The The Accounting Accounting Information Information System System Chapter Intermediate Accounting 12th Edition Kieso, Weygandt, and Warfield Chapter 3-1 Prepared by Coby Harmon, University of California, Santa Barbara Learning Learning Objectives Objectives 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 Explain the reasons for preparing adjusting entries Prepare financial statement from the adjusted trial balance Prepare closing entries Explain how to adjust inventory accounts at year-end Chapter 3-2 Accounting Accounting Information Information System System Accounting AccountingInformation Information System System The TheAccounting AccountingCycle Cycle Basic terminology Debits and credits Identification and recording Journalizing Basic equation Financial statements and ownership structure Posting Trial balance Adjusting entries Adjusted trial balance Preparing financial statements Closing Post-closing trial balance Reversing entries Chapter 3-3 Financial statements for merchandisers Accounting Accounting Information Information System System An Accounting Information System (AIS) collects and processes transaction data and disseminates the information to interested parties Chapter 3-4 Accounting Accounting Information Information System System Helps management answer such questions as: How much and what kind of debt is outstanding? Were sales higher this period than last? What assets we have? What were our cash inflows and outflows? Did we make a profit last period? Chapter 3-5 LO Identify the major financial statements and other means of financial reporting Basic Basic Terminology Terminology Event Transaction Account Real Account Nominal Account Ledger Chapter 3-6 Journal Posting Trial Balance Adjusting Entries Financial Statements Closing Entries LO Understand basic accounting terminology Debits Debits and and Credits Credits An Account shows the effect of transactions on a given asset, liability, equity, revenue, or expense account Double-entry accounting system (two-sided effect) Recording done by debiting at least one account and crediting another DEBITS must equal CREDITS Chapter 3-7 LO Explain double-entry rules Debits Debits and and Credits Credits Account An arrangement that shows the effect of transactions on an account Debit = “Left” Credit = “Right” An Account can be illustrated in a T-Account form Chapter 3-8 Account Name Debit / Dr Credit / Cr LO Explain double-entry rules Debits Debits and and Credits Credits If Debit entries are greater than Credit entries, the account will have a debit balance Account Name Debit / Dr Transaction #1 $10,000 Transaction #3 8,000 Balance Chapter 3-9 Credit / Cr $3,000 Transaction #2 $15,000 LO Explain double-entry rules Debits Debits and and Credits Credits If Credit entries are greater than Debit entries, the account will have a credit balance Account Name Debit / Dr Transaction #1 Balance Chapter 3-10 $10,000 Credit / Cr $3,000 Transaction #2 8,000 Transaction #3 $1,000 LO Explain double-entry rules Adjusting Adjusting Entries Entries –– “Accrued “Accrued Expenses” Expenses” Example: On Feb 2nd, Phoenix Corp borrowed $200,000 at a rate of 9% per year Interest is due on first of each month Show the journal entry to record the borrowing on Feb 2nd Feb Cash 200,000 Notes payable Cash Debit Notes Payable Credit 200,000 Chapter 3-41 200,000 Debit Credit 200,000 LO Explain the reasons for preparing adjusting entries Adjusting Adjusting Entries Entries –– “Accrued “Accrued Expenses” Expenses” Example: On Feb 2nd, Phoenix Corp borrowed $200,000 at a rate of 9% per year Interest is due on first of each month Show the adjusting journal entry required on Feb 28th Feb 28 Interest expense 1,500 Interest payable Interest Expense Debit Credit 1,500 Chapter 3-42 1,500 Interest Payable Debit Credit 1,500 LO Explain the reasons for preparing adjusting entries 5 Adjusted Adjusted Trial Trial Balance Balance Shows the balance of all accounts, after adjusting entries, at the end of the accounting period Chapter 3-43 LO Explain the reasons for preparing adjusting entries 6 Preparing Preparing Financial Financial Statements Statements Financial Financial Statements Statements are are prepared prepared directly directly from from the the Adjusted Adjusted Trial Trial Balance Balance Balance Sheet Chapter 3-44 Income Statement Statement of Retained Earnings Statement of Cash Flows LO Prepare financial statement from the adjusted trial balance 6 Preparing Preparing Financial Financial Statements Statements Assume the following Adjusted Trial Balance Adjusted Trial Balance Debit Cash Accounts receivable Building Note payable Common stock Retained earnings Dividends declared Sales Interest income Cost of goods sold Salary expense Depreciation expense $ 140,000 35,000 190,000 Chapter 3-45 Balance Sheet Credit Assets $ 150,000 100,000 38,000 10,000 185,000 17,000 47,000 25,000 43,000 $ 490,000 Balance Sheet $ 490,000 Cash Accounts receivable Building