Ch03 PDF

CHAPTER 3
THE ACCOUNTING
INFORMATION SYSTEM
Slide
3-1
Slide 2
Accounting Equation for a Corporation
A = L + SE
+ Issued Capital + Retained Earnings
+ Revenues - Expenses - Dividends

+ Gains - Losses
Slide 3
Account Relationships
Debits and credits affect the Statement of
Financial Position Model as follows:
A = L + PIC + RE
Issued Retained
Assets Liabilities Capital Earnings
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
+ - - + - + - +
Revenues Expenses
and Gains and Losses
Dr. Cr. Dr. Cr.
- + + -
During the Accounting Period Slide 4
Source Transaction Record in Post to

documents Analysis Journal Ledger
At the End of the Accounting Period
Financial Adjusted Record & Post Unadjusted

Statements Trial Balance Adjusting Trial Balance
Entries
The
At the End Accounting
of the Year Processing
Close Temporary Post-Closing
Cycle
Accounts Trial Balance
Slide
3-5
Slide
3-6
Slide
3-7
Slide
3-8
2. Posting
1. October 1: Shareholders invest $100,000 cash in an
advertising venture to be known as Pioneer Advertising
Agency Inc.
Cash Share Capital - Ordinary

Debit Credit Debit Credit
Slide LO 4 Record transactions in journals, post to

3-9 ledger accounts, and prepare a trial balance.
2. Posting
2. October 1: Pioneer Advertising purchases office equipment
costing $50,000 by signing a 3-month, 12%, $50,000 note
payable.
Office Equipment Notes Payable


2. Posting
3. October 2: Pioneer Advertising receives a $12,000 cash
advance from KC, a client, for advertising services that are
expected to be completed by December 31.
Illustration 3-11
Cash Unearned Service Revenue

100,000

2. Posting
4. October 3: Pioneer Advertising pays $9,000 office rent, in
cash, for October.
Cash Rent Expense

100,000
12,000

2. Posting
5. October 4: Pioneer Advertising pays $6,000 for a one-year
insurance policy that will expire next year on September 30.
Cash Prepaid Insurance

100,000 9,000
12,000

2. Posting
6. October 5: Pioneer Advertising purchases, for $25,000 on
account, an estimated 3-month supply of advertising
materials from Aero Supply.
Advertising Supplies Accounts Payable


2. Posting
7. October 9: Pioneer Advertising signs a contract with a local
newspaper for advertising inserts (flyers) to be distributed
starting the last Sunday in November. Pioneer will start
work on the content of the flyers in November. Payment of
$7,000 is due following delivery of the Sunday papers
containing the flyers.
Illustration 3-15

2. Posting
8. October 20: Pioneer Advertising’s board of directors
declares and pays a $5,000 cash dividend to shareholders.
Cash Dividends
100,000 9,000
12,000 6,000

2. Posting
9. October 26: Employees are paid every four weeks. The
total payroll is $2,000 per day. The pay period ended on
Friday, October 26, with salaries of $40,000 being paid.
Cash Salaries Expense

100,000 9,000
12,000 6,000
5,000

2. Posting
10. October 31: Pioneer Advertising receives $28,000 in cash
and bills Copa Company $72,000 for advertising services
of $100,000 provided in October.
Cash Accounts Receivable Service Revenue

Debit Credit Debit Credit Debit Credit
100,000 9,000
12,000 6,000
5,000
40,000
Slide
3-18
3. Trial Balance
Illustration 3-19
Trial Balance –
A list of each
account and its
balance; used
to prove
equality of debit
and credit
balances.

4. Adjusting Entries
Makes it possible to:

Report on the statement of financial position the
appropriate assets, liabilities, and equity at the statement
date.
Report on the income statement the proper revenues and
expenses for the period.
 Revenues are recorded in the period in which they are
earned.
 Expenses are recognized in the period in which they are
incurred.
Slide
3-20
LO 5 Explain the reasons for preparing adjusting entries.
Types of Adjusting Entries
Illustration 3-20
Deferrals Accruals
1. Prepaid Expenses. 3. Accrued Revenues.
Expenses paid in cash and Revenues earned but not
recorded as assets before yet received in cash or
they are used or consumed. recorded.
2. Unearned Revenues. 4. Accrued Expenses.

Revenues received in cash Expenses incurred but not
and recorded as liabilities yet paid in cash or recorded.
before they are earned.
Slide
3-21
Adjusting Entries for “Prepaid Expenses”
Supplies. Pioneer purchased advertising supplies costing
$25,000 on October 5. Prepare the journal entry to record the
purchase of the supplies.
Oct. 5 Advertising supplies 25,000

Account Payable 25,000
Advertising Supplies Account Payable

25,000 25,000
Slide
3-22
Supplies. An inventory count at the close of business on
October 31 reveals that $10,000 of the advertising supplies are
still on hand.
Advertising Supplies
Advertising Supplies Expense
25,000
Slide
3-23
Insurance. On Oct. 4th, Pioneer paid $6,000 for a one-year fire
insurance policy, beginning October 1. Show the entry to
record the purchase of the insurance.
Oct. 4 Prepaid insurance 6,000

