Intermediate Accounting

Volume 1 Twelfth Canadian Edition

Kieso ● Weygandt ● Warfield ● Wiecek ● McConomy
Prepared by Ilene M Gilborn MCE, FCPA (FCMA)

Volume 1—Appendix C

The Accounting Information System

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Appendix C: The Accounting
Information System
After studying this appendix, you should be able to:
1. Understand basic accounting terminology, double-entry rules,
and the accounting equation.
2. Identify the steps in the accounting cycle and the steps in the
recording process.
3. Explain the reasons for, and prepare, adjusting entries.
4. Explain how the type of ownership structure affects the
financial statements.
5. Prepare closing entries and consider other matters relating to
the closing process.
6. Prepare a 10-column work sheet and financial statements.

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The Accounting Information System
Financial
Accounting Statements
Accounting Cycle and the and
System Recording Ownership The Closing Using a Work
Review Process Structure Process Sheet
• Basic • Identifying • Preparing • Work sheet
terminology and recording closing columns
and double- transactions entries • Completing
entry rules and other • Reversing the work
• Accounting events entries sheet
equation • Journalizing • Preparing
• Posting financial
• Preparing the statements
trial balance from a work
• Adjusting sheet
entries

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Basic Terminology and Double-Entry
Rules (1 of 5)
Accounting Information System: The system for collecting and processing
transaction data to make financial information available to interested parties

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Basic Terminology and Double-Entry
Rules (2 of 5)
(1) statement of (2) statement of
comprehensive
The financial position
(balance sheet income (income
financial under ASPE) statement under
ASPE)
statements
(4) statement of
changes in
(3) statement of cash flows shareholders’ equity
(Cash flow statement under (statement of
ASPE) retained earnings
under ASPE)

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Basic Terminology and Double-Entry Rules
(3 of 5)

Debit Credit
Left side Right side
Debits and
Dr. Cr.
Credits
Debiting crediting
Debit balance Credit balance

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Basic Terminology and Double-Entry
Rules (4 of 5)
debits = credits
Double-
Transaction debits = transaction credits
entry
accounting Sum of all debits posted = sum of all credits posted
For every debit → there is a credit

The
Accounting
Equation

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Basic Terminology and Double-Entry
Rules (5 of 5)
The Expanded Accounting Equation

For every transaction, elements in the equation change, but the basic equality of the
two sides remains.

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The Accounting Cycle and the
Recording Process (1 of 17)
The
Accounting
Cycle

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The Accounting Cycle and the Recording
Process (2 of 17)
1. Identification and measurement of transactions and
other events
• Analyze transactions and other events and determine what to record
and which elements are impacted
• Generally agreed that changes in personnel and managerial policies,
and the value of human resources are not recorded
• An item should be recognized in the financial statements if it meets the
definition of an element (such as a liability or asset), and is measurable

• If uncertainty exists, use all available information to make a neutral

decision

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The Accounting Cycle and the
Recording Process (3 of 17)
2. Journalizing
• A journal is a chronological listing of transactions and other events
expressed as debits and credits to particular accounts (journal entries)
• Special journals summarize transactions that have a common
characteristic (cash receipts, sales, purchases, cash payments)
• Items entered in a general journal must be transferred to the ledger

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The Accounting Cycle and the
Recording Process (4 of 17)
3. Posting to the General Ledger
• A ledger is a book (or electronic database) that is used to summarize
and classify journal entries
• Contains all asset, liability, and all equity related accounts (capital,
revenue, and expenses)—each account has a separate page
• Accounts are numbered in order: asset, liability, shareholders’ equity,
revenue and expense accounts

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The Accounting Cycle and the
Recording Process (5 of 17)
4. Preparing the trial balance
• A trial balance is a
list of general ledger
accounts and their
balances at a specific
time, usually at the
end of the
accounting period
• Main purpose is to
prove the equality
of debits and
credits after
posting
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The Accounting Cycle and the
Recording Process (6 of 17)
5. Adjusting Entries
• Adjustments are needed so revenues are recorded in the period in
which they are earned, and expenses are recognized in the period in
which they are incurred—regardless of when payment occurs
(matching)
• Required every time financial statements are prepared
• Types of adjustments:
Prepayments Accruals Estimated items
Prepaid expenses Accrued revenues Bad debts
Deferred revenues Accrued expenses Unrealized gain or loss
Unrealized gain or loss—OCI

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The Accounting Cycle and the Recording
Process (7 of 17)
5. Adjusting Entries—Prepaid Expenses
• Expenses paid in cash and recorded as assets (Prepaid Expense) before
they are used or consumed
• Expire through passage of time (insurance, rent) or by being used or
consumed (supplies)
• Adjusting entry results in a debit to an expense account and a credit to
an asset account

