PPT

Chapter
3-1
Warfield
Weygandt
Kieso
CHAPTER 3
THE ACCOUNTING
INFORMATION SYSTEM
INTERMEDIATE ACCOUNTING
Principles and Analysis
2nd Edition
Chapter
3-2
Learning Objectives
1.
Understand basic accounting terminology.
2. Explain double-entry rules.
3. Identify steps in the accounting cycle.

4. Record transactions in journals, post to ledger
accounts, and prepare a trial balance.
5. Explain the reasons for preparing adjusting entries.

6. Prepare financial statement from the adjusted trial
balance.
7. Prepare closing entries.
8. Explain how to adjust inventory accounts at year-end.
Chapter
3-3
Accounting Information System
Accounting Information
System
Basic terminology
Debits and credits
Basic equation
Financial statements and
ownership structure
The Accounting Cycle

Identification and recording
Journalizing
Posting
Trial balance
Adjusting entries
Adjusted trial balance
Preparing financial
statements
Closing
Post-closing trial balance
Reversing entries
Chapter
3-4
Financial statements for

merchandisers

An Accounting Information System (AIS)
Collects and processes transaction data.
Disseminates information to interested
parties.
Chapter
3-5

Helps management answer such questions as:
How much and what kind of debt is outstanding?
Were sales higher this period than last?
What assets do we have?
What were our cash inflows and outflows?

Did we make a profit last period?
Chapter
3-6
LO 1 Identify the major financial statements and other means of financial reporting..
Basic Terminology
Event
Transaction
Account
Real Account
Nominal Account
Ledger
Chapter
3-7
Journal
Posting
Trial Balance
Adjusting Entries
Financial Statements
Closing Entries
LO 1 Understand basic accounting terminology.
Debits and Credits

An Account shows the effect of transactions on a
given asset, liability, equity, revenue, or expense
account.
Double-entry accounting system (two-sided
effect).
Recording done by debiting at least one account
and crediting another.
DEBITS must equal CREDITS.
Chapter
3-8
LO 2 Explain double-entry rules.
Debits and Credits

Account
An arrangement that shows

the effect of transactions on
an account.
Debit = Left
Credit = Right
An Account can
be illustrated in a
T-Account form.
Chapter
3-9
Account Name
Debit / Dr.
Credit / Cr.
Debits and Credits

If Debit entries are greater than Credit entries,
the account will have a debit balance.
Account Name
Debit / Dr.
Transaction #1
$10,000
Transaction #3
8,000
Balance
Chapter
3-10
Credit / Cr.
$3,000
Transaction #2
$15,000
Debits and Credits

If Debit entries are greater than Credit entries,
the account will have a debit balance.
Account Name
Debit / Dr.
Transaction #1
Balance
Chapter
3-11
$10,000
Credit / Cr.
$3,000
Transaction #2
8,000
Transaction #3
$1,000
Debits and Credits Summary

Liabilities
Normal
Balance
Debit
Normal
Balance
Credit
Assets
Credit / Cr.
Normal Balance
Chapter
3-24
Equity
Credit / Cr.
Debit / Dr.
Debit / Dr.
Debit / Dr.
Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-23
Expense
Debit / Dr.
Revenue
Chapter
3-25
Credit / Cr.
Debit / Dr.
Normal Balance
Chapter
3-27
Chapter
3-12
Credit / Cr.
Normal Balance
Chapter
3-26
Debits and Credits Summary

Balance Sheet
Income Statement
Asset = Liability + Equity
Revenue - Expense =
Debit
Credit
Chapter
3-13
Basic Accounting Equation

Relationship among the assets, liabilities and
stockholders equity of a business:
Illustration 3-3
The equation must be in balance after every

transaction. For every Debit there must be a Credit.
Chapter
3-14
Double-Entry System Exercise

1. Invested $32,000 cash and equipment valued at
$14,000 in the business.
Assets
+ 32,000
Liabilities
Stockholders
Equity
+ 46,000
+ 14,000
Chapter
3-15

