Intermediate
Financial Accounting I
The Accounting Information
System
Objectives of the Chapter
I. Learning the accounting process in
preparing financial statements.
II. Introduce the accrual accounting concept
and the adjusting entries.
III.Introduce the worksheet (including the
trial balance, the adjustments and the
adjusted trial balance, the I/S and the
B/S columns), the preparation of financial
statements from the worksheet and the
closing entries.
Accounting Cycle
2
I. Accounting Process
1.Identification and measurement of
business transactions and other events;
2. Journalization (general or special journals);
3. Post (to ledger accounts and subsidiaries);
4. Prepare worksheet (including unadjusted
T/B, adjustments; adjusted T/B, I/S, B/S…);
5. Prepare financial statements;
Accounting Cycle
3
Accounting Process (contd.)
6. Prepare and post adjusting entries;
7. Prepare and post closing entries;
8. Prepare post-closing trial balance
(T/B) (optional);
9. Prepare and post reversing entries.
Accounting Cycle
4
The Accounting Cycle (Source: Kieso, et al., 14th E, Illustration 3-6)
Accounting Cycle
5
1. Identifying Accounting Events


External Events: Purchase of assets,
sales of goods, loss from flood, …
Internal Events: Consumption of
prepaid rent, use of depreciable assets,
transfer of raw material to W-I-P, …
Accounting Cycle
6
1. Identifying Accounting Events
(contd.)

Events are recognized as accounting
events and would be recorded if:
a. have occurred;
b. affect the financial position of the
business;
c. can be measured in monetary terms
(measurable);
d. relevant, reliable.
Accounting Cycle
7
Examples
1. Two months of prepaid insurance expired.
2. Purchase of a machine.
3. Sales of merchandise.
4. Changes in managerial policies.
5. Value of human resources.
6. The development of a new product.
7. Sign a contract to buy a building.
8. Investment from owners.
9. Distribution to owners.
Accounting Cycle
8
2. Journalization

Introduction of the Double-Entry
System and Journal Entries:
A. Double-entry system;
B. T-account;
C. Increases and decrease in the
accounts.
Accounting Cycle
9
A. Double-Entry System


Each transaction affects at least two
accounts and the balance of the
accounting equation must be maintained.
Example: Purchases inventory and
charges to accounts payable.
Assets =
Liabilities
+ Equity
Inventory Accounts Payable 
+
+
Accounting Cycle
10
A. Double-Entry System (contd.)
1
2
3
4
5
6
7
8
9
10
Assets = Liabilities + Equity Revenues Expenses
+ +
+
+
+
+
+
-
Accounting Cycle
11
B. Introduction of the T-account
Inventory
Debit
Credit
Accounts Payable
Debit
Credit
Accounting Cycle
12
C. Increases and Decreases in the
Accounts
A
L
E

Debit

Credit

Credit

Debit
 Debit

Credit
 Debit

Debit
Revenue
Expense
Accounting Cycle
 Credit
 Credit
13
Examples of the Journal Entries:
Page 1
Journal
Date
Accounts and
Ref. Debit Credit
Explanation
Apr. 2 Cash…………………
50,000
Common stock….
50,000
Issued common
stock to owners
Apr. 3 Land………………...
40,000
Cash……………..
40,000
Paid Cash for Land
Accounting Cycle
14
Special Journals
(Cash Disbursements and Receipts)
Cash Disbursements Journal
Check
Date
No.
9
9
4
7
9 16
9 22
9 28
246
247
248
249
250
Payee
G. Winkle
Stephens
Wholesale
Harris
Insurance
City of
Norwich
Burkett
Supply
Cash
Cr.
A/P
Dr.
80.00
Selling &
Other Accounts
Administrative Exp. Dr. Acct Title Ref. Debit Credit
80.00
163.00 163.00
Prepaid
Insurance
96.00
62.00
96.00
62.00
105.00
506.00 225.00
105.00
185.00
Accounting Cycle
96.00
15
Special Journals
(Cash Disbursements and Receipts)
Cash Receipts Journal
Date
9
Explanation
1 Collection from R.
Wood on Account
5 Sale of Merchandise
to Customers
9 12 Collection from J.
Smith on Account
9 19 Receipt of Dividend
from Ford Motor Co.
Cash
Dr.
150.00
A/R Cr.
Sales
Cr.
Other Accounts
Acct Title Ref. Debit Credit
150.00
9
9 25 Sale of Merchandise
to Customers
250.00
75.00
250.00
75.00
Dividend
Rev.
120.00
400.00
400.00
995.00 225.00 650.00
Accounting Cycle
120.00
120.00
16
3. Posting
(to ledger accounts and subsidiaries)
Account: Cash
Account No. 101
Balance
Date Item Jrnl. Ref. Debit Credit Debit Credit
Apr. 2
J.1
50,000
50,000
3
J.1
40,000 10,000

