The Accounting Information System DR Ashish Varma PH.D, Ficwa, PGDBM Asstt Prof. IMT, GZB

The Accounting Information System
Dr Ashish Varma
Ph.D, FICWA, PGDBM
Asstt Prof.
IMT ,Gzb.
Financial Accounting/ DR ASHISH /

1
IMT / 2010
The Accounting Cycle

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1. Analyze transactions

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2. Record the effect of
transactions in a journal
entry

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entry
3. Summarize the effects of
transactions
a. Post journal entries to
the ledger
b. Prepare a trial
balance

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entry
3. Summarize the effects of
transactions
a. Post journal entries to
the ledger
b. Prepare a trial
balance
4. Prepare reports
a. Make adjusting
entries
b. Prepare financial
statements
c. Close the books
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Transaction Analysis
Using Debits and Credits

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1-5
Events and Transactions

• An event is a happening of consequence to an entity.
• An event could be an internal happening or external
happening.
• External events that involve transfer of value ( in
monetary terms) between two entities (within or
outside) are called transactions.
• Thus, a transaction is an external event that affects the
financial position of an entity.

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Financial Accounting: An introduction
1-6
Recording of Transactions: The
Double Entry Principle
• Each transaction has two aspects (or side): Debit and
Credit.
• Every debit has an equal and opposite credit.
• Each transaction should be recorded in such a way that
it affects two sides- debit and credit- equally.
• Thus, the first and foremost step in recording a
transaction is to identify the debit and credit elements.

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1-7
Basic Accounting Concepts

• An understanding of accounting concepts is vital to
understand the process of accounting.
• Accounting concepts underlying the recording of
transactions:
– Entity Concept
– Money Measurement Concept
– Accrual Concept
– Cost Concept

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Transaction Analysis Using
Debits and Credits
• The accounting equation
• Assets = Liabilities + Owners’ Equity
• The spreadsheet analysis format based on the

accounting equation is not practical when a
company has thousands of transactions
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1-21
Accounting Equation
• The relationship among three elements of the balance
sheet can be expressed through an equation, known as
fundamental accounting equation:
Assets (A) = Liabilities (L) + Equity (E)
• The unique feature of the above equation is that all
transactions will affect the equation in such a way that
the equality will always be maintained.
• This happens due to double entry rule.

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Transaction Analysis Using
Debits and Credits
• All transactions relating to a specific item are
recorded in an account
The most simple

form of an account is
called a T- account

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The T- Account
ACCOUNT TITLE
DEBIT CREDIT
(Left Side) (Right Side)

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3-4
Account Format
 An account in the ledger has the following format:
Dr. Ledger Account Cr.

Date Particulars JF Amount Date Particulars JF Amount
Where,
Dr. stands for Debit and Cr. Stands for Credit
JF stands for Journal Folio
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Postings in the Secondary Books
3-7
D r. D e b to rs A c c o u n t C r.
D a te P a r tic u la r s JF Am ount D a te P a r tic u la r s JF Am ount
6 .3 . T o , S a le s ? 1 0 ,0 0 ,0 0 0
2006 A /C
D r. S a le s A c c o u n t C r.
D a te P a r tic u la r s JF Am ount D a te P a r tic u la r s JF Am ount
6 .3 . B y , D e b to rs A /C ? 1 0 ,0 0 ,0 0 0
2006
A/C stands for Account.
Notice that the entry is posted on the debit side of Debtors
Account and simultaneously on the credit side of Sales
Account.
JF refers to the page number of the journal where the
particular transaction is recorded.
Use of ‘To’ (on the debit side) and ‘By’ (on the credit side) is
customary.
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Postings in the Secondary Books
Debits and Credits:
Balance Sheet Accounts
Increase Decrease
Assets Debit Left
Liabilities Credit Right
Equity Credit Right
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Financial Accounting/ DR ASHISH / IMT / 2010
Debits and Credits:
Increase Decrease
Assets Debit Left Credit Right
Liabilities Credit Right Debit Left
Equity Credit Right Debit Left
18
Debits and Credits:
ASSET LIABILITY EQUITY
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
+ - - + - +

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Debits and Credits:
Revenues, Expenses, and Dividends
Increase Decrease
Revenues Credit Right
Expenses Debit Left
Dividends Debit Left
20
Debits and Credits:
Increase Decrease
Revenues Credit Right Debit Left
Expenses Debit Left Credit Right
Dividends Debit Left Credit Right
21
Debits and Credits:
REVENUE EXPENSE DIVIDEND
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
- + + - + -

