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Accounting Information System

An Accounting Information System (AIS)


collects and processes transaction data and
disseminates the information to interested parties.

Internal controls are a system of checks and balances within the AIS
designed to maintain good accounting records and prevent and detect fraud and errors. Sarbanes Oxley act of 2002 requires large public Companies to have internal controls attested to by auditors.
Chapter 3-1

The Accounting Cycle


Transactions 9. Reversing entries 8. Post-closing trail balance 7. Closing entries 6. Financial Statements
Work Sheet

1. Journalization 2. Posting 3. Trial balance 4. Adjustments

5. Adjusted trial balance


Chapter 3-2

Transactions and Events


What to Record? FASB states, transactions and other events and circumstances that affect a business enterprise. Types of Events:
External between a business and its environment.
Internal event occurring entirely within a business.

Chapter 3-3

1. Journalizing
General Journal a chronological record of transactions. Journal Entries are recorded in the journal.
General Journal
Date Jan. 3 Account Title Cash Common stock 10 Building Note payable Ref. 100 300 130 220 150,000 150,000 Debit 100,000 100,000 Credit

Chapter 3-4

2. Posting
Posting the process of transferring amounts from the journal to the ledger accounts.
General Journal
Date Jan. 3 Account Title Cash Common stock Ref. Debit 100,000 100,000

GJ1
Credit

100

General Ledger Cash


Date Explanation Ref. Debit

Acct. No. 100


Credit Balance

Jan. 3 Sale of stock

GJ1

100,000

100,000

Chapter 3-5

2. Posting
Posting the process of transferring amounts from the journal to the ledger accounts.
General Journal
Date Jan. 3 Account Title Cash Common stock Ref. 100 300 Debit 100,000 100,000

GJ1
Credit

General Ledger Common Stock


Date Explanation Ref. Debit

Acct. No. 300


Credit Balance

Jan. 3 Sale of stock

GJ1

100,000

100,000

Chapter 3-6

3. Trial Balance
Trial Balance a list of each account and its balance; used to prove equality of debit and credit balances.
Acct. No. 100 105 110 130 200 220 300 330 400 500 Account Cash Accounts receivable Inventory Building Accounts payable Note payable Common stock Retained earnings Sales Cost of goods sold Debit $ 140,000 35,000 30,000 150,000 $ 60,000 150,000 100,000 75,000 30,000 $ 385,000 $ 385,000 Credit

Chapter 3-7

4. Adjusting Entries
Revenues - recorded in the period in which they are earned and realizable. Expenses - recognized in the period in which they are incurred.

Adjusting entries - needed to ensure that all assets and liabilities that should be recorded are recorded as of the end of the period reported. revenue recognition and expense recognition principles are followed.
Chapter 3-8

Classes of Adjusting Entries


Prepayments & Deferrals Accruals Revaluations & estimates

Chapter 3-9

Adjusting Entries Prepaid Expenses


Payment of cash that is recorded as an asset because service or benefit will be received in the future. Cash Payment
BEFORE

Expense Recorded

Prepayments often occur in regard to:


insurance supplies advertising
rent maintenance on equipment fixed assets

Chapter 3-10

Adjusting Entries Prepaid Expenses


Example: On Jan. 1st, Phoenix Corp. paid $12,000 for 12
months of insurance coverage. Show the journal entry to record the payment on Jan. 1st. Jan. 1 Prepaid insurance 12,000

Cash
Prepaid Insurance Debit Credit Debit Cash

12,000

Credit

12,000

12,000

Chapter 3-11

Adjusting Entries Prepaid Expenses


Example: On Jan. 1st, Phoenix Corp. paid $12,000 for 12
months of insurance coverage. Show the adjusting journal entry required at Jan. 31st. Jan. 31 Insurance expense 1,000

Prepaid insurance
Prepaid Insurance Debit Credit

1,000
Insurance expense Debit Credit

12,000
11,000
Chapter 3-12

1,000

1,000

Adjusting Entries Unearned Revenues


Receipt of cash that is recorded as a liability because the revenue has not been earned. Cash Receipt
BEFORE

Revenue Recorded

Unearned revenues often occur in regard to:


rent airline tickets school tuition
magazine subscriptions customer deposits

Chapter 3-13

Adjusting Entries Unearned Revenues


Example: On Nov. 1st, Phoenix Corp. received $24,000 from
Arcadia High School for 3 months rent in advance. Show the journal entry to record the receipt on Nov. 1st. Nov. 1 Cash 24,000

Unearned rent revenue


Cash Debit Credit

24,000

Unearned Rent Revenue Debit Credit

24,000

24,000

Chapter 3-14

Adjusting Entries Unearned Revenues


Example: On Nov. 1st, Phoenix Corp. received $24,000 from
Arcadia High School for 3 months rent in advance. Show the adjusting journal entry required on Nov. 30th. Nov. 30 Unearned rent revenue 8,000

Rent revenue
Rent Revenue Debit Credit

8,000
Unearned Rent Revenue Debit Credit

8,000

8,000

24,000
16,000

Chapter 3-15

Adjusting Entries Accrued Revenues


Revenues earned but not yet received in cash or recorded. Adjusting entry results in:

Revenue Recorded

BEFORE

Cash Receipt

Accrued revenues often occur in regard to:


rent interest services performed
Chapter 3-16

Adjusting Entries Accrued Revenues


Example: On July 1st, Phoenix Corp. invested $300,000 in
securities that return 5% interest per year. Show the journal entry to record the investment on July 1st. July 1 Investments 300,000

