Intermediate Accounting, 11th ed.

Kieso, Weygandt, and Warfield

Chapter 3: The Accounting Information Systems

Prepared by Jep Robertson New Mexico State University

Chapter 3: The Accounting Information Systems

After studying this chapter, you should be able to: 1. 2. 3. 4. 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.

Chapter 3: The Accounting Information Systems

5. Explain the reasons for preparing adjusting entries. 6. Prepare closing entries. 7. Explain how inventory accounts are adjusted at year-end. 8. Prepare a 10-column work sheet.

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.

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 debitcredit convention (set of rules) applying to all accounts.

The Double Entry System

The system records the two-sided effect of transactions
Transaction
Bought furniture for cash Took a loan in cash

Two-sided effect
Decrease in one asset Increase in another asset Increase in an asset Increase in a liability

The Double Entry System

Note that the accounting equation equality is maintained after recording each transaction.

The Account and the Debit-Credit Convention

Asset
Debit

Liability
Credit

Equity
Credit

Expense Debit

Revenue Credit

Normal balance in account

Expanded Basic Equation and Debit/Credit Rules and Effects

The Debit-Credit Convention

Balance increases
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

Balance decreases
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

Ownership (Equity) Structure

Investments by Owners Net Income + -

Dividends or Withdrawals
Net Loss

Owners Equity

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

The Accounting Cycle: Steps

Accounting period
Begin
2
Originating Journal Entries

End
Unadjusted Trial Balance

Adjusted Trial Balance

7 5 Adjusting Journal Entries 9

Post-Closing Trial Balance Financial Statements

Post to Ledger Start over

Closing Entries

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.

Adjusting Entries: Recognizing Revenue

Adjusting Unearned Revenue Revenues received in cash and recorded as liabilities Recording Accrued Revenue Revenues earned but not yet recorded in books

Adjusting Entries: Matching Expenses

Adjusting Prepayments for Expenses Recording Accrued Expense

Prepayments made in cash and recorded as assets

Expense incurred but not yet recorded in books

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.

Scheme of Closing Entries

Ret. Earnings

Dividends

Income Summary

4
Expense 1

3 Revenue 2

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.

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.

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.

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.