CHAPTER 3
The Accounting Information System
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 and the Double-Entry Recording Process
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. As we review the steps in the accounting cycle, the individual
terms will be defined.
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.
The Accounting Cycle
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.
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.
Copyright © 2012 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 14/e Instructor’s Manual
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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.
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 all open accounts in the general ledger and their balances. 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. Estimated items are expenses such as bad debts and depreciation whose
amounts are a function of unknown future events or developments.
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Copyright © 2012 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 14/e Instructor’s Manual
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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.
Closing-Basic Process
14. (L.O. 7) After financial statements have been prepared, nominal (revenues and expenses)
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.
Accounting Cycle Summarized
16. 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).
Copyright © 2012 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 14/e Instructor’s Manual
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Cash Versus Accrual-Basis Accounting
*17. (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
*18. (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
*19. (L.O. 10) Appendix C covers the use of a multicolumn 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.
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Copyright © 2012 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 14/e Instructor’s Manual
(For Instructor Use Only)