Cash
Investments Debit Credit Debit Cash

300,000

Credit

300,000

300,000

Chapter 3-17

Adjusting Entries Accrued Revenues


Example: On July 1st, Phoenix Corp. invested $300,000 in
securities that return 5% interest per year. Show the adjusting journal entry required on July 31st. July 31 Interest receivable 1,250

Interest revenue
Interest Receivable Debit Credit

1,250
Interest Revenue Debit Credit

1,250

1,250

Chapter 3-18

Adjusting Entries Accrued Expenses


Expenses incurred but not yet paid in cash or recorded. Adjusting entry results in:

Expense Recorded

BEFORE

Cash Payment

Accrued expenses often occur in regard to:


rent interest taxes
Chapter 3-19

salaries

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 Credit

200,000
Notes Payable Debit Credit

200,000

200,000

Chapter 3-20

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 Credit

1,500
Interest Payable Debit Credit

1,500

1,500

Chapter 3-21

Adjust Entries Revaluation & Estimates


Revaluations of impaired assets and other adjustments to fair market value
Marking Available for sale securities to market Good Will Impairment

Calculations of estimates
Bad debt expense

Chapter 3-22

5. Adjusted Trial Balance


Shows the balance of all accounts, after adjusting entries, at the end of the accounting period.

Chapter 3-23

6. Preparing Financial Statements


Financial Statements are prepared directly from the Adjusted Trial Balance.

Balance Sheet

Income Statement

Statement of Retained Earnings

Statement of Cash Flows

Chapter 3-24

6. Preparing Financial Statements


Assume the following Adjusted Trial Balance
Adjusted Trial Balance Cash Accounts receivable Building Note payable Common stock Retained earnings Dividends declared Sales Interest income Cost of goods sold Salary expense Depreciation expense Debit $ 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 Credit

Income Statement
Income Statement Revenues: Sales Interest income Total revenue Expenses: Cost of goods sold Salary expense Depreciation expense Total expenses Net income $ 185,000 17,000 202,000 47,000 25,000 43,000 115,000 $ 87,000

$ 490,000

Chapter 3-25

6. Preparing Financial Statements


Assume the following Adjusted Trial Balance
Adjusted Trial Balance Cash Accounts receivable Building Note payable Common stock Retained earnings Dividends declared Sales Interest income Cost of goods sold Salary expense Depreciation expense Debit $ 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 Credit

Statement of Retained Earnings


Statement of Retained Earnings Beginning balance + Net income - Dividends Ending balance $ 38,000 87,000 (10,000) 115,000

$ 490,000

Chapter 3-26

6. Preparing Financial Statements


Assume the following Adjusted Trial Balance
Adjusted Trial Balance Cash Accounts receivable Building Note payable Common stock Retained earnings Dividends declared Sales Interest income Cost of goods sold Salary expense Depreciation expense Debit $ 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 Credit

Balance Sheet
Balance Sheet Assets Cash Accounts receivable Building Total assets Liabilities Note payable Stockholders' equity Common stock Retained earnings Total liab. & equity $ 140,000 35,000 190,000 $ 365,000 150,000 100,000 115,000 $ 365,000

$ 490,000

Chapter 3-27

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 owners equity (through the Retained Earnings account). Dividends are also closed directly to the Retained Earnings account. Balance sheet (asset, liability, and equity) accounts are not closed.

Chapter 3-28

7. Closing Entries
Example: Ex 3-16

Chapter 3-29

8. Post-Closing Trial Balance


Example continued:
Acct. No. 100 105 130 220 300 330 380 400 430 500 520 550 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 $ 140,000 35,000 190,000 $ 150,000 100,000 115,000 $ 365,000 Credit

$ 365,000

Chapter 3-30

LO 7 Prepare closing entries.

Most companies use accrual-basis accounting

recognize revenue when it is earned and


expenses in the period incurred, without regard to the time of receipt or payment of cash. Under the strict cash basis, companies record revenue only when they receive cash, and record expenses only when they disperse cash.
Cash basis financial statements are not in conformity with GAAP.
Chapter 3-31

Illustration: Quality Contractor signs an agreement to construct a garage for $22,000. In January, Quality begins construction, incurs costs of $18,000 on credit, and by the end of January delivers a finished garage to the buyer. In February, Quality collects $22,000 cash from the customer. In March, Quality pays the $18,000 due the creditors.
Illustration 3A-1

Chapter 3-32

Illustration: Quality Contractor signs an agreement to construct a garage for $22,000. In January, Quality begins construction, incurs costs of $18,000 on credit, and by the end of January delivers a finished garage to the buyer. In February, Quality collects $22,000 cash from the customer. In March, Quality pays the $18,000 due the creditors.
Illustration 3A-2

Chapter 3-33

Conversion From Cash Basis To Accrual Basis


Illustration: Dr. Diane Windsor, like many small business owners, keeps her accounting records on a cash basis. In the year 2010, Dr. Windsor received $300,000 from her patients and paid $170,000 for operating expenses, resulting in an excess of cash receipts over disbursements of $130,000 ($300,000 - $170,000). At January 1 and December 31, 2010, she has accounts receivable, unearned service revenue, accrued liabilities, and prepaid expenses as shown in Illustration 3A-5.
Illustration 3A-5

Chapter 3-34

Conversion From Cash Basis To Accrual Basis


Illustration: Calculate service revenue on an accrual basis.
Illustration 3A-8

Illustration 3A-5

Chapter 3-35

Conversion From Cash Basis To Accrual Basis


Illustration: Calculate operating expenses on an accrual basis.
Illustration 3A-11

Illustration 3A-5

Chapter 3-36