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Chapter 3: The Accounting Information System

Chapter 3: The Accounting Information System. Expanded rules for debits and credits based on financial statement relationships: Assets = Liabilities + Stockholders’ Equity Retained Common Earnings Stock

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Chapter 3: The Accounting Information System

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  1. Chapter 3:The Accounting Information System

  2. Expanded rules for debits and credits based on financial statement relationships: Assets = Liabilities + Stockholders’ Equity Retained Common Earnings Stock Net Income Dividends Revenues Expenses Effect of Debits and Credits DR CR CR CR CR DR CR DR

  3. To initially record transactions, we use a journal entry to represent the debits and credits. For example, if investors contribute $20,000 into the company, and receive common stock, the transaction is recorded as follows: Debit Credit Cash 20,000 Common Stock 20,000 This transaction INCREASES cash with a DEBIT, and INCREASES common stock with a CREDIT. Note that the debit is to the left and the credit is to the right. First we list the account (left hand entry on top), then the amount. The Format of a Journal Entry

  4. Purchase $20,000 of equipment with the payment of $8,000 cash, and finance the balance with a Notes Payable: Equip. 20,000 Cash 8,000 Notes Pay. 12,000 Additional Entries

  5. Perform services for customer on account, and bill the customer $5,000: A/Rec. 5,000 Service Revenue 5,000 Collect $4,000 on accounts receivable: Cash 4,000 A/Rec. 4,000 Pay current month’s rent of $1,000: Rent Expense 1,000 Cash 1,000 Additional Entries

  6. Back to Class Problem: Posting to G/LNow post transactions (for Cash) to “T” account: Cash 20,000 8,000 4,000 1,000 Bal. 15,000

  7. Raider Company borrowed $10,000 on October 1, 2012. The note included a 5 percent annual interest rate, payable each September 30, starting Sept. 30, 2013. How much interest must Raider accrue at Dec. 31, 2012 before financial statements are prepared? Calc: Principal x rate x time P x R x T AJE: 1. Accrual of Expenses - Example 1 10,000 x .05 x 3/12 of a year = $125 Interest Expense 125 Interest Payable 125

  8. Raider Company purchased a 1-year insurance policy on April 1, 2012 at a cost of $2,400 General JEat time of purchase (to asset): Prepaid Insurance 2,400 Cash 2,400 Calculation for AJE at December 31 to recognize the portion that has been used up: 3.Prepaid Expenses - Example 3 2,400 /12 = 200 per month x 9 months= $1,800 AJE: Insurance Expense 1,800 Prepaid Insurance 1,800

  9. Raider Company purchased a 1-year insurance policy on April 1, 2012 at a cost of $2,400 General JEat time of purchase (to expense): Insurance Expense 2,400 Cash 2,400 Calculation for AJE at December 31 to create asset for the portion that was not used up: 3.Prepaid Expenses – Example 4 2,400 /12 = 200 per month x 3 months= $600 AJE: Prepaid Insurance 600 Insurance Expense 600

  10. Raider Company received $6,000 on November 30, 2012 for subscriptions to be delivered over the next 12 months, starting in December of 2012. General JE at time cash received (credit to liability): Cash 6,000 Unearned Revenues 6,000 AJEat end of the period (for portion earned): 4.Unearned Revenues – Example 5 6,000 / 12 = 500 per month, so 1 month earned. Unearned Revenues 500 Subscription Revenues 500

  11. Raider Company received $6,000 on November 30, 2012 for subscriptions to be delivered over the next 12 months, starting in December of 2012. General JE at time cash received (credit to revenue): Cash 6,000 Subscription Revenues 6,000 AJEat end of the period (for portion earned): 4.Unearned Revenues – Example 6 6,000 / 12 = 500 per month, so 1 month earned. Subscription Revenues 5,500 Unearned Revenues 5,500

  12. Raider Company purchased equipment in 2010 at a cost of $30,000. The equipment has a useful life of 10 years and no salvage value. Calculation for AJE at December 31, 2012 for the current year’s depreciation. 5. Depreciation Exp. – Example 7 30,000/10 = 3,000 per year AJE: Depr. Exp. 3,000 A/D 3,000

  13. Close revenues and expenses to Retained Earn.: Sales Revenue 410,000 Sales Discounts 15,000 Sales Returns & Allowances 12,000 COGS 225,700 Selling Expenses 16,000* Administrative Expenses 38,000* Income Tax Expense 30,000 Close dividends to Retained Earnings: Dividends 18,000 Ending RE? *Note: close individual account titles. Exercise 3-16 Closing JEs Retained Earnings 73,300 Retained Earnings 18,000 45,000 + 73,300 – 18,000 = 100,300

  14. 4/2 Cash 32,000 Equipment 14,000 Capital 46,000 4/2 No JE 4/3 Supplies 700 A/Pay 700 4/7 Rent Expense 600 Cash 600 4/11 A/Rec 1,100 Service Revenue 1,100 4/12 Cash 3,200 Unearned Revenue 3,200 Exercise 3-1

  15. 4/17 Cash 2,300 Service Rev. 2,300 4/21 Insurance Exp. 110 Cash 110 4/30 Salaries Exp. 1,160 Cash 1,160 4/30 Supplies Exp. 120 Supplies 120 4/30 Computer 6,100 Capital 6,100 Back to Power Points. Exercise 3-1

  16. 1.Depr. Exp. 750 Accum. Depr. 750 2.Unearned Rent Rev. 3,100 (1/3 x 9,300) Rent Rev. 3,100 3.Interest Exp. 500 Interest Pay. 500 4.Supplies Exp. 1,950 (2800-850) Supplies 1,950 5.Insurance Exp. 900 Prepaid Ins. 900 Exercise 3-5 (AJEs for 3 months)

  17. 1. A/R 750 Service Rev. 750 2.Utility Exp. 520 A/P 520 3. Depr. Exp. 400 A/D 400 Int. Exp. 500 Int. Pay. 500 4. Ins. Exp. 1,000 Prepaid Ins. 1,000 5. Supplies Exp. 1,100 Supplies 1,100 Exercise 3-6 (AJEs only)

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