2. Paid office rent of $600 for the month.
Assets
- 600
Chapter
3-16
Liabilities
Stockholders
Equity
- 600
(expense)

3. Received $3,200 advance on a management
consulting engagement.
Assets
+ 3,200
Chapter
3-17
Liabilities
Stockholders
Equity
+ 3,200

4. Received cash of $2,300 for services completed
for Shuler Co.
Assets
+ 2,300
Chapter
3-18
Liabilities
Stockholders
Equity
+ 2,300
(revenue)

5. Purchased a computer for $6,100.
Assets
Liabilities
Stockholders
Equity
+ 6,100
- 6,100
Chapter
3-19

6. Paid off liabilities of $7,000.
Assets
- 7,000
Chapter
3-20
Liabilities
Stockholders
Equity
- 7,000

7. Declared a cash dividend of $10,000.
Assets
Liabilities
+ 10,000
Stockholders
Equity
- 10,000
Note that the accounting equation equality is

maintained after recording each transaction.
Chapter
3-21
Ownership Structure
Ownership structure dictates the types of accounts
that are part of the equity section.
Proprietorship
or
Partnership
Chapter
3-22
Corporation
Capital Account
Common Stock
Drawing Account
Additional Paid-in
Capital
Dividends Declared
Retained Earnings
Corporation Ownership Structure

Illustration 3-4
Balance Sheet
Stockholders Equity
Common Stock
(Investment
by stockholders)
Dividends
Retained Earnings
(Net income retained in business)
Net income or Net loss

(Revenues less expenses)
Income Statement
Statement of Retained Earnings

Chapter
3-23
The Accounting Cycle

Illustration 3-6
Transactions
9. Reversing entries
1. Journalization
8. Post-closing trail balance
2. Posting
7. Closing entries
3. Trial balance
6. Financial Statements
Work
Sheet
4. Adjustments
5. Adjusted trial balance

Chapter
3-24
LO 3 Identify steps in the accounting cycle.
Transactions and Events

What to Record?
FASB states, transactions and other events and
circumstances that affect a business enterprise.
Types of Events:
External between a business and its environment.
Internal event occurring entirely within a business.
Chapter
3-25
Review Transactions and Events

External
1.
Internal
Not Recorded
A supplier of a companys raw material is paid

an amount owed on account.
2. A customer pays its open account.

3. A new chief executive officer is hired.
External
External
Not Recorded
4. The biweekly payroll is paid.
External
5. Raw materials are entered into production.
Internal
6. A new advertising agency is hired.

7. The accountant determines the federal income
taxes owed based on the income earned.
Chapter
3-26
Not Recorded
Internal
1. Journalizing
General Journal a chronological record of transactions.
Journal Entries are recorded in the journal.
General Journal
Date
Jan.
Account Title
Ref.
Cash
100
Common stock
10
Building
Chapter
3-27
220
Credit
100,000
300
130
Note payable
Debit
100,000
150,000
150,000
LO 4 Record transactions in journals, post to

ledger accounts, and prepare a trial balance.
2. Posting
Posting the process of transferring amounts from the
journal to the ledger accounts.
General Journal
Date
Jan. 3
Account Title
Cash
GJ1
Ref.
Debit
100
100,000
Common stock
100,000
General Ledger
Cash
Date
Explanation
Jan. 3 Sale of stock
Chapter
3-28
Credit
Ref.
Debit
GJ1
100,000
Acct. No. 100

Credit
Balance
100,000

3. Trial Balance
Trial Balance a list of each account and its balance;
used to prove equality of debit and credit balances.
Acct. No.
100
105
110
130
200
220
300
330
400
500
Chapter
3-29
Account
Cash
Accounts receivable
Inventory
Building
Accounts payable
Note payable
Common stock
Retained earnings
Sales
Cost of goods sold
Debit
Credit
$ 140,000
35,000
30,000
150,000
$
60,000
150,000
100,000
75,000
30,000
$ 385,000
$ 385,000

