Lecture Intermediate accounting, (12th Edition): Chapter 3 - Kieso, Weygandt, Warfield

Chapter 3 - The Accounting Information System. After studying this chapter, you should be able to: understand basic accounting terminology and double-entry rules, explain how transactions affect the accounting equation, identify the steps in the accounting cycle and the steps in the recording process,...

         The Accounting Information System The Accounting Information System Chapter  Intermediate Accounting 12th Edition Kieso, Weygandt, and Warfield  Chapter 3-1 Prepared by Coby Harmon, University of California, Santa Barbara Learning Objectives Learning Objectives Understand basic accounting terminology Explain double­entry 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 year­end Chapter 3-2 Accounting Information System Accounting Information 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 Information System Accounting Information System An Accounting Information System (AIS) collects and processes transaction data and disseminates the information to interested parties Chapter 3-4 Accounting Information System Accounting Information 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 do we have? What were our cash inflows and outflows? Did we make a profit last period? Chapter 3-5 LO 1  Identify the major financial statements and other means of financial reporting Basic Terminology Basic Terminology Event Transaction Account Real Account Nominal Account Ledger Chapter 3-6 Journal Posting Trial Balance Adjusting Entries Financial Statements Closing Entries LO 1  Understand basic accounting terminology Debits and Credits Debits and Credits An Account shows the effect of transactions on a given asset,  Account liability, equity, revenue, or expense account Double­entry accounting system (two­sided effect) Double­entry  Recording done by debiting at least one account and crediting  another DEBITS  must equal CREDITS must equal Chapter 3-7 LO 2  Explain double­entry rules Debits and Credits Debits and 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 2  Explain double­entry rules Debits and Credits Debits and Credits If Debit entries are  greater than Credit entries, the account  greater than will have a debit balance Account Name Debit / Dr Credit / Cr Transaction #1 $10,000 $3,000 Transaction #3 8,000 Balance Chapter 3-9 Transaction #2 $15,000 LO 2  Explain double­entry rules Debits and Credits Debits and Credits If Credit entries are  greater than Debit entries, the account  greater than 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 2  Explain double­entry rules Adjusting Entries – “Accrued Expenses” Adjusting Entries – “Accrued 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. 2 Cash 200,000 Notes payable Cash Debit Notes Payable Credit Debit 200,000 Chapter 3-41 200,000 Credit 200,000 LO 5  Explain the reasons for preparing adjusting entries Adjusting Entries – “Accrued Expenses” Adjusting Entries – “Accrued 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 Interest Payable Credit Debit 1,500 Chapter 3-42 1,500 Credit 1,500 LO 5  Explain the reasons for preparing adjusting entries 5. Adjusted Trial Balance 5. Adjusted Trial Balance Shows the balance of all accounts, after adjusting entries, at the end of  the accounting period.   Chapter 3-43 LO 5  Explain the reasons for preparing adjusting entries 6. Preparing Financial Statements 6. Preparing Financial Statements Financial Statements are prepared directly from the Adjusted Trial  Financial Statements are prepared directly from the Adjusted Trial  Balance.   Balance.   Balance Sheet Chapter 3-44 Income  Statement Statement of  Retained  Earnings Statement of  Cash Flows LO 6  Prepare financial statement from the adjusted trial balance 6. Preparing Financial Statements 6. Preparing Financial Statements Assume the following   Adjusted Trial  Balance  A d j us t e d   T r ia l  Ba la nc e De b it Ca s h A c c o unt s  r e c e iva b le Build ing No t e  pa y a b le Co m m o n  s t o c k Re t a ine d  e a r ning s Divid e nd s  d e c la r e d S a le s I nt e r e s t  inc o m e Co s t  o f  g o o d s  s o ld S a la r y  e x pe ns e De pr e c ia t io n e x pe ns e $    14 ,0 0        3 ,0 0       19 ,0 0 Chapter 3-45 Cr e d it Ba la nc e   S h e e t As s e t s $     15 ,0 0       10 ,0 0        3 ,0 0         10 ,0 0       18 ,0 0         17 ,0 0        4 ,0 0        2 ,0 0        4 ,0 0 $    4 ,0 0 Balance Sheet $    4 ,0 0 Cas h A c c o unt s  r e c e iva b le Build ing T o t a l a s s e t s $    14 ,0 0        3 ,0 0       19 ,0 0 $    3 ,0 0 Lia b ilit ie s No t e  pay ab le S t o c kh o ld e r s '   e q uit y       15 ,0 0 Co m m o n  s t o c k Re t a ine d  e a r ning s T o t a l liab  & e q uit y       10 ,0 0       115 ,0 0 $    3 ,0 0 LO 6  Prepare financial statement from the adjusted trial balance 6. Preparing Financial Statements 6. Preparing Financial Statements Assume the following   Adjusted Trial  Balance  A d j us t e d   T r ia l  Ba la nc e De b it Ca s h A c c