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Chapter 4. Accounting Information Systems. Electronic Presentation by Douglas Cloud Pepperdine University. Learning Goals. 1. Describe the nature of business information systems. 2. Describe the nature of accounting information systems.

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slide1

Chapter 4

Accounting Information Systems

Electronic Presentationby Douglas Cloud Pepperdine University

slide2

Learning Goals

1. Describe the nature of business information systems.

2. Describe the nature of accounting information systems.

3. Describe and illustrate the basic elements of transaction processing systems.

4. Describe and illustrate the basic elements of a financial reporting system.

After studying this chapter, you should be able to:

Continued

slide3

Learning Goals

5.Describe and illustrate the computation and use of earnings before interest, taxes, depreciation, and amortization (EBITDA).

slide4

Learning Goal

1

Describe the nature of business information systems.

slide5

A business information system collects and processes data and distributes information to users.

slide6

Business Information System

Data Sources

Data Collection

Data Processing

slide8

Learning Goal

2

Describe the nature of accounting information systems.

slide9

An accounting information system processes financial and operating data into reports useful to internal and external stakeholders.

slide10

Accounting Information System

ACCOUNTING INFORMATION SYSTEMS

Management Reporting System

Transaction Processing System

Financial Reporting System

Financial and Operational Data

Stakeholders

Stakeholders

Stakeholders

slide11

Accounting Information System

The management reporting system provides internal information to assist managers in making decisions.

The transaction processing system records and summarizes the effects of financial transactions on a business.

The financial reporting system produces financial statements and other reports for external stakeholders.

slide12

Learning Goal

3

Describe and illustrate the basic elements of transaction processing systems.

slide13

Cash

The Account

The account has a title.

slide14

Left side debit

The Account

Cash

The left side of the account is the debit side.

slide15

Right side credit

The Account

Cash

Left side debit

The right side of the account is the credit side.

slide16

The Account

Cash

3,750

4,300

2,900

850

1,400

700

2,900

1,000

slide17

10,950

The Account

First, foot the debit side.

Cash

3,750

4,300

2,900

850

1,400

700

2,900

1,000

slide18

Next, foot the

credit side.

10,950

6,850

The Account

Cash

3,750

4,300

2,900

850

1,400

700

2,900

1,000

slide19

10,950

6,850

The Account

Subtract total credits from total debits to obtain the account balance.

Cash

3,750

4,300

2,900

850

1,400

700

2,900

1,000

4,100

slide20

Rules of Debits and Credits

Assets

Scale or Balance

T account

Right Side

Give

CREDIT

Left Side

Receive

DEBIT

Luca Pacioli

Developer of

Double-Entry

Accounting

Give

CREDIT

Receive

DEBIT

slide21

Stockholders’ Equity

Liabilities

Capital Stock/Retained Earnings

T account

T account

Right Side

CREDIT

Left Side

DEBIT

Right Side

CREDIT

Left Side

DEBIT

Rules of Debits and Credits

slide22

Dividends

Revenues

T account

T account

Right Side

CREDIT

Left Side

DEBIT

Right Side

CREDIT

Left Side

DEBIT

Rules of Debits and Credits

slide23

The normal balance is on the increase side of an account.

Expenses

T account

Right Side

CREDIT

Left Side

DEBIT

Rules of Debits and Credits

slide25

JOURNAL

Page 1

Post. Ref.

Date

Description

Debit

Credit

2004

Nov. 1

On November 1, 2004, Shannon Hughes deposits $25,000 in a bank account in the name of Online Solutions.

Cash 25 000 00

Capital Stock 25 000 00

slide26

On November 5, Online Solutions bought land for $20,000, paying cash.

5

Land 20 000 00

Cash 20 000 00

slide27

On November 10, Online Solutions purchased supplies on account for $1,350.

10

Supplies 1 350 00

Accounts Payable 1 350 00

slide28

On November 18, Online Solutions received fees of $7,500 from customers for services provided.

