The Accounting Information Processing System

1. The Accounting Information Processing System

2. BASIC ACCOUNTING EQUATION[Corporation] Assets = Liabilities + Stockholders’ Equity Contributed (Paid-in) Capital Retained Earnings Par Value Excess Over Par Net Income (+) Net loss (-) Dividends (-) Declared Revenues & Gains (+) Expenses & Losses (-)

3. Financial Accounting Information Accounts and Transaction Recording Accounts Permanent Accounts Assets Liabilities Owners’ Equity Temporary Accounts Revenues Dividends Expenses Gains & Losses

4. PERMANENT ACCOUNTS Application of Debits and Credits A = L + OE Account Name Account Name Account Name Debit Credit Debit Credit Debit Credit The balances in PERMANENT accounts are carried over to future accounting periods.

5. PERMANENT ACCOUNTS Application of Debits and Credits A = L + OE ASSETS LIABILITIES EQUITIES Debit for Decrease Credit for Increase Debit for Decrease Credit for Increase Debit for Increase Credit for Decrease The balances in PERMANENT accounts are carried over to future accounting periods

6. TEMPORARY ACCOUNTS(Subdivisions of Retained Earnings) Application of debits and credits EXPENSES, LOSSES & DIVIDENDS DECLARED REVENUES & GAINS Debit for Decrease Credit for Increase Debit for Increase Credit for Decrease

7. The Accounting Cycle The Accounting Cycle is a series of sequential steps leading to the financial statements. • During Accounting Period • Identify transactions or events to be recorded. ANALYSIS OF TRANSACTION IS THE KEY • Journalize transactions and events. • Posting from journals to ledger.

8. The Accounting Cycle At the end of the accounting period: • Prepare unadjusted trial balance. • Journalize and post adjusting journal entries. • Prepare adjusted trial balance. • Prepare financial statements. • Journalize and post closing journal entries. • Prepare post-closing trial balance.

9. Source documents Transaction Analysis Record in Journal Post to Ledger Financial Statements Adjusted Trial Balance Record & Post Adjusting Entries Unadjusted Trial Balance The Accounting Processing Cycle Close Temporary Accounts Post-Closing Trial Balance

10. UNADJUSTED TRIAL BALANCE • Consists of a listing of each general ledger account and its balance at the end of period. • Debit balances in one column and credit balances in another • Serves as a convenient means for checking that the sum of debit account balances equals the sum of credit account balances.

11. Trial Balance - Example The General Ledger is in balance! DR = CR

12. ADJUSTING JOURNAL ENTRIES • Accruals • Prepayments (Deferrals) • Corrections of errors

13. ADJUSTING JOURNAL ENTRIESAccruals • Cash flows that occur AFTER expense and revenue recognition • Recorded when cash is to be paid or received in a future accounting period

14. AJEs Accrual Example Your company pays its workers every Friday. Year-end ,12/31/X5, falls on Wednesday. It is estimated that employees have earned salaries of $47,250 through Wednesday of the week ended 1/2/X6.

15. ADJUSTING JOURNAL ENTRIESPrepayments/Deferrals • Cash flows that occur BEFORE expense and revenue recognition • Portion that applies to future periods is deferred as a prepaid expense or unearned revenue

16. PREPAYMENTS Standard Recording Method Records an asset upon payment of cash and liability upon receipt of cash before goods or services are provided • Cash paid recorded as an asset (Prepaids) • Cash received recorded as liability (Unearned revenue)

17. Prepayment ExampleStandard Method On 12/1/X5, your company paid $1,200 for a six-month insurance policy. The $1,200 was recorded as Prepaid Insurance (an asset). What AJE is needed on 12/31/X5?

18. OTHER PREPAYMENTS Jax, Inc. purchased equipment on June 30, 19X5, that cost $25,000 (recorded as “Equipment”). The equipment has an estimated useful life of 5 years and no salvage value. Jax uses straight-line depreciation.

19. Here comes something that’s A LITTLE BIT DIFFERENT!

20. PREPAYMENTS Expedient Recording Method Records an expense upon payment of cash before goods or services are consumed Records revenue upon receipt of cash before goods or services are provided

21. Prepayment ExampleExpedient Method On 12/1/X5, your company paid $1,200 for a six-month insurance policy. The $1,200 was recorded as Insurance expense. What AJE is needed on 12/31/X5?

22. Prepare Adjusted Trial Balance • Includes all account balances after adjustments have been posted. • Used to produce the financial statements.

23. Prepare Financial Statements • The income statement is always prepared first. • Includes the temporary account balances from the adjusted trial balance.

24. Prepare Financial Statements • The retained earnings statement explains the changes in retained earnings during the year.

25. Prepare Financial Statements • The Balance Sheet includes the permanent accounts. • Retained Earnings is taken from the Retained Earnings Statement.

26. Closing Entries • Two purposes of closing journal entries: • Reduce to zero the balances of temporary accounts related to earnings measurement and dividends • Increase (or decrease) retained earnings by the net impact of the temporary accounts for the period

27. CLOSING ENTRIESFlow - Chart Revenues 11,200 11,200 Dividends Declared Retained Earnings 50 50 85 50 Expenses 11,115 11,115 Note: Large type amounts are closing entries

28. Prepare Post-Closing Trial Balance • Lists the balances of the permanent accounts after the closing process is finished. • Retained Earnings will show the end of period balance.

29. WOW!