The Ledger: all individual accounts
(assets, liability, and stockholder’s equity
accounts) combined make up the ledger.
Accounting Cycle
17
Another Example of Posting (Kieso, et al., 14th edition,
Illustration 3-8)
Accounting Cycle
18
General Ledger (T-Account Format)
Accounts Receivable
20x1
Mar 31 Balance 672.00 Apr 30 CR8
Apr 30 S6
2,662.00
Accounting Cycle
No. 3
1,136.00
19
Examples of Posting using T-accounts (Kieso, et
al., 14th edition, Illustrations 3-9 and 3-10)
Accounting Cycle
20
Subsidiary Ledger
Accounts Receivable
SUBSIDIARY LEDGER
Ellen Odom
202
520
910
Nita Doty
204
20x1
Mar 31 Balance
Apr 2 S6
20x1
Mar 31 Balance
Apr 6 S6
20x1
Mar 31 Balance
Apr 4 S6
20x1
Apr 1
S6
30 Apr 18 CR8
750
Joe Leo
750
122 Apr 16 CR8
816
Rex Road
200
186 Apr 7
186
Accounting Cycle
CR8
206
208
21
Examples of Controlling Accounts
General Ledger
Controlling Acct.
Accounts
Receivable
Accounts Payable
Capital Stock
Notes Receivable
Type of Subsidiary Record
Individual customers’ ledger
accounts, or a file of uncollected
sales invoices.
Individual ledger accounts, or a
file of unpaid purchase invoices.
A record of the stock certificates
and number of shares held by
each shareholder.
A file of uncollected N/R, or a
“register” or book in which the
notes are listed.
Accounting Cycle
22
Examples of Controlling Accounts
(contd.)
General Ledger
Controlling Acct.
Raw Material on
Hand
Equipment
Land
Type of Subsidiary Record
Separate record card for each
item of material used in
manufacturing.
Separate record card for each
item of equipment. This is often
known as a plant ledger.
Separate record card for each
parcel of land owned.
Accounting Cycle
23
The Flows of Accounting Data
Transaction
Occurs
Source
Documen
ts
Prepared
Amounts Posted
to Ledger
Transaction
Analysis
Takes
Place
Transaction
Entered in
Journal
Accounting Cycle
24
XYZ Corp.
Trail Balance
4/30/20x1
Cash
Accounts receivable
Office supplies
Land
Accounts payable
Common Stock
Dividends
Service revenue
Rent Expense
Salary Expense
Utilities Expense
Total
33,300
2,000
500
18,000
100
50,000
2,100
8,500
1,100
1,200
400
58,600 58,600
.
.
Accounting Cycle
25
II. Accrual Accounting
 The time-period concept, the
revenue recognition and matching
principles.
 Accrual versus cash basis
accounting.
 Adjusting entries.
Accounting Cycle
26
The Time-Period Concept, the Revenue
Recognition & Matching Principles


The time-period concept:
Income and financial position of a
business are reported periodically, not
until the end of life of a business.
Accounting Cycle
27
Revenue Recognition Principle (SFAS
No. 5) (-An Accrual Basis)





Revenue is recognized when it is earned and
realized or realizable (SFAC 5, par. 83).
Earned : the entity has substantially
accomplished what it must do to be entitled to
compensation.
Realized: goods are exchanged for cash or
claims.
Realizable: assets received as compensation
are readily convertible into cash or claims to
cash.
In general, these conditions are met at time of sale (delivery)
or when services are rendered regardless whether cash is
collected or not (SFAC Income
5, par.
84). And Profit Analysis
Measurement
28
Revenue Recognition Principle
Other conditions for revenue
recognition (Staff Accounting Bulletin
No. 101(1999)):
 Persuasive evidence of a sale.
 Price is fixed or determinable.
 Collectibility is reasonably assured.
 Delivery has occurred or services
have been rendered.

