CHAPTER
3
The Accounting
Information
System
……..…………………………………………………………...
Collecting
Preparing
Processing
Data
Financial Reports
Basic Equation
Assets
=
Liabilities
+
Stockholders’
Equity
+ Common Stock
+ Retained Earnings
- Dividends
+ Revenues
- Expenses
THE ACCOUNTING CYCLE
Record transactions
in journals
Post in ledgers
Reversing entries
(optional)
Trial balance
Close temporary
accounts
Record adjustments
Financial statements
Recording Transactions
Brief Exercise 3-1, p.105
May 1
Invested $3,000 cash in common stock of
welding company.
May 3
Bought equipment on account for $1,100.
May 13 Paid $400 to landlord for May rent.
May 21 Billed Noble Corp. $500 for welding work
done.
Adjusting Entries
Adjust Prepaid Expenses
Prepaid insurance (for 2 years)
carried-over from the prior year.
Prepaid Insurance
Beg. 2,000
Adjust for the amount of prepaid insurance used
during the year.
Adjust Unearned Revenue
Customers prepay for subscriptions throughout
the year.
Unearned Subscr Rev
Jan
5,600

Dec 8,700
Adjust for the subscriptions provided during the year.
Accrue Expenses
Salaries are paid on a biweekly basis.
Salary Expense
1/11
31,500

12/27 36,000
Accrue $7200 salary expense incurred but not yet paid
at the end of December.
Accrue Revenues
Apartments are leased to tenants who pay at the end of
the month.
Rental Income
Jan. 25,700

Dec. 31,200
One tenant forgets to pay rent of $500 at end
of December.
Record Depreciation
On October 1 bought a truck for $28,000 on account.
The truck has a 4-year life and the firm expects to use
the truck evenly throughout its life.
Automobiles
To record depreciation on 12/31.
Closing Entries
Salary Expense
860,000
Dividends
120,000
Insurance Expense
Income Summary
3,400
Depreciation Exp.
Retained Earnings
81,200
Subscription Rev.
1,130,000