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The Accounting Information System
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  1. The Accounting Information System

  2. Objectives of the Chapter I. Learning the accounting process in preparing financial statements. II. Introduce the accrual accounting concept and the adjusting entries. III. Introduce the worksheet (including the trial balance, the adjustments and the adjusted trial balance, the I/S and the B/S columns), the preparation of financial statements from the worksheet and the closing entries. Accounting Cycle

  3. I. Accounting Process 1. Identification and measurement of business transactions and other events; 2. Journalization (general or special journals); 3. Post (to ledger accounts and subsidiaries); 4. Prepare worksheet (including unadjusted T/B, adjustments; adjusted T/B, I/S, B/S…); 5. Prepare financial statements; Accounting Cycle

  4. Accounting Process (contd.) 6. Prepare and post adjusting entries; 7. Prepare and post closing entries; 8. Prepare post-closing trial balance (T/B) (optional); 9. Prepare and post reversing entries. Accounting Cycle

  5. The Accounting Cycle (Source: Kieso, et al., 14th E, Illustration 3-6) Accounting Cycle

  6. 1. Identifying Accounting Events • External Events: Purchase of assets, sales of goods, loss from flood, … • Internal Events: Consumption of prepaid rent, use of depreciable assets, transfer of raw material to W-I-P, … Accounting Cycle

  7. 1. Identifying Accounting Events (contd.) • Events are recognized as accounting events and would be recorded if: a. have occurred; b. affect the financial position of the business; c. can be measured in monetary terms (measurable); d. relevant, reliable. Accounting Cycle

  8. Examples 1. Two months of prepaid insurance expired. 2. Purchase of a machine. 3. Sales of merchandise. 4. Changes in managerial policies. 5. Value of human resources. 6. The development of a new product. 7. Sign a contract to buy a building. 8. Investment from owners. 9. Distribution to owners. Accounting Cycle

  9. 2. Journalization • Introduction of the Double-Entry System and Journal Entries: A. Double-entry system; B. T-account; C. Increases and decrease in the accounts. Accounting Cycle

  10. A. Double-Entry System • Each transaction affects at least two accounts and the balance of the accounting equation must be maintained. • Example: Purchases inventory and charges to accounts payable. Assets = Liabilities + Equity Inventory Accounts Payable  + + Accounting Cycle

  11. A. Double-Entry System (contd.) Accounting Cycle

  12. Inventory Debit Credit Accounts Payable Debit Credit B. Introduction of the T-account Accounting Cycle

  13. C. Increases and Decreases in the Accounts  Debit A  Credit  Credit Revenue  Debit  Credit L  Debit  Credit E  Debit  Debit Expense  Credit Accounting Cycle

  14. Examples of the Journal Entries: Accounting Cycle

  15.    Special Journals (Cash Disbursements and Receipts) Cash Disbursements Journal Accounting Cycle

  16.    Special Journals (Cash Disbursements and Receipts) Cash Receipts Journal Accounting Cycle

  17. 3. Posting(to ledger accounts and subsidiaries) • The Ledger: all individual accounts (assets, liability, and stockholder’s equity accounts) combined make up the ledger. Accounting Cycle

  18. Another Example of Posting (Kieso, et al., 14th edition, Illustration 3-8) Accounting Cycle

  19. Accounts Receivable No. 3 20x1 Mar 31 Balance 672.00 Apr 30 CR8 1,136.00 Apr 30 S6 2,662.00 General Ledger (T-Account Format) Accounting Cycle

  20. Examples of Posting using T-accounts (Kieso, et al., 14th edition, Illustrations 3-9 and 3-10) Accounting Cycle

  21. Accounts Receivable SUBSIDIARY LEDGER Ellen Odom 202 20x1 Mar 31 Balance 520 Apr 2 S6 910 Nita Doty 204 20x1 Mar 31 Balance 30 Apr 18 CR8 750 Apr 6 S6 750 Joe Leo 206 20x1 Mar 31 Balance 122 Apr 16 CR8 200 Apr 4 S6 816 Rex Road 208 20x1 Apr 1 S6 186 Apr 7 CR8 186 Subsidiary Ledger Accounting Cycle 21

  22. General Ledger Controlling Acct. Type of Subsidiary Record Accounts Receivable Accounts Payable Capital Stock Notes Receivable Individual customers’ ledger accounts, or a file of uncollected sales invoices. Individual ledger accounts, or a file of unpaid purchase invoices. A record of the stock certificates and number of shares held by each shareholder. A file of uncollected N/R, or a “register” or book in which the notes are listed. Examples of Controlling Accounts Accounting Cycle

