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Act 310 Chapter 03
Act 310 Chapter 03
3 Information System
Intermediate Accounting
3-2
Accounting
Accounting Information
Information System
System
3-3
Accounting
Accounting Information
Information System
System
3-4
Accounting
Accounting Information
Information System
System
Basic Terminology
Event Journal
Transaction Posting
Account Trial Balance
Real Account Adjusting Entries
Nominal Account Financial Statements
Ledger Closing Entries
Balance $15,000
Balance $1,000
Assets Chapter
Equity
3-24
Normal Balance
Normal Balance
Chapter
Expense
3-23
Revenue
Chapter
3-25
Normal Balance
Normal Balance
Chapter
3-27 Chapter
3-26
Debit
Credit
Stockholders’
Assets = Liabilities +
Equity
+ 40,000 + 40,000
Stockholders’
Assets = Liabilities +
Equity
- 600 - 600
(expense)
Stockholders’
Assets = Liabilities +
Equity
+ 5,200 + 5,200
Stockholders’
Assets = Liabilities +
Equity
+ 4,000 + 4,000
(revenue)
Stockholders’
Assets = Liabilities +
Equity
- 7,000 - 7,000
Stockholders’
Assets = Liabilities +
Equity
+ 5,000 - 5,000
Stockholders’
Assets = Liabilities +
Equity
- 80,000 + 80,000
Stockholders’
Assets = Liabilities +
Equity
- 16,000
+ 16,000
Note
Notethat
thatthe
theaccounting
accountingequation
equationequality
equalityisis
maintained
maintainedafter
afterrecording
recordingeach
eachtransaction.
transaction.
Proprietorship
Proprietorship or
or Corporation
Corporation
Partnership
Partnership
Common
Common Stock
Stock Retained
Retained Earnings
Earnings
(Investment
(Investment by
by stockholders)
stockholders) (Net
(Net income
income retained
retained in
in business)
business)
Net
Net income
income or
or Net
Net loss
loss
Dividends (Revenues
(Revenues less
less expenses)
expenses)
Income Statement
9.
9. Reversing
Reversing entries
entries 1.
1. Journalization
Journalization
8.
8. Post-closing
Post-closing trail
trail balance
balance 2.
2. Posting
Posting
7.
7. Closing
Closing entries
entries 3.
3. Trial
Trial balance
balance
Work
Work
6.
6. Financial
Financial Statements
Statements Sheet
Sheet
4.
4. Adjustments
Adjustments
5.
5. Adjusted
Adjusted trial
trial balance
balance
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.
Illustration 3-8
Illustration 3-8
3-27 LO 4
2.
2. Posting
Posting
Expanded Example
The purpose of transaction analysis is
(1) to identify the type of account involved, and
(2) to determine whether a debit or a credit is required.
Keep in mind that every journal entry affects one or more of the
following items: assets, liabilities, stockholders’ equity, revenues, or
expense.
Cash Dividends
Debit Credit Debit Credit
100,000 9,000 5,000
12,000 6,000
5,000
Trial Balance –
A list of each
account and its
balance; used
to prove
equality of debit
and credit
balances.
3-39 LO 4
4.
4. Adjusting
Adjusting Entries
Entries
Prepayments 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.
Deferrals are
either
prepaid
expenses
or
unearned
revenues.
Illustration 3-21
Supplies Cash
Debit Credit Debit Credit
25,000 25,000
10,000
Statement
Presentation:
Supplies identifies that
portion of the asset’s
cost that will provide
future economic benefit.
5,500
Statement
Presentation:
Prepaid insurance
identifies that portion of
the asset’s cost that will
provide future economic
benefit.
Statement
Presentation:
Accumulated
Depreciation—is a
contra asset account.
Statement
Presentation:
Unearned service
revenue identifies that
portion of the liability
that has not been
earned.
Accruals are
either
accrued
revenues or
accrued
expenses.
Illustration 3-27
Illustration 3-35
3-63 LO 5
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
1 2 3 Illustration 3-29
Illustration 3-35
3-67 LO 5
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
46,000
Illustration 3-35
3-71 LO 5
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
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
Illustration 3-35
3-73 LO 5
5.
5. Adjusted
Adjusted Trial
Trial Balance
Balance
Shows the
balance of all
accounts, after
adjusting entries,
at the end of the
accounting period.
Illustration 3-33
3-74
6.
6. Preparing
Preparing Financial
Financial Statements
Statements
Financial
FinancialStatements
Statementsare
areprepared
prepareddirectly
directlyfrom
fromthe
the
Adjusted
AdjustedTrial
TrialBalance.
Balance.
Retained
Income Balance
Earnings
Statement Sheet
Statement
Illustration 3-34
3-76 LO 6
6.
6. Preparing
Preparing Financial
Financial Statements
Statements
Illustration 3-35
3-77 LO 6
7.
7. Closing
Closing Entries
Entries
3-80
8.
8. Post-Closing
Post-Closing Trial
Trial Balance
Balance
Illustration 3-38
3-81 LO 7
9.
9. Reversing
Reversing Entries
Entries
Illustration 3-39
3-84 LO 7
Financial
Financial Statements
Statements of
of aa Merchandising
Merchandising Company
Company
Illustration 3-40
3-85 LO 7
Financial
Financial
Statements
Statements of
of aa
Merchandising
Merchandising
Company
Company
Illustration 3-41
3-86 LO 7
RELEVANT FACTS
International companies use the same set of procedures and records
to keep track of transaction data. Thus, the material in Chapter 3 is
the same under both GAAP and IFRS.
Transaction analysis is the same under IFRS and GAAP but, as you
will see in later chapters, different standards sometimes impact how
transactions are recorded.
Rules for accounting for specific events sometimes differ across
countries. For example, European companies rely less on historical
cost and more on fair value than U.S. companies. Despite the
differences, the double-entry accounting system is the basis of
accounting systems worldwide.
3-87
RELEVANT FACTS
Both the IASB and FASB go beyond the basic definitions provided in
this textbook for the key elements of financial statements, that is,
assets, liabilities, equity, revenues, and expenses.
A trial balance under IFRS follows the same format as shown in the
textbook.
Internal controls are a system of checks and balances designed to
prevent and detect fraud and errors. While most companies have
these systems in place, many have never completely documented
them nor had an independent auditor attest to their effectiveness.
Both of these actions are required under SOX. Enhanced internal
control standards apply only to large public companies listed on U.S.
exchanges.
3-88
IFRS SELF-TEST QUESTION
Information in a company’s first IFRS statements must:
a. have a cost that does not exceed the benefits.
b. be transparent.
c. provide a suitable starting point.
d. All the above.
3-89
IFRS SELF-TEST QUESTION
The transition date is the date:
a. when a company no longer reports under its national standards.
b. when the company issues its most recent financial statement
under IFRS.
c. three years prior to the reporting date.
d. None of the above.
3-90
IFRS SELF-TEST QUESTION
When converting to IFRS, a company must:
a. recast previously issued financial statements in accordance
with IFRS.
b. use GAAP in the reporting period but subsequently use IFRS.
c. prepare at least three years of comparative statements.
d. use GAAP in the transition year but IFRS in the reporting year.
3-91