Cash 6,000
Prepaid Insurance Cash

6,000 6,000
Slide
3-24
Insurance. An analysis of the policy reveals that $500 ($6,000 /
12) of insurance expires each month. Thus, Pioneer makes the
following adjusting entry.
Prepaid Insurance Insurance Expense

6,000
Slide
3-25
Depreciation. Pioneer Advertising estimates depreciation on its
office equipment to be $400 per month. Accordingly, Pioneer
recognizes depreciation for October by the following adjusting
entry.
Depreciation Expense Accumulated Depreciation

Slide
3-26
Adjusting Entries for “Unearned Revenues”
Unearned Revenue. Pioneer Advertising received $12,000 on

October 2 from KC for advertising services expected to be
completed by December 31. Show the journal entry to record
the receipt on Oct. 2nd.
Oct. 2 Cash 12,000
Unearned service revenue 12,000
Cash Unearned Service Revenue

12,000 12,000
Slide
3-27
Adjusting Entries for “Unearned Revenues”
Unearned Revenues. Analysis reveals that Pioneer earned
$4,000 of the advertising services in October. Thus, Pioneer
makes the following adjusting entry.
Service Revenue Unearned Service Revenue

100,000 12,000
Slide
3-28
Adjusting Entries for “Accrued Revenues”
Accrued Revenues. In October Pioneer earned $2,000 for

advertising services that it did not bill to clients before October
31. Thus, Pioneer makes the following adjusting entry.
Accounts Receivable Service Revenue

72,000 100,000
4,000
Slide
3-29
Adjusting Entries for “Accrued Expenses”
Accrued Interest. Pioneer signed a three-month, 12%, note

payable in the amount of $50,000 on October 1. The note
requires interest at an annual rate of 12 percent. Three factors
determine the amount of the interest accumulation:
1 2 3 Illustration 3-29
Slide
3-30
Accrued Interest. Pioneer signed a three-month, 12%, note

payable in the amount of $50,000 on October 1. Prepare the
adjusting entry on Oct. 31 to record the accrual of interest.
Interest Expense Interest Payable

Slide
3-31
Accrued Salaries. At October 31, the salaries for these days

represent an accrued expense and a related liability to Pioneer.
The employees receive total salaries of $10,000 for a five-day
work week, or $2,000 per day.
Slide
3-32
Accrued Salaries. Employees receive total salaries of $10,000

for a five-day work week, or $2,000 per day. Prepare the
adjusting entry on Oct. 31 to record accrual for salaries.
Salaries Expense Salaries Payable

40,000
Slide
3-33
Accrued Salaries. On November 23, Pioneer will again pay total

salaries of $40,000. Prepare the entry to record the payment of
salaries on November 23.
Salaries Expense Salaries Payable

6,000
Slide
3-34
Bad Debts. Assume Pioneer reasonably estimates a bad debt

expense for the month of $1,600. It makes the adjusting entry for
bad debts as follows.
Illustration 3-32
Slide
3-35
5. Adjusted Trial Balance
Illustration 3-33
Shows the balance
of all accounts,
after adjusting
entries, at the end
of the accounting
period.
Slide
3-36
LO 5
Panda Corporation paid cash of Rp12,000 on June 1, 2019 for one year’s rent in
advance and recorded the transaction with a debit to Prepaid Rent. The
December 31, 2019 adjusting entry is
a. debit Prepaid Rent and credit Rent Expense, Rp5,000.
b. debit Prepaid Rent and credit Rent Expense, Rp7,000.
c. debit Rent Expense and credit Prepaid Rent, Rp7,000.
d. debit Prepaid Rent and credit Cash, Rp5,000.
Slide
3-37
Murphy Company sublet a portion of its warehouse for five years at an
annual rental of €30,000, beginning on May 1, 2019. The tenant, Sheri
Charter, paid one year's rent in advance, which Murphy recorded as a
credit to Unearned Rent Revenue. Murphy reports on a calendar-year
basis. The adjustment on December 31, 2019 for Murphy should be
a. No entry
b. Unearned Rent Revenue 10,000
Rent Revenue 10,000
c. Rent Revenue 10,000
Unearned Rent Revenue 10,000
d. Unearned Rent Revenue 20,000

Slide
3-38 Rent Revenue 20,000
Cara, Inc. purchased supplies costing TL2,500 on January 1, 2019 and
recorded the transaction by increasing assets. At the end of the year
TL1,000 of the supplies are still on hand. How will the adjusting entry
impact Cara, Inc.’s statement of financial position at December 31,
2019?
a. Decrease Assets TL1,000.
b. Increase Equity TL1,000.
c. Increase Liabilities TL1,500.
d. Decrease Assets TL1,500.
Slide
3-39
Wave Inn is a resort located in Canada. Wave Inn collects cash when
guest make a reservation. During December 2019, Wave Inn collected
$90,000 of cash and recorded the receipt by recognizing unearned
revenue. By the end of the month Wave Inn had earned one third of this
amount, the other two thirds will be earned during January 2020. The
adjusting entry required at December 31, 2019 would impact the
statement of financial position by
a. Increasing Equity $60,000.
b. Decreasing Liabilities $30,000.
c. Increasing Assets $90,000.
d. Decreasing Equity $30,000