18

Cash 7 500 00

Fees Earned 7 500 00

slide29

Throughout the month, Online Solutions incurred the following expenses that were paid in cash: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

30

Wages Expense 2 125 00

Rent Expense 800 00

Utilities Expense 450 00

Miscellaneous Expense 275 00

Cash 3 650 00

slide30

On December 30, Online Solutions paid creditors on account, $950.

30

Accounts Payable 950 00

Cash 950 00

slide31

Online Solutions paid stockholder (Shannon Hughes) a dividend of $2,000.

30

Dividends 2 000 00

Cash 2 000 00

slide32

You should have noted that in every entry the sum of the debits always equaled the sum of the credits.

slide33

JOURNAL

Page 1

Post. Ref.

Date

Description

Debit

Credit

2004

Cash 25 000 00

Nov. 1

Capital Stock 25 000 00

Posting to a Ledger

11

31

CASH

CAPITAL STOCK

31

11

Nov. 1

25,000

Nov. 1

25,000

slide34

Cash

Dividends

Nov. 30 2,000

Nov. 1 25,000

Nov. 5 25,000

30 3,650

30 960

30 2,000

18 7,500

Fees Earned

Nov. 18 7,500

30 Bal. 5,900

Wages Expense

Supplies

Nov. 30 2,125

Nov. 10 1,350

Land

Rent Expense

Nov. 5 20,000

Nov. 30 800

Accounts Payable

Utilities Expense

Nov. 30 950

Nov. 10 1,350

Nov. 30 450

30 Bal. 400

Miscellaneous Expense

Capital Stock

Nov. 30 275

Nov. 1 25,000

Ledger for Online Solutions—November

slide35

Online Solutions

Trial Balance

November 30, 2004

Cash 5,900

Supplies 1,350

Land 20,000

Accounts Payable 400

Capital Stock 25,000

Dividends 2,000

Fees Earned 7,500

Wages Expense 2,125

Rent Expense 800

Utilities Expense 450

Miscellaneous Expense 275

32,900 32,900

slide36

Learning Goal

4

Describe and illustrate the basic elements of a financial reporting system.

slide37

On December 1, paid a premium of $2,400 for a comprehensive insurance policy covering liability, theft, and fire. The policy covers a two year period.

Dec. 1 Prepaid Insurance 2,400

Cash 2,400

slide38

On December 1, paid rent for December, $800. The company from which Online Solutions is renting its store space now requires the payment of rent on the first of each month rather than the end of the month.

Dec. 1 Rent Expense 800

Cash 800

slide39

This account is a liability!

On December 1, received an offer from a local retailer to rent the land purchased on November 5. The retailer plans to use the land as a parking lot for its employees and customers. Online Solutions agreed to rent the land to the retailer for three months, with rent payable in advance. Online Solutions received $360 for three months’ rent beginning December 1.

Dec. 1 Cash 360

Unearned Rent 360

slide40

On December 4, purchased office equipment on account from Executive Supply Co. for $1,800.

Dec. 4 Office Equipment 1,800

Accounts Payable 1,800

slide41

On December 6, paid $180 for a newspaper advertisement.

Dec. 6 Miscellaneous Expense 180

Cash 180

slide42

On December 11, paid creditors, $400.

Dec. 11 Accounts Payable 400

Cash 400

On December 13, paid a receptionist and a part-time assistant $950 for two week’s wages.

Dec. 13 Wages Expense 950

Cash 950

slide43

On December 16, received $3,100 from fees earned for the first half of December.

Dec. 16 Cash 3,100

Fees Earned 3,100

On December 16, earned fees on account totaling $1,750 for the first half of December.

Dec. 16 Accounts Receivable 1,750

Fees Earned 1,750

slide44

On December 20, paid $1,800 to Executive Supply Co. on the debt owed from the December 4 transaction.

Dec. 20 Accounts Payable 1,800

Cash 1,800

On December 21, received $650 from customers in payment of their accounts.

Dec. 21 Cash 650

Accounts Receivable 650

slide45

On December 23, purchased $1,450 of supplies by paying $550 cash and charging the remainder of account.