  23. General Ledger Controlling Acct. Type of Subsidiary Record Raw Material on Hand Equipment Land Separate record card for each item of material used in manufacturing. Separate record card for each item of equipment. This is often known as a plant ledger. Separate record card for each parcel of land owned. Examples of Controlling Accounts (contd.) Accounting Cycle

  24. The Flows of Accounting Data Transaction Occurs Source Documents Prepared Transaction Analysis Takes Place Amounts Posted to Ledger Transaction Entered in Journal Accounting Cycle

  25. XYZ Corp.Trail Balance4/30/20x1 Cash 33,300 Accounts receivable 2,000 Office supplies 500 Land 18,000 Accounts payable 100 Common Stock 50,000 Dividends 2,100 Service revenue 8,500 Rent Expense 1,100 Salary Expense 1,200 Utilities Expense 400 . Total 58,600 58,600 . Accounting Cycle 25

  26. II. Accrual Accounting • The time-period concept, the revenue recognition and matching principles. • Accrual versus cash basis accounting. • Adjusting entries. Accounting Cycle

  27. The Time-Period Concept, the Revenue Recognition & Matching Principles • The time-period concept: • Income and financial position of a business are reported periodically, not until the end of life of a business. Accounting Cycle

  28. Revenue Recognition Principle (SFAS No. 5) (-An Accrual Basis) • Revenue is recognized when it is earned and realized or realizable (SFAC 5, par. 83). • Earned: the entity has substantially accomplished what it must do to be entitled to compensation. • Realized: goods are exchanged for cash or claims. • Realizable: assets received as compensation are readily convertible into cash or claims to cash. • In general, these conditions are met at time of sale (delivery) or when services are rendered regardless whether cash is collected or not (SFAC 5, par. 84). • . Income Measurement And Profit Analysis

  29. Revenue Recognition Principle • Other conditions for revenue recognition (Staff Accounting Bulletin No. 101(1999)): • Persuasive evidence of a sale. • Price is fixed or determinable. • Collectibility is reasonably assured. • Delivery has occurred or services have been rendered. Income Measurement And Profit Analysis

  30. The Expense Recognition (Matching) Principle • If revenues are recognized in a period, all related expenses should be recognized in the same period regardless whether expenses are paid or not. • The related expenses include traceable costs (e.g. product costs), periodcosts, (e.g. interest and rent expenses) and estimated expenses (e.g. depreciation expense and bad debt expense). Accrual Accounting and the Financial Statements

  31. Accrual vs. Cash Basis Accounting • Accrual-basis accounting: Revenues are recognized based on revenue recognition principle (i.e., recognized when realized and earned regardless whether cash is collected or not). Expenses are recognized based on matching principle (i.e., recognized when incur regardless whether they are paid or not). Note: revenue and expense recognize before cash settlement. Accrual Accounting and the Financial Statements

  32. Accrual vs. Cash Basis Accounting (contd.) • Cash-basis accounting: The accountant does not record a transaction until cash is received or paid. Cash-basis accounting is NOT acceptable for financial reporting. Accrual Accounting and the Financial Statements

  33. Adjusting Entries • Due to the periodicity concept, financial reports are prepared periodically. • Based on revenue recognition principle, adjusting entries are prepared at the end of a period to recognize revenues earned during the period but not yet recorded (i.e., accrued revenues). Accrual Accounting and the Financial Statements

  34. Adjusting Entries (contd.) • Based on the matching principle, the accrued expenses (i.e., expenses incurred but not yet paid/recorded) and estimated expenses (i.e., depreciation expense and bad debt expense) are recorded at the end of a period. Accrual Accounting and the Financial Statements

  35. Types of Adjusting Entries (Kieso, et al. textbook, 14th edition, illustration 3-20) Accounting Cycle

  36. Adjusting Entries and Reversing Entries Accounting Cycle

  37. Adjusting Entries for Accruals (Kieso, et al. 14th edition, illustration 3-27) Accounting Cycle

  38. 1. Accruals: Unrecorded Revenue or Expenses a. Accrued expense: • A one-year note payable was issued on 11/1/x1 to purchase an equipment. The face amount of the note is $2,400. The annual interest rate is 10% and interests are paid on 4/30/x2 and 11/1/x2. 11/1/x1 Equipment 2,400 Notes Payable 2,400 Adj. Entry 12/31/x1 Accounting Cycle

