3-1 The Accounting Information System Kimmel ● Weygandt ● Kieso Financial Accounting, Eighth Edition 3-2 CHAPTER OUTLINE LEARNING OBJECTIVES 3-3 Analyze the effect of business transactions on the basic accounting equation Explain how accounts, debits, and credits are used to record business transactions Indicate how a journal is used in the recording process Explain how a ledger and posting help in the recording process Prepare a trial balance LEARNING OBJECTIVE Analyze the effect of business transactions on the basic accounting equation Accounting Information System System of ►collecting and ►processing transaction data and ►communicating 3-4 financial information to decision-makers LO Accounting Information System Accounting information systems rely on a process referred to as the accounting cycle Analyze business transactions Adjusted Trial Balance Journalize Financial Statements Post Trial Balance Closing Entries Adjusting Entries Post-Closing Trial Balance Most businesses use computerized accounting systems 3-5 LO ACCOUNTING TRANSACTIONS Transactions are economic events that require recording in the financial statements Not all activities represent transactions Assets, liabilities, or stockholders’ equity items change as a result of some economic event Dual 3-6 effect on the accounting equation LO ACCOUNTING TRANSACTIONS Question: Are the following events recorded in the accounting records? Event Criterion Purchase computer Discuss guided trip options with potential customer Illustration 3-1 Transaction identification process Pay rent Is the financial position (assets, liabilities, or stockholders’ equity) of the company changed? Record/ Don’t Record 3-7 LO ANALYZING TRANSACTIONS The process of identifying the specific effects of economic events on the accounting equation Basic Accounting Equation Assets 3-8 = Liabilities + Stockholders’ Equity LO ANALYZING TRANSACTIONS Illustration 3-2 Expanded accounting equation 3-9 LO ANALYZING TRANSACTIONS Event (1) On October 1, cash of $10,000 is invested in Sierra Corporation by investors in exchange for $10,000 of common stock 3-10 +10,000 +10,000 LO LEARNING OBJECTIVE Prepare a trial balance The Accounting Cycle Analyze business transactions Adjusted Trial Balance 3-67 Journalize the transaction Financial Statements Post to ledger accounts Closing Entries Prepare a Trial Balance Adjusting Entries Post-Closing Trial Balance LO TRIAL BALANCE A list of accounts and their balances at a given time Accounts are listed in the order in which they appear in the ledger Purpose is to prove that debits equal credits May also uncover errors in journalizing and posting Useful in the preparation of financial statements 3-68 ▼ HELPFUL HINT Note that the order of presentation in the trial balance is: Assets Liabilities Stockholders’ equity Revenues Expenses LO TRIAL BALANCE 3-69 ILLUSTRATION 3-34 Sierra Corporation trial balance LO LIMITATIONS OF A TRIAL BALANCE The trial balance may balance even when 1.a transaction is not journalized, 2.a correct journal entry is not posted, 3.a journal entry is posted twice, 4.incorrect accounts are used in journalizing or posting, or 5.offsetting errors are made in recording the amount of a transaction 3-70 ETHICS NOTE An error is the result of an unintentional mistake It is neither ethical nor unethical An irregularity is an intentional misstatement, which is viewed as unethical LO TRIAL BALANCE Review Question A trial balance will not balance if: a a correct journal entry is posted twice b the purchase of supplies on account is debited to Supplies and credited to Cash c a $100 cash dividends is debited to the Dividends account for $1,000 and credited to Cash for $100 d a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash for $45 3-71 LO DO IT! Trial Balance The following accounts come from the ledger of SnowGo Corporation at December 31, 2017 Equipment $88,000 Dividends 8,000 Accounts Payable 22,000 Salaries and Wages Common Stock $20,000 Salaries and Wages Payable 2,000 Notes Payable (due in Expense Prepare a trial balance in good form.3 months) 3-72 42,000 19,000 LO 3-73 LO A Look at IFRS LEARNING OBJECTIVE Compare the procedures for the recording process under GAAP and IFRS KEY POINTS Similarities Transaction analysis is the same under IFRS and GAAP Both the IASB and the FASB go beyond the basic definitions provided in the textbook for the key elements of financial statements, that is assets, liabilities, equity, revenues, and expenses The implications of the expanded definitions are discussed in more advanced accounting courses 3-74 LO A Look at IFRS KEY POINTS Similarities As shown in the textbook, dollar signs are typically used only in the trial balance and the financial statements The same practice is followed under IFRS, using the currency of the country where the reporting company is headquartered A trial balance under IFRS follows the same format as shown in the textbook 3-75 LO A Look at IFRS KEY POINTS Differences IFRS relies less on historical cost and more on fair value than FASB standards Internal controls are a system of checks and balances designed to prevent and detect fraud and errors While most public U.S companies have these systems in place, many nonU.S companies have never completely documented the controls nor had an independent auditor attest to their effectiveness 3-76 LO A Look at IFRS LOOKING TO THE FUTURE The basic recording process shown in this textbook is followed by companies around the globe It is unlikely to change in the future The definitional structure of assets, liabilities, equity, revenues, and expenses may change over time as the IASB and FASB evaluate their overall conceptual framework for establishing accounting standards 3-77 LO A Look at IFRS IFRS Practice Which statement is correct regarding IFRS? a) IFRS reverses the rules of debits and credits, that is, debits are on the right and credits are on the left b) IFRS uses the same process for recording transactions as GAAP c) The chart of accounts under IFRS is different because revenues follow assets d) None of the above statements are correct 3-78 LO A Look at IFRS IFRS Practice A trial balance: a) is the same under IFRS and GAAP b) proves that transactions are recorded correctly c) proves that all transactions have been recorded d) will not balance if a correct journal entry is posted twice 3-79 LO A Look at IFRS IFRS Practice One difference between IFRS and GAAP is that: a) GAAP uses accrual-accounting concepts and IFRS uses primarily the cash basis of accounting b) IFRS uses a different posting process than GAAP c) IFRS uses more fair value measurements than GAAP d) the limitations of a trial balance are different between IFRS and GAAP 3-80 LO COPYRIGHT “Copyright © 2016 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.” 3-81 ... basic accounting equation Accounting Information System System of ►collecting and ►processing transaction data and ►communicating 3-4 financial information to decision- makers LO Accounting Information...3 The Accounting Information System Kimmel ● Weygandt ● Kieso Financial Accounting, Eighth Edition 3-2 CHAPTER OUTLINE LEARNING OBJECTIVES 3-3 Analyze... Accounting Information System Accounting information systems rely on a process referred to as the accounting cycle Analyze business transactions Adjusted Trial Balance Journalize Financial Statements