Slide
3-40
6. Preparing Financial Statements
Financial Statements are prepared directly from the

Adjusted Trial Balance.
Retained Statement
Income
Earnings of Financial
Statement
Statement Position
Slide
3-41
LO 6 Prepare financial statement from the adjusted trial balance.
Illustration 3-34
Slide
3-42 LO 6
Illustration 3-35
Slide
3-43 LO 6
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 equity.
Statement of financial position (asset, liability, and

equity) accounts are not closed.
Dividends are closed directly to the Retained

Earnings account.
Slide
3-44
LO 7 Prepare closing entries.
7. Closing Entries
Illustration 3-36
Slide
3-45
LO 7
7. Closing
Entries Illustration 3-37
Slide
3-46
LO 7
Big-Mouth Frog Corporation had revenues of €210,000, expenses of €120,000,
and dividends of €30,000. When Income Summary is closed to Retained
Earnings, the amount of the debit or credit to Retained Earnings is a
a. debit of €60,000.
b. debit of €90,000.
c. credit of €60,000.
d. credit of €90,000.
Slide
3-47
8. Post-Closing Trial Balance
Illustration 3-38
Slide
3-48 LO 7 Prepare closing entries.
Accounting Cycle Summarized
1. Enter the transactions of the period in appropriate journals.

2. Post from the journals to the ledger (or ledgers).
3. Take an unadjusted trial balance (trial balance).
4. Prepare adjusting journal entries and post to the ledger(s).
5. Take a trial balance after adjusting (adjusted trial balance).
6. Prepare the financial statements from the second trial balance.
7. Prepare closing journal entries and post to the ledger(s).
8. Take a trial balance after closing (post-closing trial balance).
Slide
3-49

Ch03 PDF

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ch03 PDF

Uploaded by

Copyright:

Available Formats

CHAPTER 3

Accounting Equation for a Corporation

+ Revenues - Expenses - Dividends

Source Transaction Record in Post to

At the End of the Accounting Period

Financial Adjusted Record & Post Unadjusted

Cash Share Capital - Ordinary

Slide LO 4 Record transactions in journals, post to

Office Equipment Notes Payable

Slide LO 4 Record transactions in journals, post to

Cash Unearned Service Revenue

Slide LO 4 Record transactions in journals, post to

Cash Rent Expense

Slide LO 4 Record transactions in journals, post to

Cash Prepaid Insurance

Slide LO 4 Record transactions in journals, post to

Advertising Supplies Accounts Payable

Slide LO 4 Record transactions in journals, post to

Slide LO 4 Record transactions in journals, post to

Slide LO 4 Record transactions in journals, post to

Cash Salaries Expense

Slide LO 4 Record transactions in journals, post to

Cash Accounts Receivable Service Revenue

Slide LO 4 Record transactions in journals, post to

Makes it possible to:

2. Unearned Revenues. 4. Accrued Expenses.

Oct. 5 Advertising supplies 25,000

Advertising Supplies Account Payable

Oct. 4 Prepaid insurance 6,000

Prepaid Insurance Cash

Prepaid Insurance Insurance Expense

Depreciation Expense Accumulated Depreciation

Unearned Revenue. Pioneer Advertising received $12,000 on

Cash Unearned Service Revenue

Service Revenue Unearned Service Revenue

Accrued Revenues. In October Pioneer earned $2,000 for

Accounts Receivable Service Revenue

Accrued Interest. Pioneer signed a three-month, 12%, note

Accrued Interest. Pioneer signed a three-month, 12%, note

Interest Expense Interest Payable

Accrued Salaries. At October 31, the salaries for these days

Accrued Salaries. Employees receive total salaries of $10,000

Salaries Expense Salaries Payable

Accrued Salaries. On November 23, Pioneer will again pay total

Salaries Expense Salaries Payable

Bad Debts. Assume Pioneer reasonably estimates a bad debt

a. debit Prepaid Rent and credit Rent Expense, Rp5,000.

b. debit Prepaid Rent and credit Rent Expense, Rp7,000.

c. debit Rent Expense and credit Prepaid Rent, Rp7,000.

d. debit Prepaid Rent and credit Cash, Rp5,000.

b. Unearned Rent Revenue 10,000

Rent Revenue 10,000

c. Rent Revenue 10,000

Unearned Rent Revenue 10,000

d. Unearned Rent Revenue 20,000

a. Decrease Assets TL1,000.

b. Increase Equity TL1,000.

c. Increase Liabilities TL1,500.

d. Decrease Assets TL1,500.

a. Increasing Equity $60,000.

b. Decreasing Liabilities $30,000.

c. Increasing Assets $90,000.