4. Adjusting Entries
Revenues - recorded in the period in which they
are earned.
Expenses - recognized in the period in which they
are incurred.
Adjusting entries - needed to ensure that the
revenue recognition and matching principles are
followed.
Chapter
3-30
LO 5
Explain the reasons for preparing adjusting entries.
Classes of Adjusting Entries

Illustration 3-20
Prepayments
Accruals
1. Prepaid Expenses.
Expenses paid in cash and
recorded as assets before
they are used or consumed.
3. Accrued Revenues.
Revenues earned but not
yet received in cash or
recorded.
2. Unearned Revenues.
Revenues received in cash
and recorded as liabilities
before they are earned.
4. Accrued Expenses.
Expenses incurred but not
yet paid in cash or
recorded.
Chapter
3-31
LO 5
Adjusting Entries Prepaid Expenses

Payment of cash that is recorded as an asset because
service or benefit will be received in the future.
Cash Payment
BEFORE
Expense Recorded
Prepayments often occur in regard to:

insurance
supplies
advertising
Chapter
3-32
LO 5
rent
maintenance on equipment
fixed assets

Example: On Jan. 1st, Phoenix Corp. paid $12,000 for 12
months of insurance coverage. Show the journal entry to

record the payment on Jan. 1st.
Jan. 1
Prepaid Insurance
12,000
Cash
12,000
Prepaid Insurance
Debit
Credit
12,000
Chapter
3-33
Cash
Debit
Credit
12,000
LO 5

Example: On Jan. 1st, Phoenix Corp. paid $12,000 for 12
months of insurance coverage. Show the adjusting journal

entry required at Jan. 31st.
Jan. 31
Insurance Expense
1,000
Prepaid Insurance
Prepaid Insurance
Debit
Credit
12,000
1,000
1,000
Insurance Expense
Debit
Credit
1,000
11,000
Chapter
3-34
LO 5
Adjusting Entries Unearned Revenues

Receipt of cash that is recorded as a liability because
the revenue has not been earned.
Cash Receipt
BEFORE
Revenue Recorded
Unearned revenues often occur in regard to:

rent
airline tickets
school tuition
Chapter
3-35
LO 5
magazine subscriptions
customer deposits

Example: On Nov. 1st, Phoenix Corp. received $24,000 from
Arcadia High School for 3 months rent in advance. Show
the journal entry to record the receipt on Nov. 1st.
Nov. 1
Cash
24,000
Unearned Rent Revenue

Cash
Debit

Credit
24,000
Chapter
3-36
24,000
Debit
Credit
24,000
LO 5

Example: On Nov. 1st, Phoenix Corp. received $24,000 from
Arcadia High School for 3 months rent in advance. Show
the journal entry to record the receipt on Nov. 1st.
Nov. 30
8,000
Rent Revenue
Rent Revenue
Debit
8,000
Credit
8,000
Debit
8,000
Credit
24,000
16,000
Chapter
3-37
LO 5
Adjusting Entries Accrued Revenues

Revenues earned but not yet received in cash or
recorded.
Adjusting entry results in:
Revenue Recorded
BEFORE
Cash Receipt
Accrued revenues often occur in regard to:

rent
interest
services performed
Chapter
3-38
LO 5

Example: On July 1st, Phoenix Corp. invested $300,000 in
securities that return 5% interest per year. Show the
journal entry to record the investment on July 1st.
July 1
Investments
300,000
Cash
300,000
Investments
Debit
Credit
300,000
Chapter
3-39
Cash
Debit
Credit
300,000
LO 5

Example: On July 1st, Phoenix Corp. invested $300,000 in
securities that return 5% interest per year. Show the
journal entry to record the investment on July 1st.
July 31
Interest Receivable
1,250
Interest Revenue
Interest Receivable
Debit
Credit
1,250
Chapter
3-40
1,250
Interest Revenue
Debit
Credit
1,250
LO 5
Adjusting Entries Accrued Expenses

