Infosys - 1
The Accounting
Information Processing
System
Infosys - 2
BASIC ACCOUNTING EQUATION
[Corporation]
Assets = Liabilities + Stockholders’ Equity
Contributed
Retained
Earnings
(Paid-in)
Capital
Par
Value
Excess
Over
Par
Net Income (+)
Net loss (-)
Revenues & Gains (+)
Dividends (-)
Declared
Expenses & Losses (-)
Infosys - 3
Accounts and Transaction Recording
Financial Accounting Information
Accounts
Permanent Accounts
Temporary Accounts
Assets
Liabilities
Owners’ Equity
Revenues Dividends
Expenses
Gains & Losses
Infosys - 4
PERMANENT ACCOUNTS
Application of Debits and Credits
A = L + OE
Account Name
Account Name
Account Name
Debit
Debit
Debit
Credit
Credit
Credit
The balances in PERMANENT accounts
are carried over to future accounting periods.
Infosys - 5
PERMANENT ACCOUNTS
Application of Debits and Credits
A = L + OE
ASSETS
LIABILITIES
Debit
Credit for
Debit
Credit for
for
Increase
for
Decrease
Decrease
Increase
EQUITIES
Debit
Credit for
for
Increase
Decrease
The balances in PERMANENT accounts
are carried over to future accounting periods
Infosys - 6
TEMPORARY ACCOUNTS
(Subdivisions of Retained Earnings)
Application of debits and credits
EXPENSES, LOSSES
REVENUES & GAINS
Debit
Credit for
for
Increase
Decrease
& DIVIDENDS
DECLARED
Debit
Credit for
for
Decrease
Increase
Infosys - 7
The Accounting Cycle
The Accounting Cycle is a series of sequential
steps leading to the financial statements.
 During Accounting Period
 Identify transactions or events to be
recorded.
ANALYSIS OF TRANSACTION IS THE KEY
 Journalize transactions and events.
 Posting from journals to ledger.
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The Accounting Cycle
At the end of the accounting period:
 Prepare unadjusted trial balance.
 Journalize and post adjusting journal entries.
 Prepare adjusted trial balance.
 Prepare financial statements.
 Journalize and post closing journal entries.
 Prepare post-closing trial balance.
Infosys - 9
Source
documents
Transaction
Analysis
Record in
Journal
Post to
Ledger
Financial
Statements
Adjusted
Trial Balance
Record & Post
Adjusting
Entries
Unadjusted
Trial Balance
Close Temporary
Accounts
Post-Closing
Trial Balance
The
Accounting
Processing
Cycle
Infosys - 10
UNADJUSTED TRIAL BALANCE
 Consists of a listing of each general ledger
account and its balance at the end of period.
– Debit balances in one column and credit
balances in another
 Serves as a convenient means for checking
that the sum of debit account balances equals
the sum of credit account balances.
Infosys - 11
Trial Balance - Example
Sample Company
Unadjusted Trial Balance
December 31, 1998
Cash
Accounts Receivable
Equipment
Accounts Payable
Notes Payable
Capital Stock
Retained Earnings - 1/1/X8
Dividends declared
Revenues
Salary Expense
Utility Expense
Rent Expense
Total
Debits
$
450
1,200
3,800
Credits
$
700
1,450
3,000
0
50
11,000
5,250
3,000
2,400
$ 16,150 $ 16,150
The General
Ledger is in
balance!
DR = CR
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ADJUSTING JOURNAL ENTRIES
 Accruals
 Prepayments
(Deferrals)
 Corrections
of errors
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ADJUSTING JOURNAL ENTRIES
Accruals
 Cash flows that occur AFTER
expense and revenue
recognition
 Recorded when cash is to be
paid or received in a future
accounting period
Infosys - 14
AJEs Accrual Example
Your company pays its workers every Friday.
Year-end ,12/31/X5, falls on Wednesday.
It is estimated that employees have earned
salaries of $47,250 through Wednesday of
the week ended 1/2/X6.
GENERAL JOURNAL
Date
Description
Page: 1
PR
31-Dec Salary Expense
Salary Payable
Debit
Credit
47,250
47,250
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ADJUSTING JOURNAL ENTRIES
Prepayments/Deferrals
 Cash flows that occur BEFORE
expense and revenue recognition
 Portion that applies to future
periods is deferred as a prepaid
expense or unearned revenue
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PREPAYMENTS
Standard
Recording Method
Records an asset upon payment of cash
and liability upon receipt of cash
before goods or services are provided
– Cash paid recorded as an asset (Prepaids)
– Cash received recorded as liability
(Unearned revenue)
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Prepayment Example
Standard Method
On 12/1/X5, your company paid $1,200 for
a six-month insurance policy. The $1,200
was recorded as Prepaid Insurance (an
asset).
