ch03_-_jb

7/29/2019 ch03_-_jb

http://slidepdf.com/reader/full/ch03-jb 1/47

Slide3-1

7/29/2019 ch03_-_jb


Slide3-2

C H A P T E R 3

THE ACCOUNTING

INFORMATION SYSTEM

Intermediate AccountingIFRS Edition

Kieso, Weygandt, and Warfield

7/29/2019 ch03_-_jb


Slide3-3

1. Understand basic accounting terminology.

2. Explain double-entry rules.

3. Identify steps in the accounting cycle.

4. Record transactions in journals, post to ledger accounts,

and prepare a trial balance.

5. Explain the reasons for preparing adjusting entries.

6. Prepare financial statement from the adjusted trial balance.

7. Prepare closing entries.

Learning Objectives

7/29/2019 ch03_-_jb


Slide3-4

Collects and processes transaction data.

Disseminates the information to interested parties.

Accounting Information System

Accounting Information System (AIS)

7/29/2019 ch03_-_jb


Slide3-5

How much and what kind of debt is outstanding?

Were sales higher this period than last?

What assets do we have?

What were our cash inflows and outflows?

Did we make a profit last period?

Are any of our product lines or divisions operating at a loss?

Can we safely increase our dividends to shareholders?

Is our rate of return on net assets increasing?

Accounting Information System

Helps management answer such questions as:

7/29/2019 ch03_-_jb


Slide3-6

Basic Terminology

LO 1 Understand basic accounting terminology.

Event

Transaction

Account

Real Account

Nominal Account

Ledger

Journal

Posting

Trial Balance

Adjusting Entries

Financial Statements

Closing Entries

7/29/2019 ch03_-_jb


Slide3-7

Debits and Credits

LO 2 Explain double-entry rules.

An Account shows the effect of transactions on agiven asset, liability, equity, revenue, or expenseaccount.

Double-entry accounting system (two-sided effect).

Recording done by debiting at least one account andcrediting another.

DEBITS must equal CREDITS.

7/29/2019 ch03_-_jb


Slide3-8

Account Name

Debit / Dr. Credit / Cr.

Debits and Credits

An arrangement that shows theeffect of transactions on anaccount.

Debit = “Left”

Credit = “Right”

Account


An Account can

be illustrated in a

T-Account form.

7/29/2019 ch03_-_jb


Slide3-9

Account Name


Debits and Credits

If Debit entries are greater than Credit entries, theaccount will have a debit balance.


$10,000 Transaction #2$3,000

$15,000

8,000Transaction #3

Balance

Transaction #1

7/29/2019 ch03_-_jb


Slide3-10

Account Name


Debits and Credits

If Credit entries are greater than Debit entries, theaccount will have a credit balance.


$10,000 Transaction #2$3,000

$1,000

8,000 Transaction #3

Balance

Transaction #1

7/29/2019 ch03_-_jb


Slide3-11

Chapter

3-23

AssetsAssets


Normal BalanceNormal Balance

Chapter

3-27



ExpenseExpense

Chapter

3-24

LiabilitiesLiabilities



Chapter

3-25



EquityEquity

Chapter

3-26



RevenueRevenue

Normal

BalanceCredit

Normal

BalanceDebit

Debits and Credits Summary


7/29/2019 ch03_-_jb


Slide3-12

Statement of Financial Position Income Statement

= + =-Asset Liability Equity Revenue Expense

Debit

Credit

Debits and Credits Summary


7/29/2019 ch03_-_jb


Slide3-13

The Accounting Equation


Relationship among the assets, liabilities and equity of abusiness:

The equation must be in balance after every transaction.

For every Debit there must be a Credit.

Illustration 3-3

7/29/2019 ch03_-_jb


Slide3-14

Let’s do an example!

The Accounting Equation

7/29/2019 ch03_-_jb


Slide3-15

Ownership structure dictates the types of accounts thatare part of the equity section.

Proprietorship or

Partnership Corporation

Share capital

Share premium

Dividends

Retained Earnings

Financial Statements and Ownership Structure


Capital account

Drawing account

7/29/2019 ch03_-_jb


Slide3-16

Financial Statements and Ownership Structure


Equity

Statement of Financial Position

Retained Earnings Statement

Net income or Net loss

(Revenues less expenses)

Income StatementDividends

Retained Earnings

(Net income retained in business)

Share Capital

(Investment by shareholders)

Illustration 3-4

7/29/2019 ch03_-_jb


Slide3-17

The Accounting Cycle

LO 3 Identify steps in the accounting cycle.

Transactions

1. Journalization

6. Financial Statements

7. Closing entries

8. Post-closing trail balance

9. Reversing entries

3. Trial balance

2. Posting

5. Adjusted trial balance

4. AdjustmentsWorkSheet

Illustration 3-6

7/29/2019 ch03_-_jb


Slide3-18

Identify and Recording Transactions

What to Record?

An item should be recognized in the financial

statements if it is an element, is measurable,

and is relevant and afaithful representation.

LO 3 Identify steps in the accounting cycle.

