1. Chapter 3: The Accounting Information Systems
Intermediate Accounting, 11th ed.
Kieso, Weygandt, and Warfield
Chapter 3: The Accounting Information Systems 2

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’ Equity
The 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-sided
effect of transactions
Transaction Two-sided effect
Bought furniture for cash Decrease in one asset
Increase in another asset
Took a loan in cash Increase in an asset
Increase in a liability

7. The Double Entry System
Note that the accounting equation equality is
maintained after recording
each transaction.

8. The Account and the Debit-Credit Convention
Asset
Expense
Debit
Revenue
Liability
Equity
Credit
Normal balance in account

9. Expanded Basic Equation and Debit/Credit Rules and Effects

10. The Debit-Credit Convention
Balance increases
Balance decreases
Debit entries in an asset account
Debit entries in an expense account
Credit entries in a liability account
Credit entries in equity account
Credit entries in a revenue account
Credit entries in an asset account
Credit entries in an expense account
Debit entries in a liability account
Debit entries in equity account
Debit entries in a revenue account

11. Ownership (Equity) Structure
Net Loss
Dividends or
Withdrawals -
Net Income
Investments
by Owners +
Owners’ Equity

12. The Accounting Cycle: Steps
1. Analyze the transaction
2. Journalize the transaction
3. Post the transaction to accounts in ledger
4. Prepare the (unadjusted) trial balance
5. Prepare necessary adjusting journal entries
6. Prepare the adjusted trial balance
7. Prepare financial statements
8. Prepare closing journal entries for the year
9. Prepare the post-closing trial balance

13. The Accounting Cycle: Steps
Begin
Accounting period
Originating
Journal
Entries 2
End
Unadjusted
Trial
Balance 4 6
Adjusted
Trial
Balance 7
Post to
Ledger 3
Financial
Statements 5
Adjusting
Journal
Entries 9
Closing
Entries
Post-Closing Trial Balance 8
Start 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 Revenue
Recording
Accrued Revenue
Revenues received
in cash
and
recorded as liabilities
Revenues earned
but not yet
recorded
in books

16. Adjusting Entries: Matching Expenses
Prepayments for
Expenses
Recording
Accrued Expense
Prepayments made
in cash
and
recorded as assets
Expense incurred
but not yet
recorded
in 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. Earnings
Dividends
Income Summary 3 4
Expense
Revenue 1 2

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 Worksheet
A 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.

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