Dec. 23 Supplies 1,450

Cash 550

Accounts Payable 900

On December 27, paid the receptionist and the part-time assistant $1,200 for two weeks’ wages

Dec. 27 Wages Expense 1,200

Cash 1,200

slide46

On December 31, paid $310 telephone bill for the month.

Dec. 31 Utilities Expense 310

Cash 310

On December 31, paid $225 electric bill for the month.

Dec. 31 Utilities Expense 225

Cash 225

slide47

On December 31, received $2,870 from fees earned for the second half of December.

Dec. 31 Cash 2,870

Fees Earned 2,870

On December 31, earned fees on account totaling $1,120 for the second half of December.

Dec. 31 Accounts Receivable 1,120

Fees Earned 1,120

slide48

On December 31, paid dividend of $2,000 to stockholder (Shannon Hughes).

Dec. 31 Dividends 2,000

Cash 2,000

slide49

Adjusting

Entries

slide50

Online Solutions

Trial Balance

December 31, 2004

Cash 2,065

Accounts Receivable 2,220

Supplies 2,800

Prepaid Insurance 2,400

Office Equipment 1,800

Land 20,000

Accounts Payable 900

Unearned Rent 360

Capital Stock 25,000

Dividends 4,000

Fees Earned 16,340

Wages Expense 4,275

Rent Expense 1,600

Utilities Expense 985

Miscellaneous Expense 455

42,600 42,600

slide51

Online Solutions

Trial Balance

December 31, 2004

Cash 2,065

Accounts Receivable 2,220

Supplies 2,800

Prepaid Insurance 2,400

Office Equipment 1,800

Land 20,000

Accounts Payable 900

Unearned Rent 360

Capital Stock 25,000

Dividends 4,000

Fees Earned 16,340

Wages Expense 4,275

Rent Expense 1,600

Utilities Expense 985

Miscellaneous Expense 455

42,600 42,600

The Supplies account has a balance of $2,800 on the December 31 trial balance.

Some of these supplies have been used. On December 31, a count reveals that $760 of supplies are on hand.

slide52

$2,800

– 780

$2,040

Adjusting Entries

Supplies on hand at December 31, $760.

Dec. 31 Supplies Expense 2,040

Supplies 2,040

slide53

Online Solutions

Trial Balance

December 31, 2004

Cash 2,065

Accounts Receivable 2,220

Supplies 2,800

Prepaid Insurance 2,400

Office Equipment 1,800

Land 20,000

Accounts Payable 900

Unearned Rent 360

Capital Stock 25,000

Dividends 4,000

Fees Earned 16,340

Wages Expense 4,275

Rent Expense 1,600

Utilities Expense 985

Miscellaneous Expense 455

42,600 42,600

Prepaid Insurance has a balance of $2,400 on the December 31 trial balance.

Of this prepayment, $100 of it expired during December.

slide54

Adjusting Entries

Insurance premiums expired during December, $100.

Dec. 31 Insurance Expense 100

Prepaid Insurance 100

slide55

Online Solutions

Trial Balance

December 31, 2004

Cash 2,065

Accounts Receivable 2,220

Supplies 2,800

Prepaid Insurance 2,400

Office Equipment 1,800

Land 20,000

Accounts Payable 900

Unearned Rent 360

Capital Stock 25,000

Dividends 4,000

Fees Earned 16,340

Wages Expense 4,275

Rent Expense 1,600

Utilities Expense 985

Miscellaneous Expense 455

42,600 42,600

Unearned Rent has a balance of $360 on the December 31 trial balance.

Of this amount, $120 was earned during December for the use of the land owned by Online Solutions.

slide56

Adjusting Entries

Unearned rent earned during December, $120.

Dec. 31 Unearned Rent 120

Rent Revenue 120

The liability is being reduced.