7/29/2019 ch03_-_jb


Slide3-19

General Journal – a chronological record of transactions.Journal Entries are recorded in the journal.

1. Journalizing

LO 4 Record transactions in journals, post toledger accounts, and prepare a trial balance.

September 1: Shareholders invested $15,000 cash in the

corporation in exchange for ordinary shares.Illustration 3-7

7/29/2019 ch03_-_jb


Slide3-20

Posting – the process of transferring amounts from the journalto the ledger accounts.

2. Posting


Illustration 3-7

Illustration 3-8

7/29/2019 ch03_-_jb


Slide3-21

Posting – Transferring amounts from journal to ledger.

2. Posting

LO 4

Illustration 3-8

7/29/2019 ch03_-_jb


Slide3-22

Expanded Example


2. Posting

The purpose of transaction analysis is

(1) to identify the type of account involved, and

(2) to determine whether a debit or a credit is required.

Keep in mind that every journal entry affects one or more of the

following items: assets, liabilities, equity, revenues, or expense.

7/29/2019 ch03_-_jb


Slide3-23

1. October 1: Shareholders invest $100,000 cash in anadvertising venture to be known as Pioneer Advertising Agency Inc.

Share capital - ordinary 100,000

Cash 100,000Oct. 1

Debit Credit

Cash

100,000 100,000

Debit Credit

Share Capital - Ordinary

2. Posting


Illustration 3-9

7/29/2019 ch03_-_jb


Slide3-24

2. October 1: Pioneer Advertising purchases office equipmentcosting $50,000 by signing a 3-month, 12%, $50,000 notepayable.

Notes payable 50,000

Office equipment 50,000Oct. 1

Debit Credit

Office Equipment

50,000 50,000

Debit Credit

Notes Payable

2. Posting


Illustration 3-10

7/29/2019 ch03_-_jb


Slide3-25

3. October 2: Pioneer Advertising receives a $12,000 cashadvance from KC, a client, for advertising services that areexpected to be completed by December 31.

Unearned service revenue 12,000

Cash 12,000Oct. 2

Debit Credit

Cash

100,000 12,000

Debit Credit

Unearned Service Revenue

2. Posting

12,000


Illustration 3-11

7/29/2019 ch03_-_jb


Slide3-26

4. October 3: Pioneer Advertising pays $9,000 office rent, incash, for October.

Cash 9,000

Rent expense 9,000Oct. 3

Debit Credit

Cash

100,000 9,000

Debit Credit

Rent Expense

2. Posting

12,000

9,000


Illustration 3-12

7/29/2019 ch03_-_jb


Slide3-27

5. October 4: Pioneer Advertising pays $6,000 for a one-year insurance policy that will expire next year on September 30.

Cash 6,000

Prepaid insurance 6,000Oct. 4

Debit Credit

Cash

100,000 6,000

Debit Credit

Prepaid Insurance

2. Posting

12,000

9,000

6,000


Illustration 3-13

7/29/2019 ch03_-_jb


Slide3-28

6. October 5: Pioneer Advertising purchases, for $25,000 onaccount, an estimated 3-month supply of advertisingmaterials from Aero Supply.

Accounts payable 25,000

Advertising supplies 25,000Oct. 5

Debit Credit

Advertising Supplies

25,000 25,000

Debit Credit

Accounts Payable

2. Posting


Illustration 3-14

7/29/2019 ch03_-_jb


Slide3-29

7. October 9: Pioneer Advertising signs a contract with a localnewspaper for advertising inserts (flyers) to be distributedstarting the last Sunday in November. Pioneer will startwork on the content of the flyers in November. Payment of $7,000 is due following delivery of the Sunday papers

containing the flyers.

2. Posting


Illustration 3-15

7/29/2019 ch03_-_jb


Slide3-30

8. October 20: Pioneer Advertising’s board of directorsdeclares and pays a $5,000 cash dividend to shareholders.

Cash 5,000

Dividends 5,000Oct. 20

Debit Credit

Cash

100,000 5,000

Debit Credit

Dividends

2. Posting

12,000

9,000

6,000

5,000


Illustration 3-16

7/29/2019 ch03_-_jb


Slide3-31

9. October 26: Employees are paid every four weeks. Thetotal payroll is $2,000 per day. The pay period ended onFriday, October 26, with salaries of $40,000 being paid.

Cash 40,000

Salaries expense 40,000Oct. 26

Debit Credit

Cash

100,000 40,000

Debit Credit

Salaries Expense

2. Posting

12,0009,0006,000

5,000

40,000


Illustration 3-17

7/29/2019 ch03_-_jb


Slide3-32

10. October 31: Pioneer Advertising receives $28,000 in cash

and bills Copa Company $72,000 for advertising servicesof $100,000 provided in October.

Accounts receivable 72,000

Cash 28,000Oct. 31

Debit Credit

Cash

100,000 72,000

Debit Credit

Accounts Receivable

2. Posting

12,0009,0006,000

5,000

40,000

Service revenue 100,000

100,000

Debit Credit

Service Revenue

28,000

80,000

Illustration 3-18

7/29/2019 ch03_-_jb


Slide3-33

Trial Balance – A list of each

account and its

balance; used

to proveequality of debit

and credit

balances.