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Debits and Credits — All Accounts
Owners’
Assets = Liabilities + Equity
Dr. Cr. Dr. Cr. Dr. Cr.
+ - - + - +
Paid-in Retained
Capital Earnings
Dr. Cr. Dr. Cr.
- + - +
Expenses Revenues
Dr. Cr. Dr. Cr.
+ - - +
Dividends
Dr. Cr.
IMT / 2010 + - 23
Recording
Journal Entries

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Recording the Effects
of Transactions
• The journal is a book
in which all
transactions are
DR = CR
• Each journal entry
recorded in has its debit
chronological order amounts equal to
its credit amounts
to ensure that the
accounting
equation remains
in balance
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of Transactions
• Journalizing involves a three-step process:
1. Identify which accounts are involved
2. For each account, determine if it is increased or
decreased
3. For each account, determine by how much it
changed

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of Transactions
• The account debited is always listed first,
followed by the account credited
• The credit entry is indented
• Some selected transactions from Veda
Landscape Solutions are presented next as
examples…

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Transaction 1
Investment of
$700,000 cash into
the business.
Tx # Account Titles Ref Debit Credit

1 Cash 700,000
Paid-In Capital 700,000

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Transaction 2
Borrowed $300,000
cash from the bank.
2 Cash 300,000
Bank Loan Payable 300,000

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Transaction 3
Purchased land costing $50,000
and buildings costing $400,000.
Paid $100,000 in cash and
signed a mortgage for the
balance.
3 Land 50,000
Buildings 400,000
Cash 100,000
Mortage Payable 350,000

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Transaction 4
Purchased equipment
for $650,000 in cash.
4 Equipment 650,000
Cash 650,000

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Transaction 7
Purchased inventory
costing $90,000 for $10,000
in cash and the remaining
$80,000 on account.
7 Inventory 90,000
Cash 10,000
Accounts Payable 80,000

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Transaction 8
Paid $15,000 cash for an
insurance policy.
8 Prepaid Insurance 15,000

Cash 15,000

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Transaction
Performed landscaping
consulting services and
billed clients $200,000
for these services.
11 Accounts Receivable 200,000

Consulting 200,000

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Transaction
Collected $820,000 cash
from customers as
payment on their
accounts.
14 Cash 820,000
Accounts Receivable 820,000

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Transaction
Paid $1,200,000 in cash
to suppliers as payment
on account.
15 Accounts Payable 1,200,000

Cash 1,200,000

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Transaction
Paid cash of $150,000 for
advertising, utilities, and
office supplies.
18 SG&A Expense 150,000

Cash 150,000

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Transaction
Paid cash
dividends of
$5,000.
23 Dividends 5,000
Cash 5,000

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Posting
and the Trial Balance

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Posting
• Posting involves transferring the the debits

and credits from the journal entries to the
individual accounts
• Posting is purely mechanical in nature and
requires no analysis
• The collection of all of a company’s accounts
is called a ledger
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Example:
Posting Transaction 1
• Cash 700,000
Paid-in Capital 700,000
Cash Paid-in Capital

700,000 700,000

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Trial Balance
• A trial balance is a listing of all of the ledger

accounts and their balances
• The total of the debit balance accounts should
equal the total of the credit balance accounts
• The equality of theDR

debits=and
CR credits provides
some assurance that the posting process has
been completed correctly
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Veda Landscape Solutions
Trial Balance
December 31, 2006
Debit Credit
Cash $130,400
Accounts receivable 120,000
Inventory 490,000
Prepaid insurance 0
Land 50,000
Buildings 380,000
Equipment 520,000
Accounts payable $180,000
Wages payable 40,000
Unearned franchise revenue 50,000
Interest payable 58,000
Bank loan payable 300,000
Mortgage payable 350,000
Paid-in capital 700,000
Retained earnings (beginning of year) 0
Sales revenue 1,100,000
Consulting revenue 200,000
Landscaping revenue 500,000
Cost of goods sold 800,000
Landscaping supplies expense 100,000
Wages expense 500,000
Selling, general, and administrative expense 174,600
Interest expense 58,000
Depreciation expense 150,000
Dividends 5,000
43
Totals IMT / 2010 $3,478,000 $3,478,000
The Account
• Device used for calculating net change
• Simplest form is T-account.
• Increases listed on one side; decreases listed
on other side.
• Balanced periodically.

1-44
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Permanent Accounts
• = real accounts = balance sheet accounts.
• Reported on balance sheet.
• Carried forward into next period:
– In this sense, they are permanent.

