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Chapter 3 - The accounting information system. After studying this chapter, you should be able to: 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;...
3-1 PREVIEW OF CHAPTER Intermediate Accounting IFRS 2nd Edition Kieso, Weygandt, and Warfield 3-2 The Accounting Information System LEARNING OBJECTIVES After studying this chapter, you should be able to: 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 3-3 Prepare financial statements from the adjusted trial balance Prepare closing entries Prepare financial statements for a merchandising company ACCOUNTING INFORMATION SYSTEM Accounting Information System (AIS) 3-4 u Collects and processes transaction data u Disseminates financial information to interested parties u Varies widely from business to business ► Nature of business ► Type of transactions ► Size of business ► Volume of data ► Informational demands LO 1 ACCOUNTING INFORMATION SYSTEM Helps management answer such questions as: 3-5 u How much and what kind of debt is outstanding? u Were our sales higher this period than last? u What assets do we have? u What were our cash inflows and outflows? u Did we make a profit last period? u Are any of our product lines or divisions operating at a loss? u Can we safely increase our dividends to shareholders? u Is our rate of return on net assets increasing? LO 1 ACCOUNTING INFORMATION SYSTEM Basic Terminology 3-6 u Event u Journal u Transaction u Posting u Account u Trial Balance u Real Account u Adjusting Entries u Nominal Account u Financial Statements u Ledger u Closing Entries LO 1 The Accounting Information System LEARNING OBJECTIVES After studying this chapter, you should be able to: 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 3-7 Prepare financial statements from the adjusted trial balance Prepare closing entries Prepare financial statements for a merchandising company ACCOUNTING INFORMATION SYSTEM Debits and Credits uAn account shows the effect of transactions on a given asset, liability, equity, revenue, or expense account uDoubleentry accounting system (twosided effect) uRecording done by debiting at least one account and crediting another uDEBITS must equal CREDITS 3-8 LO 2 Debits and Credits Account uAn arrangement that shows the effect of transactions on an account uDebit = “Left” uCredit = “Right” An Account can be illustrated in a TAccount form 3-9 Account Name Debit / Dr Credit / Cr LO 2 Debits and Credits If the sum of Debit entries are greater than the sum of Credit entries, the account will have a debit balance Account Name Debit / Dr Credit / Cr Transaction #1 $10,000 $3,000 Transaction #3 8,000 Balance 3-10 Transaction #2 $15,000 LO 2 APPENDIX 3A OPERATING EXPENSE COMPUTATION To convert cash paid for operating expenses during the year to operating expenses on an accrual basis, we must consider changes in prepaid expenses and accrued liabilities ILLUSTRATION 3A11 ILLUSTRATION 3A5 3-111 Advance slide in presentation mode to reveal answers LO 9 APPENDIX 3A CONVERSION FROM CASH BASIS TO ACCRUAL BASIS ILLUSTRATION 3A12 3-112 LO 9 APPENDIX 3A CASHBASIS ACCOUNTING VERSUS ACCRUALBASIS ACCOUNTING THEORETICAL WEAKNESSES OF THE CASH BASIS 3-113 u Today’s economy is considerably more lubricated by credit than by cash. u The accrual basis, not the cash basis, recognizes all aspects of the credit phenomenon. u Investors, creditors, and other decision makers seek timely information about a company’s future cash flows LO 9 APPENDIX 3B USING REVERSING ENTRIES ILLUSTRATION OF REVERSING ENTRIESACCRUALS ILLUSTRATION 3B1 3-114 LO 10 Identifying adjusting entries that may be reversed APPENDIX 3B USING REVERSING ENTRIES ILLUSTRATION OF REVERSING ENTRIESDEFERRALS ILLUSTRATION 3B2 3-115 LO 10 APPENDIX 3B USING REVERSING ENTRIES SUMMARY OF REVERSING ENTRIES All accruals should be reversed All deferrals for which a company debited or credited the original cash transaction to an expense or revenue account should be reversed Adjusting entries for depreciation and bad debts are not reversed Reversing entries do not have to be used. 3-116 LO 10 APPENDIX 3C USING A WORKSHEET: THE ACCOUNTING CYCLE REVISITED A company prepares a worksheet either on ucolumnar paper or uwithin a computer spreadsheet. A company uses the worksheet to adjust uaccount balances and uto prepare financial statements 3-117 LO 11 Prepare a 10column worksheet APPENDIX 3C USING A WORKSHEET: THE ACCOUNTING CYCLE REVISITED WORKSHEET COLUMNS uTrial Balance Columns uAdjustment Columns 3-118 LO 11 APPENDIX 3C USING A WORKSHEET: THE ACCOUNTING CYCLE REVISITED ILLUSTRATION 3C1 (Partial) Use of a Worksheet 3-119 LO 11 APPENDIX 3C USING A WORKSHEET: THE ACCOUNTING CYCLE REVISITED ILLUSTRATION 3C1 Use of a Worksheet 3-120 APPENDIX 3C USING A WORKSHEET: THE ACCOUNTING CYCLE REVISITED PREPARING FINANCIAL STATEMENTS FROM A WORKSHEET The Worksheet: uprovides information needed for preparation of the financial statements uSorts data into appropriate columns, which facilitates the preparation of the statements 3-121 LO 11 ILLUSTRATION 339 3-122 ILLUSTRATION 340 3-123 LO 11 ILLUSTRATION 341 3-124 LO 11 COPYRIGHT Copyright © 2014 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 3-125 ... Balance Chapter 3- 23 Credit / Cr Normal Balance Expense Debit / Dr Chapter 3- 25 Revenue Debit / Dr Credit / Cr 3- 12 Credit / Cr Normal Balance Normal Balance Chapter 3- 27 Credit / Cr Chapter 3- 24...PREVIEW OF? ?CHAPTER Intermediate? ?Accounting IFRS? ?2nd? ?Edition Kieso,? ?Weygandt,? ?and? ?Warfield? ? 3- 2 The? ?Accounting? ? Information System LEARNING OBJECTIVES After studying this? ?chapter, you should be able to:... corporation in exchange for ordinary shares ILLUSTRATION? ?3? ?7 3- 30 LO 4 Posting Posting – The process of transferring amounts from the journal to the ledger accounts. ILLUSTRATION? ?3? ?7 ILLUSTRATION? ?3? ?8 3- 31 Advance slide in presentation mode to reveal answers