CHAPTER 3
The Accounting Information System
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
1, 2
1, 3, 4, 17
1
1.
Transaction identification.
1, 2, 3, 5,
7, 8
2.
Real or nominal accounts.
4, 7
14
3.
Trial balance.
6, 10
2, 3, 4
1, 2, 4, 7, 9
4.
Adjusting entries.
8, 11, 13, 14
3, 4, 5, 6, 7,
8, 9, 10
5, 6, 7, 8,
9, 10, 20
1, 2, 3, 4,
5, 6, 7, 8,
9, 10, 12
5.
Financial statements for
service companies.
10
11, 12, 13, 15,
22, 23
1, 2, 4, 6
6.
Closing.
12
11
13, 14, 16
1, 4, 8, 9,
10, 12
7.
Financial statements for
merchandising
companies.
9
8.
Comprehensive
accounting cycle.
*9.
10
1, 4, 12
Cash vs. Accrual Basis.
15, 16, 17
12
18, 19
*10.
Reversing entries.
18
13
20
*11.
Worksheet.
19
21, 22, 23
11
12
*These topics are dealt with in an Appendix to the Chapter.
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Kieso, Intermediate Accounting, 15/e Instructor’s Manual
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3-1
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Brief
Exercises
Exercises
Problems
1.
Understand basic accounting terminology.
2.
Explain double-entry rules.
3.
Identify steps in accounting cycle.
4.
Record transactions in journals, post to ledger
accounts, and prepare a trial balance.
1, 2, 3, 4,
5, 6, 7
1, 2, 3,
4, 17
1, 4, 9, 10
5.
Explain the reasons for preparing adjusting
entries and identify major types of adjusting
entries.
3, 4, 5, 6, 7,
8, 9, 10
5, 6, 7, 8,
9, 10, 20
2, 3, 4, 5,
6, 7, 8, 9,
10, 12
6.
Prepare financial statements from the adjusted
trail balance.
11, 12
1, 2, 4, 6,
7, 8, 9,
10, 12
7.
Prepare closing entries.
13, 14, 16
1, 4, 9,
10, 12
8.
Prepare financial statements for a
merchandising company.
13, 14, 15
4, 10
*9.
Differentiate the cash basis of accounting from
the accrual basis of accounting.
12
18, 19
11
*10. Identify adjusting entries that may be reversed.
13
20
11
*11. Prepare a 10-column worksheet.
21, 22, 23
12
*These topics are dealt with in an Appendix to the Chapter.
3-2
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ASSIGNMENT CHARACTERISTICS TABLE
Level of
Difficulty
Time
(minutes)
Simple
Simple
Simple
Simple
Moderate
Moderate
Complex
Moderate
Moderate
Complex
Moderate
Moderate
Simple
Moderate
Simple
Moderate
Moderate
15–20
10–15
15–20
10–15
10–15
15–20
15–20
10–15
15–20
25–30
20–25
20–25
10–15
10–15
10–15
10–15
10–15
*E3-18
*E3-19
*E3-20
*E3-21
*E3-22
*E3-23
Transaction analysis–service company.
Corrected trial balance.
Corrected trial balance.
Corrected trial balance.
Adjusting entries.
Adjusting entries.
Analyze adjusted data.
Adjusting entries.
Adjusting entries.
Adjusting entries.
Prepare financial statements.
Prepare financial statements.
Closing entries.
Closing entries.
Missing amounts.
Closing entries for a corporation.
Transactions of a corporation, including investment
and dividend.
Cash to accrual basis.
Cash and accrual basis.
Adjusting and reversing entries.
Worksheet.
Worksheet and balance sheet presentation.
Partial worksheet preparation.
Moderate
Moderate
Complex
Simple
Moderate
Moderate
15–20
10–15
20–25
10–15
20–25
10–15
P3-1
P3-2
P3-3
P3-4
P3-5
P3-6
P3-7
P3-7
P3-8
P3-9
P3-10
*P3-11
*P3-12
Transactions, financial statements–service company.
Adjusting entries and financial statements.
Adjusting entries.
Financial statements, adjusting and closing entries.
Adjusting entries.
Adjusting entries and financial statements.
Adjusting entries and financial statements.
Adjusting entries and financial statements.
Adjusting entries and financial statements.
Adjusting and closing.
Adjusting and closing.
Cash and accrual basis.
Worksheet, balance sheet, adjusting and closing entries.
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Complex
25–35
35–40
25–30
40–50
15–20
25–35
25–35
25–35
25–35
30–40
30–35
35–40
40–50
Item
E3-1
E3-2
E3-3
E3-4
E3-5
E3-6
E3-7
E3-8
E3-9
E3-10
E3-11
E3-12
E3-13
E3-14
E3-15
E3-16
E3-17
Description
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e Instructor’s Manual
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3-3
LEARNING OBJECTIVES
1.