Income Measurement And Profit Analysis
29
The Expense Recognition (Matching)
Principle


If revenues are recognized in a period, all
related expenses should be recognized in
the same period regardless whether
expenses are paid or not.
The related expenses include traceable
costs (e.g. product costs), period costs, (e.g.
interest and rent expenses) and estimated
expenses (e.g. depreciation expense and
bad debt expense).
Accrual Accounting and the Financial Statements
30
Accrual vs. Cash Basis Accounting
Accrual-basis accounting:
Revenues are recognized based on revenue
recognition principle (i.e., recognized when
realized and earned regardless whether
cash is collected or not).
Expenses are recognized based on
matching principle (i.e., recognized when
incur regardless whether they are paid or
not).
Note: revenue and expense recognize before
cash settlementAccrual
. Accounting and the Financial Statements
31

Accrual vs. Cash Basis Accounting
(contd.)

Cash-basis accounting:
The accountant does not record a
transaction until cash is received or
paid.
Cash-basis accounting is NOT
acceptable for financial reporting.
Accrual Accounting and the Financial Statements
32
Adjusting Entries


Due to the periodicity concept, financial
reports are prepared periodically.
Based on revenue recognition principle,
adjusting entries are prepared at the
end of a period to recognize revenues
earned during the period but not yet
recorded (i.e., accrued revenues).
Accrual Accounting and the Financial Statements
33
Adjusting Entries (contd.)

Based on the matching principle, the
accrued expenses (i.e., expenses
incurred but not yet paid/recorded) and
estimated expenses (i.e., depreciation
expense and bad debt expense) are
recorded at the end of a period.
Accrual Accounting and the Financial Statements
34
Types of Adjusting Entries (Kieso, et al.
textbook, 14th edition, illustration 3-20)
Accounting Cycle
35
Adjusting Entries and Reversing Entries
Types of
Adjusting Entries
Can or Cannot Have
Reversing Entries
Can
B/S approach: Cannot
I/S approach: Can
3. Estimated Expenses Cannot (except for I/T
Exp.)
1. Accruals
2. Deferrals
Accounting Cycle
36
Adjusting Entries for Accruals (Kieso, et al.
14th edition, illustration 3-27)
Accounting Cycle
37
1. Accruals: Unrecorded Revenue or
Expenses
a. Accrued expense:
A one-year note payable was issued on
11/1/x1 to purchase an equipment. The face
amount of the note is $2,400. The annual
interest rate is 10% and interests are paid
on 4/30/x2 and 11/1/x2.
11/1/x1
Equipment
2,400
Notes Payable
2,400

Adj. Entry
12/31/x1
Accounting Cycle
38
Accruals: (contd.)
b. Accrued revenue:
A
one year note was received from a
credit sale with a face amount of $3,000
and an annual interest rate of 12% on
9/1/x1. Interests are received on 3/1/x2
and 9/1/x2.
9/1/x1
N/R
3,000
Sales
3,000
Adj. Entry
12/31/x1
Accounting Cycle
39
Adjusting Entries for Deferrals (Kieso, et al.
textbook, 14th edition, illustration 3-21)
Accounting Cycle
40
2. Deferrals: Postponing the Recognition
of Revenues or Expenses
a. Unearned revenues
 Receiving $2,400 for one-year
advanced rent payment from tenant
on 12/1/x1
(B/S Approach)
(I/S Approach)
12/1/x1
Cash
2400
Unearned Rent
2400
12/31/x1
Unearned Rent 200
Rent Revenue
200
12/1/x1
Cash
2400
Rent Revenue
2400
12/31/x1
Rent Revenue 2200
Unearned Rent
2200
Accounting Cycle
41
Deferrals (contd.)
b. Prepaid expenses
 Prepaid 12 month insurance of
$1,200 on 11/1/x1
(B/S Approach)
(I/S Approach)
11/1/x1
Prepaid Ins. 1200
Cash
1200
12/31/x1
Ins. Exp.
200
Prepaid Ins.
200
11/1/x1
Ins. Exp.
1200
Cash
1200
12/31/x1
Prepaid Ins. 1000
Ins. Exp.
1000
Accounting Cycle
42
3. Estimated Expenses
(no reversing entry except for I/T)
Examples - Depreciation Exp.:
12/31 Depreciation Exp.
Accumulated Depr.
XXX
Bad Debt Exp.:
12/31 B/D Exp.
Allowance for B/D
XXX
Income Tax
12/31 Income Tax Exp.
Income Tax Payable
XXX
Accounting Cycle
XXX
XXX
XXX
43
III. Worksheet Example
A. The adjusting entries information for
the worksheet example.
B. Preparing financial statements from a
worksheet.
C. Closing and reversing entries.
Accounting Cycle
44
A. Adjusting Entries Information