What AJE is needed on 12/31/X5?
GENERAL JOURNAL
Date
Description
Page: 1
PR
31-Dec Insurance Expense
Prepaid Insurance
Debit
Credit
200
200
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OTHER PREPAYMENTS
Jax, Inc. purchased equipment on June 30, 19X5,
that cost $25,000 (recorded as “Equipment”).
The equipment has an estimated useful life of 5
years and no salvage value. Jax uses straightline depreciation.
GENERAL JOURNAL
Date
Description
Page: 1
Debit
31-Dec Depreciation Expense
Accumulated Deprec. - Equip
Credit
2,500
2,500
Infosys - 19
Here comes something
that’s A LITTLE BIT
DIFFERENT!
Infosys - 20
PREPAYMENTS
Expedient
Recording Method
Records an expense upon payment of cash
before goods or services are consumed
Records revenue upon receipt of cash before
goods or services are provided
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Prepayment Example
Expedient Method
On 12/1/X5, your company paid $1,200 for a
six-month insurance policy. The $1,200 was
recorded as Insurance expense.
What AJE is needed on 12/31/X5?
GENERAL JOURNAL
Date
Description
Page: 1
PR
31-Dec Prepaid Insurance
Insurance expense
Debit
Credit
1,000
1,000
Infosys - 22
Prepare Adjusted Trial Balance
 Includes all
account
balances after
adjustments
have been
posted.
 Used to produce
the financial
statements.
Sample Company
Adjusted Trial Balance
December 31, 1998
Cash
Accounts Receivable
Interest Receivable
Equipment
Accumulated Depreciation
Accounts Payable
Interest Payable
Notes Payable
Capital Stock
Retained Earnings - 1/1/X8
Dividends declared
Revenues
Interest Revenue
Salary Expense
Utility Expense
Rent Expense
Interest Expense
Depreciation Expense
Total
Debits
$
450
1,200
200
3,800
Credits
$
400
700
65
1,450
3,000
-
50
11,000
200
$
5,250
3,000
2,400
65
400
16,815
$
16,815
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Prepare Financial Statements
 The income
statement is
always prepared
first.
 Includes the
temporary
account balances
from the
adjusted trial
balance.
Sample Company
Income Statement
For the Year Ended 12/31/98
Revenues:
Sales
Interest
Total
Expenses:
Salary
Utility
Rent
Interest
Depreciation
Total
Net Income
$
11,000
200
$
11,200
5,250
3,000
2,400
65
400
11,115
$
85
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Prepare Financial Statements
 The retained
earnings
statement
explains the
changes in
retained earnings
during the year.
Retained Earnings Statement
For the Year Ended 12/31/98
Retained Earnings - 1/1/98
Add: Net Income
Less: Dividends declared
$
85
(50)
Retained Earnings - 12/31/98
$ 35
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Prepare Financial Statements
Balance
Sheet includes
 The
the permanent
accounts.
 Retained Earnings
is taken from the
Retained Earnings
Statement.
ASSETS:
Cash
Accounts Receivable
Interest Receivable
Equipment
Less: Accum.Depr.
Equipment (net)
Total Assets
LIABILITIES:
Accounts Payable
Interest Payable
Notes Payable
Total Liabilities
EQUITY:
Common Stock
R/E - 12/31/98
Total Equity
Total Liabilities & Equity
$
$
450
1,200
200
3,800
(400)
$
$
$
$
$
$
3,400
5,250
700
65
1,450
2,215
3,000
35
3,035
5,250
Infosys - 26
Closing Entries
 Two purposes of closing journal
entries:
– Reduce to zero the balances of
temporary accounts related to
earnings measurement and
dividends
– Increase (or decrease) retained
earnings by the net impact of
the temporary accounts for the
period
Infosys - 27
CLOSING ENTRIES
Flow - Chart
Revenues
11,200
11,200
Dividends
Declared
50
50
Retained
Earnings
50
85
Expenses
11,115
11,115
Note: Large type
amounts are
closing entries
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Prepare Post-Closing Trial Balance
 Lists the balances of the
permanent accounts after the
closing process is finished.
 Retained Earnings will show the
end of period balance.
Infosys - 29
WOW!