2.
3.
4.
5.
6.
7.
8.
*9.
*10.
*11.
*12.
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.
Explain the reasons for preparing adjusting entries and identify major types of adjusting
entries.
Prepare financial statements from the adjusted trial balance.
Prepare closing entries.
Prepare financial statements for a merchandising company.
Differentiate the cash basis of accounting from the accrual basis of accounting.
Identify adjusting entries that may be reversed.
Prepare a 10-column worksheet.
Compare the accounting information systems under GAAP and IFRS.
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e Instructor’s Manual
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CHAPTER REVIEW
*Note: All asterisked (*) items relate to material contained in the Appendices to the chapter.
1. Chapter 3 presents a concise yet thorough review of the accounting process. The basic
elements of the accounting process are identified and explained, and the way in which
these elements are combined in completing the accounting cycle is described.
Accounting Information System
2. (L.O. 1) The accounting information system collects and processes transaction data and
then disseminates the financial information to interested parties. To understand the
accounting process, one must be aware of the basic terminology employed in the
process. The basic terminology includes: event, transaction, account, real accounts,
nominal accounts, ledger, journal, posting, trial balance, adjusting entries, financial
statements, and closing entries. These terms refer to the various activities that make
up the accounting cycle.
Double-Entry Rules
3. (L.O. 2) Double-entry accounting refers to the process used in recording transactions.
The terms debit and credit are used in the accounting process to indicate the effect
a transaction has on account balances. The debit side of any account is the left side; the
right side is the credit side. Assets and expenses are increased by debits and decreased
by credits. Liabilities, stockholders’ equity, and revenues are decreased by debits and
increased by credits.
4. In a double-entry system, for every debit there must be a credit and vice-versa. This leads
us to the basic accounting equation: Assets = Liabilities + Stockholders’ Equity.
The Accounting Cycle
5. (L.O. 3) The first step in the accounting cycle is analysis of transactions and selected
other events. The purpose of this analysis is to determine which events represent
transactions that should be recorded.
6. Events can be classified as external or internal. External events are those between an
entity and its environment, whereas internal events relate to transactions totally within an
entity.
Journalizing
7. (L.O. 4) Transactions are initially recorded in a journal, sometimes referred to as the
book of original entry. A general journal is merely a chronological listing of transactions
expressed in terms of debits and credits to particular accounts. No distinction is made in
a general journal concerning the type of transaction involved. In addition to a general
journal, specialized journals are used to accumulate transactions possessing common
characteristics.
Copyright © 2013 John Wiley & Sons, Inc.
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3-5
Posting
8. The next step in the accounting cycle involves transferring amounts entered in the journal
to the general ledger. The ledger is a book that usually contains a separate page for each
account. Transferring amounts from a journal to the ledger is called posting. Transactions
recorded in a general journal must be posted individually, whereas entries made in
specialized journals are generally posted by columnar total.
Trial Balance
9. The next step in the accounting cycle is the preparation of a trial balance. A trial balance is
a list of accounts and their balances at a given time. An entity may prepare a trial balance
at any time in the accounting cycle. A trial balance prepared after posting has been
completed serves to check the mechanical accuracy of the posting process and provides
a listing of accounts to be used in preparing financial statements.
Adjusting Entries
10. (L.O. 5) Preparation of adjusting journal entries is the next step in the accounting
cycle. Adjusting entries are entries made at the end of accounting period to bring all
accounts up to date on an accrual accounting basis so that correct financial statements
can be prepared. Adjusting entries are necessary to achieve a proper matching of
revenues and expenses in the determination of net income for the current period and to
achieve an accurate statement of the assets and equities existing at the end of the
period. One common characteristic of adjusting entries is that they affect at least one real
account (asset or liability account) and one nominal account (revenue or expense
account). Adjusting entries can be classified as: (1) deferrals (prepaid expenses,
unearned revenues), or (2) accruals (accrued revenues, accrued expenses).
11. Prepaid expenses and unearned revenues refer to situations where cash has been paid
or received but the corresponding expense or revenue will not be recognized until a future
period. Accrued revenues and accrued expenses are revenues and expenses recognized
in the current period for which the corresponding payment or receipt of cash is to occur in
a future period.
Adjusted Trial Balance
12. After adjusting entries are recorded and posted, an adjusted trial balance is prepared. It
shows the balance of all accounts at the end of the accounting period.
Financial Statements
13. (L.O. 6) From the adjusted trial balance, a company can directly prepare its financial
statements.
3-6
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Closing Process
14. (L.O. 7) After financial statements have been prepared, nominal (revenue and expense)
accounts should be reduced to zero in preparation for recording the transactions of the next
period. This closing process requires recording and posting of closing entries. All nominal
accounts are reduced to zero by closing them through the Income Summary account. The
net balance in the Income Summary account is equal to net income or net loss for the
period. The net income or net loss for the period is transferred to an owners’ equity account
by closing the Income Summary account to Retained Earnings.