The following items are the adjusting entries
information for the worksheet example
(source: Kieso, et al. textbook):
(a) Furniture and equipment is depreciated at
the rate of 10% per year based on original
cost of $67,000.
Depreciation Expense
--Furniture and Equipment
Accumulated Depreciation
--Furniture and Equipment
Accounting Cycle
6,700
6,700
45
A. Adjusting Entries Information
(contd.)
(b) Estimated bad debts, one-quarter of 1%
of sales ($400,000).
Bad Debts Expense
1,000
Allowance
for Doubtful Accounts
1,000
(c) Insurance expired during the year, $360.
Insurance Expense
Prepaid Insurance
Accounting Cycle
360
360
46
A. Adjusting Entries Information
(contd.)
(d) Interest accrued on notes receivable
as of December 31, $800.
Interest Receivable
Interest Revenue
800
800
(e) The Rent Expense account contains
$500 rent paid in advance, which is
applicable to next year.
Prepaid Rent Expense
Rent Expense
Accounting Cycle
500
500
47
A. Adjusting Entries Information
(contd.)
(f) Property taxes accrued December 31,
$2,000.
Property Tax Expense
2,000
Property Tax Payable
2,000
(g) Income taxes accrued December 31, $3,440
Income tax expense
Income tax payable
Accounting Cycle
3,440
3,440
48
Uptown Cabinet Corp.(source: Kieso, et al. Illu. 3C-1)
TEN-COLUMN WORK SHEET (with Periodic Inventory System)
For the Year Ended December 31, 2010
Accounts
Cash
N/R
A/R
Allow. for double
Accounts
Inventory, 1/1/12
Prepaid insurance
Furniture & equip.
Accu. Depr. -furniture & equip.
Trial Balance
Dr. Cr.
1200
16000
41000
Adjusted
Adjustments
Dr.
Cr.
1200
Trial Balance
Dr.
Cr.
16000
41000
2000
36000
900
67000
(b) 1000
12000
(a)6700
(c) 360
3000
36000
540
67000
Accounting Cycle
18700
49
TEN-COLUMN WORK SHEET (contd.)
Accounts
N/P
A/P
B/P
Common stock
R/E, 1/1/12
Sales
Purchases
Sales Salaries exp.
Advertising exp.
Traveling exp.
Office Sal. exp.
T&T exp.
Trial Balance Adjustments
Adj. T-B
Dr. Cr.
Dr.
Cr.
Dr.
Cr.
20000
20000
13500
13500
30000
30000
50000
50000
14200
14200
400000
400000
320000
320000
20000
20000
2200
2200
8000
8000
19000
19000
600
600
Accounting Cycle
50
TEN-COLUMN WORK SHEET (contd.)
Accounts
Rent exp.
Property tax exp.
Interest exp.
Totals
Dep. Exp-fur. & equ.
Bad debts exp.
Insurance exp.
Int. receivable
Int. revenue
Prepaid rent exp.
Property tax pay.
Totals
Trial Balance Adjustments
Adj. T-B
Dr. Cr.
Dr.
Cr.
Dr.
Cr.
4800
(e) 500 4300
3300
(f) 2000
5300
1700
1700
541700541700
(a) 6700
6700
(b) 1000
1000
(c) 360
360
(d) 800
800
(d) 800
800
(e) 500
500
(f) 2000
2000
2000
11360Accounting
11360
552200 552200
Cycle
51
TEN-COLUMN WORK SHEET (contd.)
Accounts
Inv., 12/31/12
Totals
Income bef. I/T
Totals
Income bef. I/T
Income tax exp.
Income tax payable
Net income
Totals
Trial Balance Adjustments
Dr. Cr.
Dr.
Cr.
Adj. T-B
Dr.
Cr.
(g) 3440
(g) 3440
Accounting Cycle
52
Uptown Cabinet Corp.
TEN-COLUMN WORK SHEET (contd.)
Accounts
Cash
N/R
A/R
Allow. for double