1-45
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Temporary Accounts
• Revenue and expense accounts.
• Details of income statement and changes in
retained earnings (RE).
• Helps summarize operating activity.
• Avoids cluttering RE account.
• At end of accounting period, amounts are totaled,
combined and transferred to RE.
– Balances at beginning of each period are 0.

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Adjusting and
Closing Entries

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Adjusting Entries
• Adjusting entries are made at the end of the
accounting period
– to properly reflect the balances of all asset,
liability, and owners’ equity accounts
– to recognize all revenues and expenses on an
accrual basis

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Adjusting Entries
Adjustments result from one of two

sequences of events:
• New information • A transaction has
requires an not yet been
adjustment to a recorded even
transaction that though a business
has already been event has occurred
recorded
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An Event Already Recorded
• Assume a company purchases a one-year

insurance policy paying $1,200 on October
1, 2006, resulting in the following journal
entry
Prepaid Insurance 1,200

Cash 1,200

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An Event Already Recorded
• At December 31, 2006, the following
adjusting journal entry is required:
• Insurance Expense 300
• Prepaid Insurance 300
$1,200 (12 months x $100 per month)
October 1 September 30
|-----------------------||-------------------------------------------|
December 31
3 months used up 9 months still an asset

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An Event Not Yet Recorded
• Assume that a chemical spill during November 2006

at a factory will require a cleanup costing $23,000.
The cleanup will take place in 2007, and nothing yet
has been recorded. The following adjustment is
necessary at December 31, 2006:
• Chemical Cleanup Expense 23,000
• Chemical Cleanup Liability 23,000

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Closing Entries
• Closing entries
– Transfer the amounts in the revenue, expense,
and dividend accounts to Retained Earnings
– Zero-out these “temporary accounts” for the start
of the next accounting period

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Closing Entries
• Comprised of three journal entries:

1. Close the revenue accounts to Retained
Earnings
2. Close the expense accounts to Retained
Earnings
3. Close the dividends account to Retained
Earnings

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IMT / 2010
Computers and Accounting
• The time spent performing routine tasks within the
accounting cycle has been greatly reduced as a result
of using computers
• Personal computers are being used for
– financial analysis
– accounting functions
– word processing
– database management
– inventory control
– credit analysis of customers

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IMT / 2010
Computers and Accounting
• Through networking (Internet and intranet),

personal computers are speeding up the
exchange of information among users
• It is still important, however, to be familiar
with the accounting cycle in order to
understand the flow of information within
an organization

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1-8
Basic Accounting Concepts

• Accounting concepts underlying financial reporting:
– Going Concern Concept
– Periodicity Concept
– Matching Concept
– Prudence
– Substance over form
– Consistency

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1-9
Accounting Concepts: Entity and
Money Measurement
• Entity Concept:
– A business entity is an economic unit distinct from its
owner(s). Such entity owns its assets and has its own
obligations. Only those transactions and events which affect
the financial position of the business entity will be recorded
in its books of accounts.
• Money Measurement Concept:
– Only transactions and events which are measurable in
monetary terms should be recorded.

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1-10
Accounting Concepts: Accrual and
Cost
• Accrual Concept:
– Income and expenses should be recognised as and when they
are earned and incurred, irrespective of whether money is
received or paid in connection thereof. An alternative of
accrual basis of accounting is cash basis where transactions
are recorded only when cash is received or paid.
• Cost Concept:
– Assets and liabilities should be recorded at historical cost. The
recent trends in accounting show that policy makers favour
fair value accounting in place of historical cost accounting.

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1-11
Accounting Concepts: Going Concern

and Periodicity
• Going Concern Concept:
– An entity is said to be a going concern if it has ‘neither the
intention nor the necessity of liquidation or of curtailing
materially the scale of the operations’. The valuation
principles of assets and liabilities depend on this concept.
• Periodicity Concept:
– Accounts are prepared for a defined accounting period. Such
period could be a quarter, half year, a year or, in exceptional
circumstances, more than one year. This concept is essential
to measure financial performance.

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1-12
Accounting Concepts: Matching and

Prudence
• Matching Concept:
– While measuring periodic financial results, revenue earned
during an accounting period is matched with expenses
incurred (to earn the revenue) in the same accounting
period. Thus, expenditure incurred during construction phase
should be withheld till the business starts commercial activity
and earns revenue.
• Prudence Concept:
– This concept suggests that all possible expenses and losses
should be estimated and recorded, but anticipated gains
should be ignored. This concept is also called the concept of
‘conservatism’.