Expenses incurred but not yet paid in cash or
recorded.
Adjusting entry results in:
Expense Recorded
BEFORE
Cash Payment, if any*
Accrued expenses often occur in regard to:

rent
interest
taxes
Chapter
3-41
salaries
bad debts*
LO 5

Example: On Feb. 2nd, Phoenix Corp. borrowed $200,000 at a
rate of 9% per year. Interest is due on first of each month.
Show the journal entry to record the borrowing on Feb. 2nd.
Feb. 2
Cash
200,000
Notes Payable
Cash
Debit
Notes Payable
Credit
200,000
Chapter
3-42
200,000
Debit
Credit
200,000
LO 5

Example: On Feb. 2nd, Phoenix Corp. borrowed $200,000 at a
rate of 9% per year. Interest is due on first of each month.
Show the adjusting journal entry required on Feb. 28th.
Feb. 28
Interest Expense
1,500
Interest Payable
Interest Expense
Debit
Credit
1,500
Chapter
3-43
1,500
Interest Payable
Debit
Credit
1,500
LO 5
5. Adjusted Trial Balance

Shows the balance of all accounts, after adjusting
entries, at the end of the accounting period.
Chapter
3-44
LO 5
6. Preparing Financial Statements

Financial Statements are prepared directly from the
Adjusted Trial Balance.
Balance
Sheet
Chapter
3-45
Income
Statement
Statement
of
Retained
Earnings
Statement
of Cash
Flows
LO 6 Prepare financial statement from the adjusted trial balance.

Assume the following
Adjusted Trial Balance
Debit
Cash
Accounts receivable
Building
Note payable
Common stock
Retained earnings
Dividends declared
Sales
Interest income
Cost of goods sold
Salary expense
Depreciation expense
$ 140,000
35,000
190,000
Chapter
3-46
Balance Sheet
Credit
$ 150,000
100,000
38,000
10,000
185,000
17,000
47,000
25,000
43,000
$ 490,000
$ 490,000
Balance Sheet
Assets
Cash
Accounts receivable
Building
Total assets
Liabilities
Note payable
Stockholders' equity
Common stock
Retained earnings
Total liab. & equity
$ 140,000
35,000
190,000
$ 365,000
150,000
100,000
115,000
$ 365,000

Debit
Cash
Accounts receivable
Building
Note payable
Common stock
Retained earnings
Dividends declared
Sales
Interest income
Cost of goods sold
Salary expense
$ 140,000
35,000
190,000
Chapter
3-47
Income Statement
Credit
$ 150,000
100,000
38,000
10,000
185,000
17,000
47,000
25,000
43,000
$ 490,000
Income Statement
Revenues:
Sales
Interest income
Total revenue
Expenses:
Cost of goods sold
Salary expense
Total expenses
Net income
$ 185,000
17,000
202,000
47,000
25,000
43,000
115,000
$ 87,000
$ 490,000

Statement of
Retained Earnings

Debit
Cash
Accounts receivable
Building
Note payable
Common stock
Retained earnings
Dividends declared
Sales
Interest income
Cost of goods sold
Salary expense
$ 140,000
35,000
190,000
Chapter
3-48
Credit
$ 150,000
100,000
38,000
Statement of Retained Earnings

Beginning balance
+ Net income
- Dividends
Ending balance
38,000
87,000
(10,000)
115,000
10,000
185,000
17,000
47,000
25,000
43,000
$ 490,000
$ 490,000
7. Closing Entries
To reduce the balance of the income statement
(revenue and expense) accounts to zero.
To transfer net income or net loss to owners