Accounts
Inventory, 1/1/12
Prepaid insurance
Furniture & equip.
Accu. Depr. -furniture & equip.
Adjusted
Trial Balance
Dr. Cr.
1200
16000
41000
3000
36000
540
67000
Income
Statement Balance Sheet
Dr.
Cr.
Dr.
Cr.
1200
16000
41000
3000
36000
540
67000
18700
18700
Accounting Cycle
53
TEN-COLUMN WORK SHEET (contd.)
Accounts
N/P
A/P
B/P
Common stock
R/E, 1/1/12
Sales
Purchases
Sales Salaries exp.
Advertising exp.
Traveling exp.
Office Sal. exp.
T&T exp.
Adj. T-B
I/S
Dr. Cr.
Dr.
Cr.
20000
13500
30000
50000
14200
400000
400000
320000
320000
20000
20000
2200
2200
8000
8000
19000
19000
600
600
Accounting Cycle
Dr.
20000
13500
30000
50000
14200
B/S
Cr
54
TEN-COLUMN WORK SHEET (contd.)
Accounts
Rent exp.
Property tax exp.
Interest exp.
Totals
Dep. Exp-fur. & equ.
Bad debts exp.
Insurance exp.
Int. receivable
Int. revenue
Prepaid rent exp.
Property tax pay.
Totals
Adj. T-B
I/S
Dr. Cr.
Dr.
Cr.
4300
4300
5300
5300
1700 1700
6700
1000
360
800
800
500
B/S
Dr.
Cr.
6700
1000
360
800
800
500
2000
552200552200
Accounting Cycle
2000
55
TEN-COLUMN WORK SHEET (contd.)
Accounts
Inv., 12/31/12
Totals
Income bef. I/T
Totals
Income bef. I/T
Income tax exp.
Income tax payable
Net income
Totals
Adj. T-B
Dr. Cr.
I/S
Dr.
Cr.
40000 40000
425160 440800
15640
440800 440800
15640
3440
Dr.
B/S
Cr
3440
12200
12200
15640 15640 167040 167040
Accounting Cycle
56
B. Preparing Financial Statements
from a Worksheet
(Source: Illustration 3-39 of Kieso, et al. 14th edition)
Uptown Cabinet Corp.
INCOME STATEMENT
For the Year Ended December 31, 2012
Net sales
Cost of goods sold
Inventory, 1/1/x2
Purchases
Cost of goods avail. for sale
Subtract inv., 12/31/x2
Cost of goods sold
Gross profit on sales
Accounting Cycle
$400,000
$ 36,000
320,000
356,000
40,000
316,000
84,000
57
INCOME STATEMENT (contd.)
Selling expenses
Sales salaries exp.
20,000
Adv. exp.
2,200
Traveling exp.
8,000
Total selling exp.
30,200
Administrative exp.
Office Salaries exp.
$19,000
T&T exp.
600
Rent exp.
4,300
Property tax exp.
5,300
Depr. exp.-fur. & equip.
6,700
Bad debts exp.
1,000
Insurance exp.
360
Total administrative exp.
37,260
Accounting Cycle
58
INCOME STATEMENT (contd.)
Total selling & admin. exp.
Income from operations
Other revenues and gains
Interest revenue
Other exp. And losses
Interest exp.
Income bef. income taxes
Income taxes
Net income
Earnings per share
67,460
16,540
800
17,340
1,700
15,640
3,440
$12,200
$1.22
Accounting Cycle
59
B. Preparing Financial Statements from
a Worksheet (contd.)
(Source: Illustration 3-40 of KWW textbook, 14th edition)
Uptown Cabinet Corp.
STATEMENT OF RETAINED EARNINGS
For the Year Ended December 31, 2012
Retained earnings, Jan. 1, 2012
$14,200
Add net income for 20x12
12,200
Retained earnings, Dec. 31, 2012
$26,400
Accounting Cycle
60
B. Preparing Financial Statements from
a Worksheet (contd.)
(Source: Illustration 3-41 of KWW textbook, 14th edition)
Uptown Cabinet Corp.