Post-Closing Trial Balance
15. A third trial balance may be prepared after the closing entries are recorded and posted.
This post-closing trial balance shows that equal debits and credits have been posted
properly to the Income Summary account.
Reversing Entries
16. Reversing entries are made at the beginning of an accounting period to remove the
effects of some adjusting entries. They are optional.
Accounting Cycle Summarized
17. In summary, the steps in the accounting cycle performed every fiscal period are as follows:
a. Enter the transactions of the period in appropriate journals.
b. Post from the journals to the ledger (or ledgers).
c. Take an unadjusted trial balance (trial balance).
d. Prepare adjusting journal entries and post to the ledger(s).
e. Take a trial balance after adjusting (adjusted trial balance).
f. Prepare the financial statements from the adjusted trial balance.
g. Prepare closing journal entries and post to the ledger(s).
h. Take a trial balance after closing (post-closing trial balance).
i.
Prepare reversing entries (optional) and post to the ledger(s).
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3-7
Financial Statements for a Merchandising Company
18. The income statement classifies amounts into such categories as gross profit, income
from operations, income before taxes, and net income. The statement of retained
earnings shows the changes in retained earnings during the period. A classified balance
sheet classifies assets and liabilities into current and noncurrent.
19. Closing entries of a merchandising company require that the Cost of Goods Sold account
be closed along with the other expense accounts.
*Cash Versus Accrual-Basis Accounting
*20. (L.O. 8) Cash-Basis Accounting Versus Accrual-Basis Accounting is presented in
Appendix A of Chapter 3 for the purpose of demonstrating the difference between cash
basis and accrual-basis accounting. Under the strict cash basis of accounting, revenue
is recognized only when cash is received, and expenses are recorded only when cash is
paid. The accrual basis of accounting recognizes revenue when it is earned and expenses
when incurred without regard to the time of receipt or payment of cash.
*Reversing Entries
*21. (L.O. 9) Appendix B covers preparation and posting of reversing entries, the final step
in the accounting cycle. A reversing entry is made at the beginning of the next accounting
period and is the exact opposite of the adjusting entry made in the previous period. The
recording of reversing entries is an optional step in the accounting cycle that may be
performed at the beginning of the next accounting period. The entries subject to reversal
are the adjusting entries for accrued revenues and accrued expenses recorded at the
close of the previous accounting period.
*Worksheet
*22. (L.O. 10) Appendix C covers the use of a 10-column worksheet, which serves as an aid to
the accountant in adjusting the account balances and preparing the financial statements.
The worksheet provides an orderly format for the accumulation of information necessary for
preparation of financial statements. Use of a worksheet does not replace any financial
statements, nor does it alter any of the steps in the accounting cycle.
3-8
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e Instructor’s Manual
(For Instructor Use Only)
LECTURE OUTLINE
Chapter 3 provides a review of accounting procedures throughout the accounting cycle.
Depending on time constraints and students’ accounting course background, Chapter 3 can be
approached in several different ways: (1) Spend 2-3 class sessions reviewing the chapter and
Appendices 3-A through 3-C. (2) Spend 1-2 class sessions reviewing selected portions of the
chapter and Appendix 3-A. (3) Omit the chapter entirely.
It is assumed that all students have completed at least one course in financial accounting.
Therefore, students should already be familiar with the mechanics of journalizing, posting, and
preparing adjusting entries and financial statements, etc. An important objective of a review of
these procedural details is to prepare students: (1) to progress from mere memorization of
required journal entries to an understanding of the entries’ impact on the financial statements,
and (2) to visualize the effect of errors (both the failure to record transactions and the improper
recording of transactions) on the financial statements.
The following lecture outline can be expanded upon or reduced to suit the needs of your class.
A. (L.O. 1) Basic Terminology. Review the 11 terms defined on text pages 86 and 87.
B. (L.O. 2) Double-Entry Rules.
1.
Review the mechanics of debits and credits.
TEACHING TIP
Use Illustration 3-1 in reviewing double-entry rules for increasing and decreasing accounts.
Debits increase assets and expenses, while credits increase liabilities, stockholders’ equity,
and revenues. The normal balance of an account is the same as the increase side.
Use Illustration 3-2 to discuss and provide examples of transactions affecting stockholders’
equity accounts. Emphasize the difference between nominal and real accounts.
C. (L.O. 3) The Accounting Cycle.
TEACHING TIP
Present an overview of the accounting cycle by using Illustration 3-3.
1.
(L.O. 4) Journalizing.
a. General Journal.
b. Special Journals.
2.
Posting to the Ledger.
3.
Trial Balance.
4.
(L.O. 5) Adjusting Entries.