Revenue is being “recognized.”

slide57

Online Solutions

Trial Balance

December 31, 2004

Cash 2,065

Accounts Receivable 2,220

Supplies 2,800

Prepaid Insurance 2,400

Office Equipment 1,800

Land 20,000

Accounts Payable 900

Unearned Rent 360

Capital Stock 25,000

Dividends 4,000

Fees Earned 16,340

Wages Expense 4,275

Rent Expense 1,600

Utilities Expense 985

Miscellaneous Expense 455

42,600 42,600

Wages Expense does not reflect that $250 is owed to the employees at December 31.

slide58

Adjusting Entries

Wages accrued, but not paid at December 31, $250.

Dec. 31 Wages Expense 250

Wages Payable 250

An additional expense is recorded.

The books now show that employees are owed $250.

slide59

Online Solutions

Trial Balance

December 31, 2004

Online Solutions

Trial Balance

December 31, 2004

Cash 2,065

Accounts Receivable 2,220

Supplies 2,800

Prepaid Insurance 2,400

Office Equipment 1,800

Land 20,000

Accounts Payable 900

Unearned Rent 360

Capital Stock 25,000

Dividends 4,000

Fees Earned 16,340

Wages Expense 4,275

Rent Expense 1,600

Utilities Expense 985

Miscellaneous Expense 455

42,600 42,600

The account Fees Earned does not include $500 for revenue that has not been billed.

slide60

Adjusting Entries

Fees revenue earned, but not yet billed, $500.

Dec. 31 Accounts Receivable 500

Fees Earned 500

To increase the asset.

To increase the revenue account.

slide61

Adjusting Entries

Depreciation of office equipment during December, $50.

Dec. 31 Depreciation Expense 50

Accumulated Depreciation— Office Equipment 50

Notice that the Office Equipment account is not credited.

slide62

Online Solutions

Income Statement

For the Two Months Ended December 31, 2004

Fees earned $16,840

Rent revenue 120

Total revenue $16,960

Operating expenses:

Wages expense $ 4,525

Supplies expense 2,040

Rent expense 1,600

Utilities expense 985

Insurance expense 100

Depreciation expense 50

Miscellaneous expense 455

Total operating expenses 9,755

Net income $ 7,205

All amounts came from the adjusted trial balance

slide63

Make a note to yourself to analyze Exhibit 11 in the textbook and the other statements in Exhibit 12 to understand the source of the different amounts.

slide64

Closing Entries

Entry 1: Close the revenue accounts to Retained Earnings.

Dec. 31 Fees Earned 16,840

Rent Revenue 120

Retained Earnings 16,960

After this entry is posted, all revenue accounts will have zero balances.

slide65

Closing Entries

Entry 2: Close the expense accounts to Retained Earnings.

Dec. 31 Retained Earnings 9,755

Wages Expense 4,525

Rent Expense 1,600

Depreciation Expense 50

Utilities Expense 985

Supplies Expense 2,040

Insurance Expense 100

Miscellaneous Expense 455

After this entry is posted, all expense accounts will have zero balances.

slide66

Closing Entries

Entry 3: Close the Dividends account to Retained Earnings.

Dec. 31 Retained Earnings 4,000

Dividends 4,000

After this entry is posted, the Dividends account will have a zero balance.

slide67

Learning Goal

5

Describe and illustrate the computation and use of earnings before interest, taxes, depreciation, and amortization.

slide68

Earnings before interest, taxes, depreciation, and amortization.

Let’s do a pro forma computation for Online Solutions using EBITDA.

slide69

Online Solutions

Income Statement

For the Two Months Ended December 31, 2004

Fees earned $16,840

Rent revenue 120

Total revenue $16,960

Operating expenses:

Wages expense $ 4,525

Supplies expense 2,040

Rent expense 1,600

Utilities expense 985

Insurance expense 100

Depreciation expense 50

Miscellaneous expense 455

Total operating expenses 9,755

Net income $ 7,205

9,705

$ 7,255

slide70

Because Online Solutions only had a small depreciation and no interest, taxes, or amortization, there was little impact.

slide71

EBITDA is a rough estimate of operating cash flows that are available to pay interest and other fixed charges.

slide72

Chapter 4

The End