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The Accounting Cycle and the
Recording Process (8 of 17)
5. Adjusting Entries—Unearned Revenues
• Revenues that have been received and recorded as liabilities (Unearned
Revenue) before they are earned (rent, subscriptions, customer deposits)
• At the end of the period, an adjusting entry is made to record the revenue
that has been earned and to show the remaining liability
• Adjusting entry results in a debit to an liability account and a credit to a
revenue account
• Could also record original payment to expense account and adjust it later

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The Accounting Cycle and the
Recording Process (9 of 17)
5. Adjusting Entries—Accrued Revenue
• Revenues that have been earned but not yet received (Accounts
Receivable)
• Could accumulate with the passage of time (interest income) or from
services that have been performed but have not been billed or collected
(commissions)
• Adjusting entry results in a debit to an asset account and a credit to a
revenue account

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The Accounting Cycle and the Recording
Process (10 of 17)
5. Adjusting Entries—Accrued Expenses
• Expenses that have been
incurred but not yet paid or
recorded by the statement date
(interest, rent, taxes, salaries)
• Could accumulate with the
passage of time (interest
expense) or from services that
have been received but are not
billed or collected (utilities)
• Adjusting entry results in a
debit to an expense account
and a credit to a liability
account

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The Accounting Cycle and the Recording
Process (11 of 17)
5. Adjusting Entries—Estimating Items: Bad Debts
• An estimate of bad debts should be recorded as an expense of the period in
which the revenue was earned
• At the end of each period, an estimate is made of the amount of current
period revenue on account that will later be uncollectible
• The estimate is based on the amount of bad debts experienced in past years,
general economic conditions, how long the receivables are past due, and
other factors that indicate the likelihood of collection

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The Accounting Cycle and the
Recording Process (12 of 17)
5. Adjusting Entries—Estimating Items: Unrealized
Holding Gains or Losses
• At the end of each period, an estimate is made of the fair value of
investments held in the fair value through net income (F V-NI) and fair value
through other comprehensive income (FV-OCI) categories
• FV-NI investments could include equity investments or investments in
debt securities
• Any unrealized gain or loss must be recorded in the financial statements

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The Accounting Cycle and the Recording
Process (13 of 17)
6. Adjusted Trial Balance
• After the adjusting entries have been prepared and posted, an adjusted trial balance is
prepared
• The adjusted trial balance greatly helps when preparing the financial statements

7. Statement Preparation
• Ownership structure determines what the equity section of the statement of financial
position looks like:

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The Accounting Cycle and the Recording
Process (14 of 17)
7. Statement Preparation
• The adjusted trial balance provides the basis for the financial statements

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The Accounting Cycle and the Recording
Process (15 of 17)
8. The Closing Process
• Closing entries are made to close all nominal accounts (revenue and
expense accounts) for the year
• The balances in these accounts are transferred to a clearing account (Income
Summary)
• The balance in Income Summary represents net income or net loss for the
period and is transferred to an equity account
• The Dividends account is closed to retained earnings
• If there is Other Comprehensive Income, it is closed out to Accumulated
Other Comprehensive Income
• In a periodic inventory system, closing entries are made to record cost of
goods sold and ending inventory

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The Accounting Cycle and the
Recording Process (16 of 17)
8. Closing: Journal Entries

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The Accounting Cycle and the
Recording Process (17 of 17)
9. Post-Closing Trial Balance
• A third trial balance taken after the closing entries have been posted
• Shows that equal debits and credits have been posted to the Income
Summary account
• Consists only of asset, liability and shareholders’ equity accounts

10.Reversing Entries
• Some companies will reverse the adjusting entries at the beginning of the
next period
• Makes it easier to record transactions in the next accounting period
• Usually used for accrued revenues and accrued expenses
• Adds an extra step to the process—many companies don’t use them
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Using a Work Sheet (1 of 2)
• A work sheet is a spreadsheet that managers use to adjust the account
balances and prepare financial statements
• A work sheet has columns for:
o The first trial balance—obtained from the ledger balances
o Adjustments—enter adjustments, balance and then extend to the
adjusted trial balance
o An adjusted trial balance—balance in all accounts at the end of the
accounting period
o The statement of comprehensive income—included items are extended
from the adjusted trial balance
o The statement of financial position —included items are extended from
the adjusted trial balance

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Using a Work Sheet (2 of 2)
• The columns are totalled and balanced once the items for those
columns have been entered
• On the statement of comprehensive income, the amount that is
needed in order to balance the debit and credit columns is the total of
the pre-tax income or loss for the period and OCI
• Income tax is calculated and entered into the statement of
comprehensive income as Income Tax Expense and Income Tax
Payable
• Comprehensive income is extended into the statement of financial
position column
• The work sheet gives the information needed to prepare financial
statements without referring to the ledger or other records:
statement of comprehensive income, statement of changes in
shareholders’ equity, and statement of financial position

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Copyright
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