Presentation on theme: "Gabriela H. Schneider, CMA; Grant MacEwan College"— Presentation transcript:
1 Gabriela H. Schneider, CMA; Grant MacEwan College INTERMEDIATE ACCOUNTING Sixth Canadian Edition KIESO, WEYGANDT, WARFIELD, IRVINE, SILVESTER, YOUNG, WIECEKPrepared by:Gabriela H. Schneider, CMA; Grant MacEwan College2
2 The Accounting Information System C H A P T E R3The Accounting Information System
3 Learning Objectives 1. Understand basic accounting terminology. 2. Explain double-entry rules.3. Identify steps in the accounting cycle.4. Records transactions in journals, post to ledger accounts, and prepare a trial balance.5. Explain the reasons for preparing adjusting entries.
4 Learning Objectives 6. Prepare closing entries. 7. Explain how inventory accounts are adjusted at year-end.8. Prepare a 10-column work sheet.
5 The Accounting Information System Basic terminologyDebits and creditsBasic equationFinancial statements and ownership structureThe Accounting CycleIdentification and recordingJournalizingPostingTrial BalanceAdjusting entriesAdjusted trial balanceClosingPost-closing trial balanceReversing entriesUsing a WorksheetAdjustments enteredWork sheet columnsPreparing financial statements from a work sheetClosing entriesMonthly statements, yearly closing
6 Basic Terminology Event Transaction Account The source/cause of a change in assets, liabilities and equityMay be internal or externalTransactionTransfer or exchange between two or more entitiesAccountA summary of the transactions for each type of asset, liability and equity item
7 Basic Terminology Permanent account Temporary account Also known as a real accountAsset, liability and equity accountsAppear on the balance sheetPermanent accounts are not closed at year-endTemporary accountAlso known as a nominal accountRevenue and expense accountsAppear on the income statementTemporary accounts are closed at year-end
8 Basic Terminology Ledger Journal Posting Trial balance Book containing all accountsEach account has a separate pageJournalBook of original entry for all transactionsPostingProcess of transferring transaction information from the journal to the ledgerTrial balanceListing of all accounts and their balances from the general ledgerTool used to ensure that the general ledger is in balance
9 Basic Terminology Adjusting entries Record the effects of accrual accountingEnsure that revenue recognition and the matching principle are followedFive classifications of adjusting entries:Prepaid expensesUnearned revenuesAccrued revenuesAccrued expensesAmortization
10 Basic Terminology Financial statements Closing entries Final summaries of the accounting data for a specific period of timeFour statements:Balance SheetIncome StatementStatement of Cash FlowsStatement of Owners’ EquityClosing entriesProcess where all temporary accounts are reduced to zeroSummary balance (= net income) transferred to owners’ equity account
11 Debits and Credits Debit (Dr.) Credit (Cr.) To record or enter an amount on the left sideCredit (Cr.)To record or enter an amount on the right sideThis system of recording transactionsis referred to as the double-entry system.When a transaction is ‘in balance’ the debits equal the credits.