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3-9
TEACHING TIP
Use Illustration 3-4 in discussing adjusting entries. Provide examples of each type and
discuss the effect on the financial statements when failing to make each type of entry. The
ability to classify adjusting entries into one of the accrual-deferral categories is necessary to
an understanding of reversing entries.
5.
a.
Prepaid expenses.
b.
Unearned revenues.
c.
Accrued revenues.
d.
Accrued expenses.
(L.O. 6) Prepare financial statements.
a.
6.
Financial statements of a service company.
(L.O. 7) Prepare closing entries.
a.
Temporary accounts vs. permanent accounts.
b.
Post-closing trial balance.
D. (L.O. 8) Financial statements of a merchandising company.
a.
Income statement.
b.
Classified balance sheet.
c.
Closing entries.
*E. (L.O. 9) APPENDIX 3-A. Cash basis versus accrual-basis accounting.
1. Strict cash basis. Recognize revenue when cash is received and expenses when cash
is paid.
a.
Used by small businesses and individual taxpayers.
b.
Not acceptable under GAAP.
2. Modified cash basis. Recognize revenue when cash is received. Depreciable assets
are capitalized and depreciated; prepaid assets are capitalized and expensed as used;
and all other expenses are recognized as paid.
3-10
a.
Used by service organizations (CPAs, lawyers, doctors, and architects).
b.
Not acceptable under GAAP if inventory is significant or if average annual gross
receipts are at least $5 million.
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3. Accrual basis. Revenues are recognized when earned and expenses when incurred.
4. Conversion from cash to accrual basis.
5. Weaknesses of the cash basis.
TEACHING TIP
Use Illustration 3-5 to discuss the conversion of the cash basis to the accrual basis.
*F. (L.O. 10) APPENDIX 3-B. Using reversing entries.
TEACHING TIP
Use Illustration 3-6 to compare journal entries made when reversing entries are used
compared to when reversing entries are not used.
Emphasize that reversing entries are optional and that the financial statement amounts are
identical whether or not reversing entries are used.
1.
Use of reversing entries is optional.
2.
In an accounting system which uses reversing entries, the following types of adjusting
entries should be reversed:
a. Adjusting entries for unearned and prepaid items where the original amount was
entered in a revenue or expense account.
b.
Adjusting entries for all accrued items.
*G. (L.O. 11) APPENDIX 3-C. Using a worksheet: The accounting cycle revisited.
1.
The worksheet does not replace the financial statements.
2.
Worksheet columns.
3.
Preparing the worksheet.
4.
Preparing the financial statements from a worksheet.
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3-11
*H. (L.O. 12) IFRS Insights
1. As indicated in this chapter, companies must have an effective accounting system. In
the wake of accounting scandals at U.S. companies like Sunbeam, Rite-Aid, Xerox,
and WorldCom, U.S. lawmakers demanded higher assurance on the quality of
accounting reports. Since the passage of the Sarbanes-Oxley Act of 2002 (SOX),
companies that trade on U.S. exchanges are required to place renewed focus on their
accounting systems to ensure accurate reporting.
2.
Relevant facts
a.
Similarities
(1) International companies use the same set of procedures and records to keep
track of transaction data. Thus, the material in Chapter 3 dealing with the
account, general rules of debit and credit, and steps in the recording
process—the journal, ledger, and chart of accounts—is the same under both
GAAP and IFRS.
(2) 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.
(3) 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.
(4) A trial balance under IFRS follows the same format as shown in the textbook.
As shown in the textbook, dollar signs are typically used only in the trial
balance and the financial statements. The same practice is followed under
IFRS, using the currency of the country in which the reporting company is
headquartered.
b.
Differences
(1) 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.
(2) 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.
3-12
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3. First-time adoption of IFRS.
a. IFRS 1 requires that information in a company’s first IFRS statements (1) be
transparent, (2) provide a suitable starting point, and (3) have a cost that does not
exceed the benefits. As a result, many companies will be going through a substantial
conversion process to switch from their reporting standards to IFRS.
b.
The overriding principle in converting to IFRS is full retrospective application of
IFRS. Retrospective application—recasting prior financial statements on the basis
of IFRS—provides financial statement users with comparable information.
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3-13
ILLUSTRATION 3-1
DOUBLE-ENTRY ACCOUNTING SYSTEM
3-14
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ILLUSTRATION 3-2
TRANSACTIONS AFFECTING OWNERS’ EQUITY ACCOUNTS
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3-15
ILLUSTRATION 3-3
THE ACCOUNTING CYCLE
3-16
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ILLUSTRATION 3-4
TYPES OF ADJUSTING ENTRIES
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3-17
ILLUSTRATION 3-5
CONVERSION FROM CASH BASIS TO ACCRUAL BASIS
3-18
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ILLUSTRATION 3-6
REVERSING ENTRIES
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3-19