BALANCE SHEET
As of December 31, 2012
Assets
Current assets
Cash
$ 1,200
Notes receivable
$16,000
Accounts receivable
41,000
Interest receivable
800 $57,800
Less allow. for doub. acct.
3,000 54,800
Merchandise inv. on hand
40,000
Accounting Cycle
61
BALANCE SHEET (contd.)
Prepaid insurance
Prepaid rent
Total current assets
Property, plant & equip.
Furniture & equipment
Less accu. Depr.
Total property, plant & equip.
Total assets
540
500
97,040
67,000
18,700
48,300
$145,340
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable
$ 20,000
Accounts payable
13,500
Property tax payable
2,000
Income taxes payable
3,440
Accounting Cycle
62
BALANCE SHEET (contd.)
Total current liabilities
38,940
Long-term liabilities
B/P, due June 30, 20x7
30,000
Total liabilities
68,940
Stockholders’ equity
Common stock,
$5.00 par value,
issued & outstanding,
10,000 shares
$50,000
Retained earnings
26,400
Total stockholders’ equity
76,400
Total liabilities & stockholders’ equity
$145,340
Accounting Cycle
63
C. Closing and Reversing Entries
Closing Entries
(Source: p. 98 of Kieso, et al., textbook, 13th edition)
General Journal
December 31, 2012
Inventory (12/31)
40,000
Cost of Goods Sold
316,000
Inventory (1/1)
36,000
Purchases
320,000
(To record ending inv. bal. & to determine CGS)
Interest Revenue
800
Sales
400,000
CGS
316,000
Sales Sal. Exp.
20,000
Adv. Exp.
2,200
Accounting Cycle
64
Closing Entries (contd.)
Traveling Exp.
8,000
Office Salaries Exp.
19,000
T&T Exp.
600
Rent Exp.
4,300
Property Tax Exp.
5,300
Depr. Exp. - Fur. & Equip.
6,700
Bad Debts Exp.
1,000
Insurance Exp.
360
Interest Exp.
1,700
Income Tax Exp.
3,440
Income Summary
12,200
(To close revenues and expenses to Income Summary)
Income Summary
12,200
Retained Earnings
12,200
(To close Income Summary to Retained Earnings)
Accounting Cycle
65
C. Closing and Reversing Entries
Reversing Entries (Optional)
January 1, 2012
(D)
Interest Revenue
Interest Receivable
800
800
(E)
Rent Expense
Prepaid Rent Expense
500
500
(F)
Property Tax Payable
Property Tax Expense
2,000
2,000
(G)
Income Tax Payable
Income Tax Expense
3,440
Accounting Cycle
3,44066
Closing Entries for Periodic Inventory System( with
Purchase Returns and Allow): An Example
Inventory & Related Accounts
Inventory
B.B 12,600
Freight-In
4,350
Purchases
44,650
Pur. R&A
3,700
Income Summary
CGS
Assuming Ending Inv. = 17,200
CGS= Beg. Inv + Net Purchases - Endings Inv.
Net Purchases = Pur. -Pur. R&A - Pur. Dis + Freight-In
Accounting Cycle
67
IFRS Insights (Source: Kieso, etc. 14th e, p153155)
 Companies around the world use the same
accounting process as shown in this
chapter.
 Despite some differences in standards
between IFRS and GAAP, the double entry
accounting system is the basis of accounting
systems worldwide.
 IFRS is growing in acceptance around the
world. Approximately 40% of Global
Fortune 500 companies use IFRS.
Accounting Cycle
68