Presentation on theme: "Chapter 3: The Accounting Information Systems"— Presentation transcript:
1 Chapter 3: The Accounting Information Systems Intermediate Accounting, 11th ed.Kieso, Weygandt, and WarfieldChapter 3: The Accounting Information Systems2
2 Chapter 3: The Accounting Information Systems After studying this chapter, you should be able to:Understand basic accounting terminology.Explain double entry rules.Identify steps in the accounting cycle.Record transactions in journals, post to ledger accounts, and prepare a trial balance.
3 Chapter 3: The Accounting Information Systems Explain the reasons for preparing adjusting entries.Prepare closing entries.Explain how inventory accounts are adjusted at year-end.Prepare a 10-column work sheet.
4 The Basic Accounting Equation Accounting data is represented by the following relationship among the assets, liabilities and owners’ equity of a business:Assets = Liabilities + Owners’ EquityThe equation must be in balance after every recorded transaction in the system.
5 The Double Entry System Accounting information is based on the double entry system.An account is an arrangement of transactions affecting a given asset, liability or other element.Under this system, the two-sided effect of a transaction is recorded in the appropriate accounts.The recording is done by means of a “debit-credit” convention (set of rules) applying to all accounts.
6 The Double Entry System The system records the two-sidedeffect of transactionsTransaction Two-sided effectBought furniture for cash Decrease in one assetIncrease in another assetTook a loan in cash Increase in an assetIncrease in a liability
7 The Double Entry System Note that the accounting equation equality ismaintained after recordingeach transaction.
8 The Account and the Debit-Credit Convention AssetExpenseDebitRevenueLiabilityEquityCreditNormal balance in account
9 Expanded Basic Equation and Debit/Credit Rules and Effects
10 The Debit-Credit Convention Balance increasesBalance decreasesDebit entries in an asset accountDebit entries in an expense accountCredit entries in a liability accountCredit entries in equity accountCredit entries in a revenue accountCredit entries in an asset accountCredit entries in an expense accountDebit entries in a liability accountDebit entries in equity accountDebit entries in a revenue account
11 Ownership (Equity) Structure Net LossDividends orWithdrawals-Net IncomeInvestmentsby Owners+Owners’ Equity
12 The Accounting Cycle: Steps 1. Analyze the transaction2. Journalize the transaction3. Post the transaction to accounts in ledger4. Prepare the (unadjusted) trial balance5. Prepare necessary adjusting journal entries6. Prepare the adjusted trial balance7. Prepare financial statements8. Prepare closing journal entries for the year9. Prepare the post-closing trial balance
13 The Accounting Cycle: Steps BeginAccounting periodOriginatingJournalEntries2EndUnadjustedTrialBalance46AdjustedTrialBalance7Post toLedger3FinancialStatements5AdjustingJournalEntries9ClosingEntriesPost-Closing Trial Balance8Start over
14 Adjusting Journal Entries Adjusting entries are needed for:Recognizing revenue for the period.Matching expenses with revenues they helped generate.Adjusting entries are required every time financial statements are prepared.
15 Adjusting Entries: Recognizing Revenue Unearned RevenueRecordingAccrued RevenueRevenues receivedin cashandrecorded as liabilitiesRevenues earnedbut not yetrecordedin books
16 Adjusting Entries: Matching Expenses Prepayments forExpensesRecordingAccrued ExpensePrepayments madein cashandrecorded as assetsExpense incurredbut not yetrecordedin books
17 Closing Journal Entries Closing entries are made to close all nominal accounts (revenue and expense accounts) for the year.Real (or Permanent) accounts (balance sheet accounts) are not closed.Dividend account is closed to Retained Earnings account.
18 Scheme of Closing Entries Ret. EarningsDividendsIncome Summary34ExpenseRevenue12
19 Closing Entries: Periodic Inventory System In a periodic inventory system, closing entries are made to record cost of goods sold and ending inventory.In a perpetual inventory system, such entries are not required.
20 Using a WorksheetA worksheet is a multiple column form that may be used in the adjustment process and in preparing financial statements.The use of a worksheet is optional and not a permanent accounting record.The worksheet does not replace the financial statements.
21 Steps in Preparing a Worksheet Prepare a trial balance on the worksheet.Enter the adjustments in the adjustments column.Enter adjusted balances in the adjusted trial balance columns.Extend adjusted trial balance amounts to appropriate financial statement columns.Total the statement columns, compute net income (loss), and complete the worksheet.