Total assets $ 140,000 35,000 190,000 $ 365,000 Liabilities Note payable Stockholders' equity 150,000 Common stock Retained earnings Total liab & equity 100,000 115,000 $ 365,000 LO Prepare financial statement from the adjusted trial balance 6 Preparing Preparing Financial Financial Statements Statements Assume the following Adjusted Trial Balance Adjusted Trial Balance Debit Cash Accounts receivable Building Note payable Common stock Retained earnings Dividends declared Sales Interest income Cost of goods sold Salary expense Depreciation expense $ 140,000 35,000 190,000 Chapter 3-46 Income Statement Credit Revenues: $ 150,000 100,000 38,000 10,000 185,000 17,000 47,000 25,000 43,000 $ 490,000 Income Statement Sales Interest income Total revenue Expenses: $ 185,000 17,000 202,000 Cost of goods sold Salary expense Depreciation expense Total expenses Net income 47,000 25,000 43,000 115,000 $ 87,000 $ 490,000 LO Prepare financial statement from the adjusted trial balance 6 Preparing Preparing Financial Financial Statements Statements Statement of Retained Earnings Assume the following Adjusted Trial Balance Adjusted Trial Balance Debit Cash Accounts receivable Building Note payable Common stock Retained earnings Dividends declared Sales Interest income Cost of goods sold Salary expense Depreciation expense $ 140,000 35,000 190,000 Chapter 3-47 Credit $ 150,000 100,000 38,000 10,000 Statement of Retained Earnings Beginning balance + Net income - Dividends Ending balance $ 38,000 87,000 (10,000) 115,000 185,000 17,000 47,000 25,000 43,000 $ 490,000 $ 490,000 LO Prepare financial statement from the adjusted trial balance 7 Closing Closing Entries Entries To reduce the balance of the income statement (revenue and expense) accounts to zero To transfer net income or net loss to owner’s equity Balance sheet (asset, liability, and equity) accounts are not closed Dividends are closed directly to the Retained Earnings account Chapter 3-48 LO Prepare closing entries 7 Closing Closing Entries Entries Example: Assume the following Adjusted Trial Balance Acct No 100 105 130 220 300 330 380 400 430 500 520 550 Chapter 3-49 Account Cash Accounts receivable Building Note payable Common stock Retained earnings Dividends declared Sales Interest income Cost of goods sold Salary expense Depreciation expense Debit Credit $ 140,000 35,000 190,000 $ 150,000 100,000 38,000 10,000 185,000 17,000 47,000 25,000 43,000 $ 490,000 $ 490,000 LO Prepare closing entries 7 Closing Closing Entries Entries Example: Prepare the Closing journal entry from the adjusted trial balance on the previous slide Chapter 3-50 Sales Interest income Income summary 202,000 Income summary Cost of goods sold 47,000 Salary expense 25,000 Depreciation expense 43,000 Income summary Retained earnings 87,000 Retained earnings Dividends declared 10,000 185,000 17,000 115,000 87,000 10,000 LO Prepare closing entries 8 Post-Closing Post-Closing Trial Trial Balance Balance Example continued: Acct No 100 105 130 220 300 330 380 400 430 500 520 550 Chapter 3-51 Account Cash Accounts receivable Building Note payable Common stock Retained earnings Dividends declared Sales Interest income Cost of goods sold Salary expense Depreciation expense Debit Credit $ 140,000 35,000 190,000 $ 150,000 100,000 115,000 $ 365,000 $ 365,000 LO Prepare closing entries 9 Reversing Reversing Entries Entries Reversing entries is an optional step that a company may perform at the beginning of the next accounting period Chapter 3-52 LO Prepare closing entries Perpetual Perpetual Inventory Inventory System System Inventory account increased with each purchase Inventory account reduced and Cost of Goods Sold account increased with each sale Balance in Inventory account should equal inventory amount on hand No Adjusting Entries should be needed Physical inventory performed to confirm balance in Inventory account Chapter 3-53 LO Explain how to adjust inventory accounts at year-end Periodic Periodic Inventory Inventory System System Inventory account remains unchanged during period Purchases account increased with each purchase At end of accounting period: Purchases account closed Inventory account adjusted to physical count Chapter 3-54 LO Explain how to adjust inventory accounts at year-end Copyright Copyright Copyright © 2007 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 Chapter 3-55 ... accounts at year-end Chapter 3-2 Accounting Accounting Information Information System System Accounting AccountingInformation Information System System The TheAccounting AccountingCycle Cycle... Post-closing trial balance Reversing entries Chapter 3-3 Financial statements for merchandisers Accounting Accounting Information Information System System An Accounting Information System (AIS) collects... and processes transaction data and disseminates the information to interested parties Chapter 3-4 Accounting Accounting Information Information System System Helps management answer such questions