13 The Rules of Debit and Credit To increase the balance of any account, record the amount in the normal balance columnTo decrease the balance of any account, record the amount in the column opposite to its normal balanceWhen any transaction is correctly recorded, the accounting equation will remain in balance
14 The Rules of Debit and Credit AccountDebitCreditAssetsIncreaseDecreaseLiabilitiesShareholders’ EquityRevenueExpenses
15 Ownership Structure Owners’ Equity Net Income + Investments by Owners Common Shares–Corp.Capital – Proprietoror PartnershipNet Loss-Dividends (Corp.) orWithdrawals (Proprietor orPartnership)Owners’ Equity
16 The Accounting Cycle: Steps Analyse the transactionJournalize the transactionPost the transaction to general ledger (and sub-ledgers) accountsPrepare the (unadjusted) trial balancePrepare necessary adjusting journal entriesPrepare the (adjusted) trial balancePrepare financial statementsPrepare closing journal entries for the yearPrepare post-closing trial balance (optional)Prepare reversing entries (optional)
17 The Accounting CycleIdentification and Measurement of Transactions1Record Transaction in Journal2Post Journal Entries to the Ledgers3Prepare Financial Statement7Reversing Entries10Prepare Trial Balance4Post-Closing Trial Balance9Adjusted Trial Balance6Record Adjusting Journal Entries to Worksheet (post to the Ledgers as well)Prepare Adjusting Journal Entries5Close Temporary Accounts8
18 Recording a Transaction From BE3-1 Assets = Liabilities + Common Shares + Revenue – Expenses - Dividends+ $3,000To record this transaction as a journal entry:Dr. Cash $3,000Cr. Common Shares $3,000These amounts are then posted to the general ledgerCashCommon Shares3,000
19 Recording a Transaction From the example we can see that:The accounting equation is in balance because:the debits = credits within our journal entrywe have posted the debits and credits correctly to our general ledger accountsThe system of double-entry bookkeeping facilitates this processErrors may still occurDouble-entry simply ensures that the debits = the creditsIncorrect amounts may still be recorded or posted to the incorrect account
20 Preparation of Trial Balance Trial Balance: list of accounts and their balances at a given point in timeObjective: prove the mathematical equality of debits and credits after postingList the accounts in the order they appear in the ledger (do not include sub-ledger balances)All debit balances listed in the left column, credit balances in the right columnOnce all accounts listed, and totalled, the two column totals must agree
21 Preparation of Trial Balance Selected account balances for Pioneer Advertising Agency Inc. at Oct. 31, 2002Account Debit CreditCash 18,000Accounts Receivable 72,000Advertising Supplies 25,000Prepaid Insurance ,000Office Equipment 50,000Notes Payable ,000Accounts Payable ,000Unearned Service Revenue 12,000Common Shares 100,000Dividends 5,000Service Revenue 100,000Salaries Expense 40,000Rent Expense 9,000TOTALS , ,000Cash18,000Notes Payable50,000Dividends5,000Revenue100,000
22 Adjusting Journal Entries Adjusting entries ensure that:Revenue recognition and the matching principle are followed within the periodReasons for adjusting entries include:To record those events that are not journalized dailyTo record those costs, which expire with time and are therefore not recordedTo record item previously unrecordedAdjusting entries are required each time financial statements are prepared
23 Adjusting Entries: Recognizing Revenue Unearned RevenueRecordingAccrued RevenueRevenues receivedin cashandrecorded as liabilitiesbefore being earnedRevenues earnedbut not yetreceived in cashor recorded
24 Adjusting Entries: Matching Expenses Prepayments forExpensesRecordingAccrued ExpensePrepayments madein cashandrecorded as assetsBefore item is usedExpense incurredbut not yetpaid or recorded
25 Closing EntriesClosing entries are made to close all nominal accounts (revenue and expense accounts) for the yearReal (or Permanent) accounts are not closedDividends account is closed to Retained Earnings account
26 Closing Entries The following closing entries are made: Income Summary Account $$$ Expense Accounts (Individually) $$$Revenue Accounts (Individually) $$$ Income Summary Account $$$Income Summary Account $$$ Retained Earnings $$$Retained Earnings Account $$$ Dividends Account $$$
27 Scheme of Closing Entries Income SummaryRet. EarningsDividendsExpenseRevenue4312
28 Closing Entries: Inventory In a periodic inventory system, closing entries are made to record cost of goods sold and ending inventoryIn a perpetual inventory system, such entries are not requiredSee the scheme of entries (next slide)
29 Closing Entry: Periodic Inventory System Inventory (ending) $Purchases Returns $Cost of Goods Sold $Freight-in $Purchases $Inventory (Begin) $DrCrInventory$To recordending balancePurchases Returns$Freight-In$Purchases$To removebeginning balance
30 Periodic Inventory: Closing Entry Intell Company has the following balances on December 31, The company uses a periodic inventory system.Purchases (gross) $400,000 Purchases Returns $ 27,000 Freight-in, $ 12,000 Opening Inventory $ 62,000Inventory count on December 31, 2000 was $46,000.
31 Periodic Inventory: Closing Entry Account Dr CrCost of Goods Sold $ 369,000Inventory (Ending balance) $ 62,000Purchases Returns $ 27,000Purchases (Gross) $ 400,000Freight-in $ 12,000Inventory (Beginning balance) $ 46,000