equity.
Balance sheet (asset, liability, and equity)
accounts are not closed.
Dividends are closed directly to the Retained
Earnings account.
Chapter
3-49
LO 7 Prepare closing entries.
7. Closing Entries
Example: Assume the following Adjusted Trial Balance
Acct. No.
100
105
130
220
300
330
380
400
430
500
520
550
Chapter
3-50
Account
Cash
Accounts receivable
Building
Note payable
Common stock
Retained earnings
Dividends declared
Sales
Interest income
Cost of goods sold
Salary expense
Debit
Credit
$ 140,000
35,000
190,000
$ 150,000
100,000
38,000
10,000
185,000
17,000
47,000
25,000
43,000
$ 490,000
$ 490,000
7. Closing Entries
Example: Prepare the Closing journal entry from the
adjusted trial balance on the previous slide.
Chapter
3-51
Sales
Interest Income
Income summary
185,000
17,000
Income Summary
Cost of Goods Sold
Salary Expense
Depreciation Expense
115,000
Income Summary
Retained Earnings
87,000
Retained Earnings
Dividends Declared
10,000
202,000
47,000
25,000
43,000
87,000
10,000
8. Post-Closing Trial Balance

Example continued:
Acct. No.
100
105
130
220
300
330
380
400
430
500
520
550
Chapter
3-52
Account
Cash
Accounts receivable
Building
Note payable
Common stock
Retained earnings
Dividends declared
Sales
Interest income
Cost of goods sold
Salary expense
Debit
Credit
$ 140,000
35,000
190,000
$ 150,000
100,000
115,000
$ 365,000
$ 365,000
9. Reversing Entries
Reversing entries is an optional step that
a company may perform at the beginning
of the next accounting period.
Chapter
3-53
Perpetual Inventory System

Inventory account increased with each purchase.
Inventory account reduced and Cost of Goods Sold
account increased with each sale.
Balance in Inventory account should equal
inventory amount on hand.
No Adjusting Entries should be needed.

Physical inventory performed to confirm balance in
Inventory account.
Chapter
3-54
LO 8 Explain how to adjust inventory accounts at year-end.
Periodic Inventory System

Inventory account remains unchanged during
period.
Purchases account increased with each purchase.
At end of accounting period:
Purchases account closed.
Inventory account adjusted to physical count.
Chapter
3-55
LO 8 Explain how to adjust inventory accounts at year-end.
Copyright
Copyright 2008 John Wiley & Sons, Inc. All rights reserved.
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Chapter
3-56

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Chapter

Understand basic accounting terminology.

2. Explain double-entry rules.

3. Identify steps in the accounting cycle.

5. Explain the reasons for preparing adjusting entries.

Accounting Information System

The Accounting Cycle

Financial statements for

Accounting Information System

Accounting Information System

What were our cash inflows and outflows?

LO 1 Understand basic accounting terminology.

Debits and Credits

LO 2 Explain double-entry rules.

Debits and Credits

An arrangement that shows

LO 2 Explain double-entry rules.

Debits and Credits

LO 2 Explain double-entry rules.

Debits and Credits

LO 2 Explain double-entry rules.

Debits and Credits Summary

LO 2 Explain double-entry rules.

Debits and Credits Summary

Asset = Liability + Equity

LO 2 Explain double-entry rules.

Basic Accounting Equation

The equation must be in balance after every

LO 2 Explain double-entry rules.

Double-Entry System Exercise

LO 2 Explain double-entry rules.

Double-Entry System Exercise

LO 2 Explain double-entry rules.

Double-Entry System Exercise

LO 2 Explain double-entry rules.

Double-Entry System Exercise

LO 2 Explain double-entry rules.

Double-Entry System Exercise

LO 2 Explain double-entry rules.

Double-Entry System Exercise

LO 2 Explain double-entry rules.

Double-Entry System Exercise

Note that the accounting equation equality is

LO 2 Explain double-entry rules.

LO 2 Explain double-entry rules.

Corporation Ownership Structure

(Net income retained in business)

Net income or Net loss

Statement of Retained Earnings

LO 2 Explain double-entry rules.

The Accounting Cycle

8. Post-closing trail balance

5. Adjusted trial balance

LO 3 Identify steps in the accounting cycle.

Transactions and Events

LO 3 Identify steps in the accounting cycle.

Review Transactions and Events

A supplier of a companys raw material is paid

2. A customer pays its open account.

4. The biweekly payroll is paid.

5. Raw materials are entered into production.

6. A new advertising agency is hired.

LO 3 Identify steps in the accounting cycle.