Intermediate Accounting, 11th ed.
Kieso, Weygandt, and Warfield
Chapter 3: The Accounting
Information Systems
Chapter 3: The Accounting
Information Systems
After studying this chapter, you should be
able to:
1.
2.
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.
Chapter 3: The Accounting
Information Systems
5. Explain the reasons for preparing
adjusting entries.
6. Prepare closing entries.
7. Explain how inventory accounts are
adjusted at year-end.
8. Prepare a 10-column work sheet.
The Basic Accounting Equation
• Accounting data is represented by the
following relationship among the
assets, liabilities and owners’ equity of
a business:
Assets = Liabilities + Owners’ Equity
• The equation must be in balance after
every recorded transaction in the
system.
The Double Entry System
• Accounting information is based on the
double entry system.
• An account is an arrangement of transactions
affecting a given asset, liability or other
element.
• Under this system, the two-sided effect of a
transaction is recorded in the appropriate
accounts.
• The recording is done by means of a “debitcredit” convention (set of rules) applying to
all accounts.
The Double Entry System
The system records the two-sided
effect of transactions
Transaction
Two-sided effect
Bought furniture for cash
Decrease in one asset
Increase in another asset
Took a loan in cash
Increase in an asset
Increase in a liability
The Double Entry System
Note that the accounting equation equality is
maintained after recording
each transaction.
The Account and the Debit-Credit
Convention
Asset
Liability
Debit
Credit
Expense
Debit
Equity
Credit
Revenue
Credit
Normal balance in account
Expanded Basic Equation and
Debit/Credit Rules and Effects
The Debit-Credit Convention
Balance increases
• Debit entries in an
asset account
• Debit entries in an
expense account
• Credit entries in a
liability account
• Credit entries in
equity account
• Credit entries in a
revenue account
Balance decreases
• Credit entries in an
asset account
• Credit entries in an
expense account
• Debit entries in a
liability account
• Debit entries in
equity account
• Debit entries in a
revenue account
Ownership (Equity) Structure
Investments
by Owners
Dividends or
Withdrawals
Net Income
Net Loss
+
-
Owners’ Equity
The Accounting Cycle: Steps
1. Analyze the transaction
2. Journalize the transaction
3. Post the transaction to accounts in ledger
4. Prepare the (unadjusted) trial balance
5. Prepare necessary adjusting journal entries
6. Prepare the adjusted trial balance
7. Prepare financial statements
8. Prepare closing journal entries for the year
9. Prepare the post-closing trial balance
The Accounting Cycle: Steps
Accounting period
Begin
2
4
Originating
Journal
Entries
Unadjusted
Trial
Balance
6
Adjusted
Trial
Balance
7
3
Financial
Statements
5 Adjusting
Journal
Entries
Post to
Ledger
9
Start over
End
Post-Closing
Trial Balance
8
Closing
Entries
Adjusting Journal Entries
Adjusting entries are needed for:
• Recognizing revenue for the period.
• Matching expenses with revenues they
helped generate.
• Adjusting entries are required every time
financial statements are prepared.
Adjusting Entries: Recognizing
Revenue
Adjusting
Unearned Revenue
Revenues received
in cash
and
recorded as liabilities
Recording
Accrued Revenue
Revenues earned
but not yet
recorded
in books
Adjusting Entries: Matching
Expenses
Adjusting
Prepayments for
Expenses
Prepayments made
in cash
and
recorded as assets
Recording
Accrued Expense
Expense incurred
but not yet
recorded
in books
Closing Journal Entries
• Closing entries are made to close all nominal
accounts (revenue and expense accounts) for
the year.
• Real (or Permanent) accounts (balance sheet
accounts) are not closed.
• Dividend account is closed to Retained
Earnings account.
Scheme of Closing Entries
Ret. Earnings
Dividends
Income Summary
3
4
Expense
Revenue
1
2
Closing Entries: Periodic Inventory
System
• In a periodic inventory system, closing
entries are made to record cost of goods sold
and ending inventory.
• In a perpetual inventory system, such entries
are not required.
Using a Worksheet
• A worksheet is a multiple column form that
may be used in the adjustment process and
in preparing financial statements.
• The use of a worksheet is optional and not a
permanent accounting record.
• The worksheet does not replace the financial
statements.
Steps in Preparing a Worksheet
•
•
•
•
•
Prepare a trial balance on the worksheet.
Enter the adjustments in the adjustments
column.
Enter adjusted balances in the adjusted
trial balance columns.
Extend adjusted trial balance amounts to
appropriate financial statement columns.
Total the statement columns, compute net
income (loss), and complete the
worksheet.
COPYRIGHT
Copyright © 2004 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
in Section 117 of the 1976 United States Copyright Act without
the express written permission of the copyright owner is
unlawful. Request for further information should be addressed
to the Permissions Department, John Wiley & Sons, Inc. The
purchaser may make back-up copies for his/her own use only
and not for distribution or resale. The Publisher assumes no
responsibility for errors, omissions, or damages, caused by the
use of these programs or from the use of the information
contained herein.