3. Trial Balance


Illustration 3-19

7/29/2019 ch03_-_jb


Slide3-34

4. Adjusting Entries

LO 5 Explain the reasons for preparing adjusting entries.

Makes it possible to:

Report on the statement of financial position the

appropriate assets, liabilities, and equity at the statement

date.

Report on the income statement the proper revenues and

expenses for the period.

Revenues are recorded in the period in which they are

earned.

Expenses are recognized in the period in which they are

incurred.

7/29/2019 ch03_-_jb


Slide3-35

Types of Adjusting Entries

1. Prepaid Expenses.

Expenses paid in cash and

recorded as assets before they are used or consumed.

Deferrals

3. Accrued Revenues.

Revenues earned but not

yet received in cash or recorded.

4. Accrued Expenses.

Expenses incurred but not

yet paid in cash or recorded.

2. Unearned Revenues.

Revenues received in cash

and recorded as liabilitiesbefore they are earned.

Accruals


Illustration 3-20

7/29/2019 ch03_-_jb


Slide3-36

Deferrals areeither

prepaid

expenses

or

unearned

revenues.

Adjusting Entries for Deferrals

Illustration 3-21


7/29/2019 ch03_-_jb


Slide3-37

Payment of cash that is recorded as an asset becauseservice or benefit will be received in the future.

Adjusting Entries for “Prepaid Expenses”

insurance

supplies

advertising

Cash Payment Expense RecordedBEFORE

rent

purchasing buildings andequipment

Prepayments often occur in regard to:


7/29/2019 ch03_-_jb


Slide3-38

Receipt of cash that is recorded as a liability because therevenue has not been earned.

Adjusting Entries for “Unearned Revenues”

rent

airline tickets

school tuition

Cash Receipt Revenue RecordedBEFORE

magazine subscriptions

customer deposits

Unearned revenues often occur in regard to:


7/29/2019 ch03_-_jb


Slide3-39

Accruals areeither

accrued

revenues or

accrued

expenses.

Adjusting Entries for Accruals

Illustration 3-27


7/29/2019 ch03_-_jb


Slide3-40

Revenues earned but not yet received in cash or recorded.

Adjusting Entries for “Accrued Revenues”

rentinterest

services performed

BEFORE

Accrued revenues often occur in regard to:

Cash ReceiptRevenue Recorded

Adjusting entry results in:


7/29/2019 ch03_-_jb


Slide3-41

Expenses incurred but not yet paid in cash or recorded.

Adjusting Entries for “Accrued Expenses”

rentinterest

BEFORE

Accrued expenses often occur in regard to:

Cash PaymentExpense Recorded

salariestaxes

Adjusting entry results in:


7/29/2019 ch03_-_jb


Slide3-42

Shows the balanceof all accounts,

after adjusting

entries, at the end

of the accounting

period.

5. Adjusted Trial Balance

LO 5

Illustration 3-33

7/29/2019 ch03_-_jb


Slide3-43

6. Preparing Financial Statements

LO 6 Prepare financial statement from the adjusted trial balance.

Financial Statements are prepared directly from the Adjusted Trial Balance.

Statement

of Financial

Position

Income

Statement

Retained

Earnings

Statement

7/29/2019 ch03_-_jb


Slide3-44

7. Closing Entries

LO 7 Prepare closing entries.

To reduce the balance of the income statement(revenue and expense) accounts to zero.

To transfer net income or net loss to equity.

Statement of financial position (asset, liability, and

equity) accounts are not closed.

Dividends are closed directly to the RetainedEarnings account.

7/29/2019 ch03_-_jb


Slide3-45

Accounting Cycle Summarized

LO 7 Prepare closing entries.

1. Enter the transactions of the period in appropriate journals.

2. Post from the journals to the ledger (or ledgers).

3. Take an unadjusted trial balance (trial balance).

4. Prepare adjusting journal entries and post to the ledger(s).5. Take a trial balance after adjusting (adjusted trial balance).

6. Prepare the financial statements from the second trial balance.

7. Prepare closing journal entries and post to the ledger(s).

8. Take a trial balance after closing (post-closing trial balance).

9. Prepare reversing entries (optional) and post to the ledger(s).

7/29/2019 ch03_-_jb


Slide3-46

Internal controls are a system of checks and balances designed to

prevent and detect fraud and errors. Both of these actions arerequired under SOX.

Companies find that internal control review is a costly process. Onestudy estimates the cost for U.S. companies at over $35 billion,with audit fees doubling in the first year of compliance.

The enhanced internal control standards apply only to large publiccompanies listed on U.S. exchanges. There is continuing debate overwhether foreign issuers should have to comply.

7/29/2019 ch03_-_jb


Copyright © 2011 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 addressedto 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 theuse of these programs or from the use of the information

contained herein.

Copyright

ch03_-_jb

Documents