  39. Accruals: (contd.) b. Accrued revenue: • A one year note was received from a credit sale with a face amount of $3,000 and an annual interest rate of 12% on 9/1/x1. Interests are received on 3/1/x2 and 9/1/x2. 9/1/x1 N/R 3,000 Sales 3,000 Adj. Entry 12/31/x1 Accounting Cycle

  40. Adjusting Entries for Deferrals (Kieso, et al. textbook, 14th edition, illustration 3-21) Accounting Cycle

  41. 2. Deferrals: Postponing the Recognition of Revenues or Expenses a. Unearned revenues • Receiving $2,400 for one-year advanced rent payment from tenant on 12/1/x1 (B/S Approach) (I/S Approach) 12/1/x1 Cash 2400 Unearned Rent 2400 12/1/x1 Cash 2400 Rent Revenue 2400 12/31/x1 Unearned Rent 200 Rent Revenue 200 12/31/x1 Rent Revenue 2200 Unearned Rent 2200 Accounting Cycle

  42. Deferrals (contd.) b. Prepaid expenses • Prepaid 12 month insurance of $1,200 on 11/1/x1 (B/S Approach) (I/S Approach) 11/1/x1 Prepaid Ins. 1200 Cash 1200 11/1/x1 Ins. Exp. 1200 Cash 1200 12/31/x1 Ins. Exp. 200 Prepaid Ins. 200 12/31/x1 Prepaid Ins. 1000 Ins. Exp. 1000 Accounting Cycle

  43. 3. Estimated Expenses (no reversing entry except for I/T) Examples - Depreciation Exp.: 12/31 Depreciation Exp. XXX Accumulated Depr. XXX Bad Debt Exp.: 12/31 B/D Exp. XXX Allowance for B/D XXX Income Tax 12/31 Income Tax Exp. XXX Income Tax Payable XXX Accounting Cycle

  44. III. Worksheet Example A. The adjusting entries information for the worksheet example. B. Preparing financial statements from a worksheet. C. Closing and reversing entries. Accounting Cycle

  45. A. Adjusting Entries Information • The following items are the adjusting entries information for the worksheet example (source: Kieso, et al. textbook): (a) Furniture and equipment is depreciated at the rate of 10% per year based on original cost of $67,000. • Depreciation Expense • --Furniture and Equipment 6,700 • Accumulated Depreciation • --Furniture and Equipment 6,700 Accounting Cycle

  46. A. Adjusting Entries Information (contd.) (b) Estimated bad debts, one-quarter of 1% of sales ($400,000). • Bad Debts Expense 1,000 • Allowance • for Doubtful Accounts 1,000 (c) Insurance expired during the year, $360. • Insurance Expense 360 • Prepaid Insurance 360 Accounting Cycle

  47. A. Adjusting Entries Information (contd.) (d) Interest accrued on notes receivable as of December 31, $800. • Interest Receivable 800 • Interest Revenue 800 (e) The Rent Expense account contains $500 rent paid in advance, which is applicable to next year. • Prepaid Rent Expense 500 • Rent Expense 500 Accounting Cycle

  48. A. Adjusting Entries Information (contd.) (f) Property taxes accrued December 31, $2,000. • Property Tax Expense 2,000 • Property Tax Payable 2,000 • (g) Income taxes accrued December 31, $3,440 • Income tax expense 3,440 • Income tax payable 3,440 Accounting Cycle

  49. Adjusted Trial Balance Adjustments Trial Balance Dr. Cr. Dr. Cr. Dr. Cr. 1200 1200 16000 16000 41000 41000 2000 (b) 1000 3000 36000 36000 900 (c) 360 540 67000 67000 12000 (a)6700 18700 Accounts Cash N/R A/R Allow. for double Accounts Inventory, 1/1/12 Prepaid insurance Furniture & equip. Accu. Depr. -- furniture & equip. Uptown Cabinet Corp.(source: Kieso, et al. Illu. 3C-1) TEN-COLUMN WORK SHEET (with Periodic Inventory System) For the Year Ended December 31, 2010 Accounting Cycle 49

  50. Trial Balance Adjustments Adj. T-B Accounts N/P A/P B/P Common stock R/E, 1/1/12 Sales Purchases Sales Salaries exp. Advertising exp. Traveling exp. Office Sal. exp. T&T exp. Dr. Cr. Dr. Cr. Dr. Cr. 20000 20000 13500 13500 30000 30000 50000 50000 14200 14200 400000 400000 320000 320000 20000 20000 2200 2200 8000 8000 19000 19000 600 600 TEN-COLUMN WORK SHEET (contd.) Accounting Cycle 50