Accounts Payable900 Unearned Rent360 Capital Stock25,000 Dividends4,000 Fees Earned16,340 Wages Expense4,275 Rent Expense1,600 Utilities Expense985 Miscellaneous Expense 45542,600 Online Solutions Trial Balance December 31, 2004 The account Fees Earned does not include $500 for revenue that has not been billed. Online Solutions Trial Balance December 31, 2004

4-60 Fees revenue earned, but not yet billed, $500. Dec. 31Accounts Receivable500 Fees Earned500 Adjusting Entries To increase the asset. To increase the revenue account.

4-61 Depreciation of office equipment during December, $50. Dec. 31Depreciation Expense50 Accumulated Depreciation— Office Equipment50 Adjusting Entries Notice that the Office Equipment account is not credited.

4-62 Fees earned$16,840 Rent revenue 120 Total revenue$16,960 Operating expenses: Wages expense$ 4,525 Supplies expense2,040 Rent expense1,600 Utilities expense985 Insurance expense100 Depreciation expense50 Miscellaneous expense 455 Total operating expenses 9,755 Net income$ 7,205 Online Solutions Income Statement For the Two Months Ended December 31, 2004 All amounts came from the adjusted trial balance

4-63 Make a note to yourself to analyze Exhibit 11 in the textbook and the other statements in Exhibit 12 to understand the source of the different amounts.

4-64 Closing Entries Entry 1: Close the revenue accounts to Retained Earnings. Dec. 31Fees Earned16,840 Rent Revenue120 Retained Earnings16,960 After this entry is posted, all revenue accounts will have zero balances.

4-65 Closing Entries Entry 2: Close the expense accounts to Retained Earnings. Dec. 31Retained Earnings9,755 Wages Expense4,525 Rent Expense1,600 Depreciation Expense50 Utilities Expense985 Supplies Expense2,040 Insurance Expense100 Miscellaneous Expense455 After this entry is posted, all expense accounts will have zero balances.

4-66 Closing Entries Entry 3: Close the Dividends account to Retained Earnings. Dec. 31Retained Earnings4,000 Dividends4,000 After this entry is posted, the Dividends account will have a zero balance.

4-67 Describe and illustrate the computation and use of earnings before interest, taxes, depreciation, and amortization. 5 Learning Goal

4-68 Let’s do a pro forma computation for Online Solutions using EBITDA. Earnings before interest, taxes, depreciation, and amortization.

4-69 Fees earned$16,840 Rent revenue 120 Total revenue$16,960 Operating expenses: Wages expense$ 4,525 Supplies expense2,040 Rent expense1,600 Utilities expense985 Insurance expense100 Depreciation expense50 Miscellaneous expense 455 Total operating expenses 9,755 Net income$ 7,205 Online Solutions Income Statement For the Two Months Ended December 31, 2004 $ 7,255 9,705

4-70 Because Online Solutions only had a small depreciation and no interest, taxes, or amortization, there was little impact.

4-71 EBITDA is a rough estimate of operating cash flows that are available to pay interest and other fixed charges.

4-72 The End Chapter 4

4-73