o unt s  r e c e iva b le Build ing No t e  pa y a b le Co m m o n  s t o c k Re t a ine d  e a r ning s Divid e nd s  d e c la r e d S a le s I nt e r e s t  inc o m e Co s t  o f  g o o d s  s o ld S a la r y  e x pe ns e De pr e c ia t io n e x pe ns e $    14 ,0 0        3 ,0 0       19 ,0 0 Chapter 3-46 Cr e d it I nc o m e   S t a t e m e nt Re ve nue s : $     15 ,0 0       10 ,0 0        3 ,0 0         10 ,0 0       18 ,0 0         17 ,0 0        4 ,0 0        2 ,0 0        4 ,0 0 $    4 ,0 0 Income Statement S ale s I nt e r e s t  inc o m e T o t al r e ve nue Ex pe ns e s : $    18 ,0 0         17 ,0 0      2 ,0 0 Co s t  o f  g o o d s  s o ld S ala r y  e x pe ns e De pr e c iat io n e x pe ns e T o t al e x pe ns e s N e t   inc o m e        4 ,0 0        2 ,0 0        4 ,0 0       115 ,0 0 $      8 ,0 0 $    4 ,0 0 LO 6  Prepare financial statement from the adjusted trial balance 6. Preparing Financial Statements 6. Preparing Financial Statements Assume the following   Adjusted Trial  Balance  A d j us t e d   T r ia l  Ba la nc e De b it Ca s h A c c o unt s  r e c e iva b le Build ing No t e  pa y a b le Co m m o n  s t o c k Re t a ine d  e a r ning s Divid e nd s  d e c la r e d S a le s I nt e r e s t  inc o m e Co s t  o f  g o o d s  s o ld S a la r y  e x pe ns e De pr e c ia t io n e x pe ns e $    14 ,0 0        3 ,0 0       19 ,0 0 Chapter 3-47 Cr e d it $     15 ,0 0       10 ,0 0        3 ,0 0 Statement of        Retained  Earnings S t a t e m e nt   o f   Re t a ine d   Ea r ning s Be g inning  b a lanc e + Ne t  inc o m e ­  Divid e nd s End ing  b ala nc e $      3 ,0 0        8 ,0 0       (10 ,0 0 )       115 ,0 0         10 ,0 0       18 ,0 0         17 ,0 0        4 ,0 0        2 ,0 0        4 ,0 0 $    4 ,0 0 $    4 ,0 0 LO 6  Prepare financial statement from the adjusted trial balance 7. Closing Entries 7. Closing 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 7  Prepare closing entries 7. Closing Entries 7. Closing Entries Example : Assume the following Adjusted Trial Balance Ac c t   No 10 10 13 220 300 330 380 400 430 500 520 550 Chapter 3-49 A c c o unt Cas h A c c o unt s  r e c e ivab le Build ing No t e  pay ab le Co m m o n  s t o c k Re t aine d  e ar ning s Divid e nd s  d e c lar e d S ale s I nt e r e s t  inc o m e Co s t  o f  g o o d s  s o ld S alar y  e x pe ns e De pr e c iat io n e x pe ns e De b it Cr e d it $    14 ,0 0        3 ,0 0       19 ,0 0 $     15 ,0 0       10 ,0 0        3 ,0 0         10 ,0 0       18 ,0 0         17 ,0 0        4 ,0 0        2 ,0 0        4 ,0 0 $    4 ,0 0 $    4 ,0 0 LO 7  Prepare closing entries 7. Closing Entries 7. Closing Entries Example:   Prepare the Closing journal entry from the adjusted trial balance on  the previous slide Chapter 3-50 Sales Interest income Income summary 185,000 17,000 Income summary Cost of goods sold Salary expense Depreciation expense 115,000 Income summary Retained earnings 87,000 Retained earnings Dividends declared 10,000 202,000 47,000 25,000 43,000 87,000 10,000 LO 7  Prepare closing entries 8. Post­Closing Trial Balance 8. Post­Closing Trial Balance Example  continued: Ac c t   No 10 10 13 220 300 330 380 400 430 500 520 550 Chapter 3-51 A c c o unt Cas h A c c o unt s  r e c e ivab le Build ing No t e  pay ab le Co m m o n  s t o c k Re t aine d  e ar ning s Divid e nd s  d e c lar e d S ale s I nt e r e s t  inc o m e Co s t  o f  g o o d s  s o ld S alar y  e x pe ns e De pr e c iat io n e x pe ns e De b it Cr e d it $    14 ,0 0        3 ,0 0       19 ,0 0 $     15 ,0 0       10 ,0 0       115 ,0 0              ­              ­              ­              ­              ­              ­ $    3 ,0 0 $    3 ,0 0 LO 7  Prepare closing entries 9. Reversing Entries 9. Reversing Entries Reversing entries is an optional step  that a company  may perform at the beginning of the next accounting  period Chapter 3-52 LO 7  Prepare closing entries Perpetual Inventory System Perpetual Inventory 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 8  Explain how to adjust inventory accounts at year­end Periodic Inventory System Periodic Inventory 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 8  Explain how to adjust inventory accounts at year­end 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 back­up 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 ... Normal Balance Chapter 3- 24 Eq uit y Credit / Cr Debit / Dr Lia b ilit ie s Debit / Dr Credit / Cr Normal Balance Normal Balance Chapter 3- 23 Ex pe ns e Debit / Dr Re ve nue Chapter 3- 25 Credit /... Dr Re ve nue Chapter 3- 25 Credit / Cr Debit / Dr Normal Balance Chapter 3- 27 Chapter 3- 11 Credit / Cr Normal Balance Chapter 3- 26 LO 2  Explain double­entry rules Debits and Credits Summary... Relationship among the assets, liabilities and stockholders’ equity of  a business:   Illustration 3 3 The equation must be in balance after every transaction.  For every  Debit  there must be a Credit Chapter 3- 13 LO 2  Explain double­entry rules Double­Entry System Exercise