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Chapter 3: The Accounting Information Systems

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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.

22 COPYRIGHT Copyright © 2004 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

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