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1-13
Accounting Concepts: Substance over

form and Consistency
• Substance over form:
– While recording transactions more emphasis needs to be given
to the substance of the transactions and not merely to their legal
form. A transaction may appear to be an expense when looked at
from legal angle (e.g., construction of road by a business entity
on land owned by the municipality), but the substance of the
matter may demand such expense be shown as asset (e.g., if
such road is primarily used by the business entity for its business
purposes).
• Consistency:
– A business entity frames accounting policies that lay down rules
for presentation of financial statements. Accounting policies,
once framed, should be consistently followed. However, such
policies may be changed if circumstances so warrant.

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1-14
Financial Statements: Objective
 To provide information about the financial

position, performance and cash flows of an
enterprise that is useful to a wide range of users
in making economic decisions.
 Financial statements do not necessarily provide
non-financial information.

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1-15
Financial Statements: Qualitative

Characteristics
 Understandability
 Relevance
 Reliability
 Faithful representation
 Substance over form
 Prudence
 Neutrality
 Comparability

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1-17
Financial Elements: Definition

– Assets are economic resources controlled by the
enterprise as a result of past events from which
future economic benefits are expected to flow to
the enterprise.
– Liabilities are present obligations of the enterprise
arising from past events, the settlement of which is
expected to result in an outflow from the enterprise
of resources embodying economic benefits.
– Equity is the residual interest in the assets of the
enterprise after deducting all its liabilities.

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IMT / 2010
1-18
Financial Elements: Definition

• Income is increase in economic benefits during the
accounting period in the form of inflows or enhancement
of assets or decreases of liabilities that result in increases
in equity, other than those relating to contributions from
equity participants.
• Expenses are decreases in economic benefits during the
accounting period in the form of outflows or depletion of
assets or incurrence of liabilities that result in decreases
in equity, other than those relating to distributions to
equity participants.

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1-19
Corporate Financial Statements

• What are the corporate financial statements?
– Balance Sheet
• Shows the financial position (position of assets,
liabilities and equity) as on the reporting date.
– Profit & Loss Account
• Shows the financial results (profit or loss) for an
accounting period.
– Cash Flow Statement
• Shows the net increase /decrease in cash and cash
equivalents during the accounting period.
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1-20
Fundamental Accounting
Assumptions
 What are the fundamental accounting
assumptions?
Accrual

 Going concern
 Consistency.
 Why are they called “Fundamental”?

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Internal Accounting Controls
• Basic Principle: make it as difficult as is
practical for people to be dishonest or
careless.
• Activities that reduce possibility of theft, or
intentional or unintentional mistakes.

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IMT / 2010

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The Accounting Information System

Financial Accounting/ DR ASHISH /

Financial Accounting/ DR ASHISH /

Financial Accounting/ DR ASHISH /

Financial Accounting/ DR ASHISH /

Financial Accounting/ DR ASHISH /

Financial Accounting/ DR ASHISH /

Events and Transactions

Financial Accounting/ DR ASHISH /

Financial Accounting/ DR ASHISH /

Basic Accounting Concepts

Financial Accounting/ DR ASHISH /

• Assets = Liabilities + Owners’ Equity

• The spreadsheet analysis format based on the

Financial Accounting/ DR ASHISH /

The most simple

Financial Accounting/ DR ASHISH /

(Left Side) (Right Side)

Financial Accounting/ DR ASHISH /

Dr. Ledger Account Cr.

Assets Debit Left

Liabilities Credit Right

Equity Credit Right

Assets Debit Left Credit Right

Liabilities Credit Right Debit Left

Equity Credit Right Debit Left

ASSET LIABILITY EQUITY

DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT

Financial Accounting/ DR ASHISH /

Revenues Credit Right

Expenses Debit Left

Dividends Debit Left

Revenues Credit Right Debit Left

Expenses Debit Left Credit Right

Dividends Debit Left Credit Right

REVENUE EXPENSE DIVIDEND

DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT

Financial Accounting/ DR ASHISH /

Financial Accounting/ DR ASHISH /

Financial Accounting/ DR ASHISH /

Financial Accounting/ DR ASHISH /

Tx # Account Titles Ref Debit Credit

Financial Accounting/ DR ASHISH /

Financial Accounting/ DR ASHISH /

Financial Accounting/ DR ASHISH /

Financial Accounting/ DR ASHISH /

Financial Accounting/ DR ASHISH /

8 Prepaid Insurance 15,000

Financial Accounting/ DR ASHISH /

11 Accounts Receivable 200,000

Financial Accounting/ DR ASHISH /

Financial Accounting/ DR ASHISH /

15 Accounts Payable 1,200,000

Financial Accounting/ DR ASHISH /

18 SG&A Expense 150,000

Financial Accounting/ DR ASHISH /

Financial Accounting/ DR ASHISH /