Chapter 3
The Accounting
Information System
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1. Accounting Equation
A = L + SE
 Expanded: A = L + SE + R + G - E - L
 Definitions of elements

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2. Financial Statements
Balance Sheet
 Income Statement
 Statement of Stockholders’ Equity (or
Retained Earnings Statement)
 Cash Flow Statement
 Articulation

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3. Accounts
Definition
 Number needed
 T account
 General ledger

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4. Debits and Credits
Definitions
 Increases and decreases
 Normal balance
 Balance of an account

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5. Journal Entries
Journalizing
 Format
 Posting
 Special journals
 Analyzing transactions
 E 3-1

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6. Trial Balance
Definition
 Purpose
 When prepared?
 Order of accounts

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7. Adjusting Entries


Purpose
Types
◦ Deferrals – cash flow occurs before
revenue/expense recognition
 Expense, Revenue
◦ Accruals – cash flow occurs after
revenue/expense recognition
 Expense, Revenue
◦ Other
 Bad debts, Depreciation, Cost of goods sold
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8. Deferred Expense Adjustments

On January 1 you paid $1,800 for three
months’ rent in advance.
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9. Deferred Revenue Adjustments

On May 1 your tenant pays you $3,600
for four months’ rent in advance.
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10. Accrued Expense Adjustments

On December 31 your employees have
earned wages of $10,000 but they will not
be paid until January 5.
◦ Without reversing
◦ With reversing
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11. Accrued Revenue Adjustments

As of December 31 another of your
apartment building tenants has not paid
his December rent of $700.
◦ Without reversing
◦ With reversing
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12. Reversing Entries
Purpose
 If you choose to use reversing entries,
what adjustments should be reversed?

◦ All accruals
◦ Deferrals initially recorded as a revenue or
expense
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13. Other Adjusting Entries
Bad Debts Adjustment
 Depreciation Expense
 Inventory and cost of good sold
adjustments

◦ Perpetual inventory system
◦ Periodic inventory system
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14. Closing Entries


Purpose
Entries
◦ Using income summary account
 Close temporary accounts with Cr balances to income
summary
 Close temporary accounts with Dr balances to income
summary
 Close income summary to retained earnings
 Close dividends account to retained earnings
◦ Making one entry
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15. Cash Basis of Accounting
Definition
 GAAP requirements
 Conversion to accrual basis

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