Intermediate Accounting, 11th ed.

Kieso, Weygandt, and Warfield

Chapter 3: The Accounting

Information Systems
Prepared by
Jep Robertson
New Mexico State University
 Chapter 3: The Accounting
Information Systems
After studying this chapter, you should be
able to:

1. Understand basic accounting terminology.

2. Explain double entry rules.
3. Identify steps in the accounting cycle.
4. Record transactions in journals, post to
ledger accounts, and prepare a trial
balance.
 Chapter 3: The Accounting
Information Systems

5. Explain the reasons for preparing

adjusting entries.
6. Prepare closing entries.
7. Explain how inventory accounts are
adjusted at year-end.
8. Prepare a 10-column work sheet.
 The Basic Accounting Equation

• Accounting data is represented by the

following relationship among the
assets, liabilities and owners’ equity of
a business:
Assets = Liabilities + Owners’ Equity
• The equation must be in balance after
every recorded transaction in the
system.
 The Double Entry System

• Accounting information is based on the double

entry system.
• An account is an arrangement of transactions
affecting a given asset, liability or other element.
• Under this system, the two-sided effect of a
transaction is recorded in the appropriate
accounts.
• The recording is done by means of a “debit-
credit” convention (set of rules) applying to all
accounts.
 The Double Entry System

The system records the two-sided

effect of transactions
Transaction Two-sided effect

Bought furniture for cash Decrease in one asset

Increase in another asset

Took a loan in cash Increase in an asset

Increase in a liability
 The Double Entry System

Note that the accounting equation equality is

maintained after recording
each transaction.
The Account and the Debit-Credit
Convention
Asset Liability Equity
Debit Credit Credit

Expense Revenue
Debit Credit

Normal balance in account

Expanded Basic Equation and
Debit/Credit Rules and Effects
 The Debit-Credit Convention

Balance increases Balance decreases

• Debit entries in an • Credit entries in an
asset account asset account
• Debit entries in an • Credit entries in an
expense account expense account
• Credit entries in a • Debit entries in a
liability account liability account
• Credit entries in • Debit entries in
equity account equity account
• Credit entries in a • Debit entries in a
revenue account revenue account
 Ownership (Equity) Structure

Investments Dividends or
by Owners Withdrawals

Net Income Net Loss

+ -

Owners’ Equity
 The Accounting Cycle: Steps

1. Analyze the transaction

2. Journalize the transaction
3. Post the transaction to accounts in ledger
4. Prepare the (unadjusted) trial balance
5. Prepare necessary adjusting journal entries
6. Prepare the adjusted trial balance
7. Prepare financial statements
8. Prepare closing journal entries for the year
9. Prepare the post-closing trial balance
 The Accounting Cycle: Steps

Accounting period

Begin 2 End
4 6 Adjusted
Originating Unadjusted Trial
Journal Trial Balance
Entries Balance
7
3 Financial
5 Adjusting Statements
Post to Journal
Ledger Entries

9 Post-Closing 8 Closing
Trial Balance Entries
Start over
 Adjusting Journal Entries

Adjusting entries are needed for:

• Recognizing revenue for the period.
• Matching expenses with revenues they
helped generate.
• Adjusting entries are required every time
financial statements are prepared.
 Adjusting Entries: Recognizing
Revenue

Adjusting Recording
Unearned Revenue Accrued Revenue

Revenues received Revenues earned

in cash but not yet
and recorded
recorded as liabilities in books
 Adjusting Entries: Matching
Expenses

Adjusting
Recording
Prepayments for
Accrued Expense
Expenses

Expense incurred
Prepayments made but not yet
in cash recorded
and in books
recorded as assets
 Closing Journal Entries

• Closing entries are made to close all nominal

accounts (revenue and expense accounts) for
the year.
• Real (or Permanent) accounts (balance sheet
accounts) are not closed.
• Dividend account is closed to Retained
Earnings account.
 Scheme of Closing Entries

Ret. Earnings

Dividends
Income Summary

3
4

Expense Revenue

1 2
Closing Entries: Periodic Inventory
System
• In a periodic inventory system, closing
entries are made to record cost of goods sold
and ending inventory.
• In a perpetual inventory system, such entries
are not required.
 Using a Worksheet

• A worksheet is a multiple column form that

may be used in the adjustment process and
in preparing financial statements.
• The use of a worksheet is optional and not a
permanent accounting record.
• The worksheet does not replace the financial
statements.
 Steps in Preparing a Worksheet

• Prepare a trial balance on the worksheet.

• Enter the adjustments in the adjustments
column.
• Enter adjusted balances in the adjusted
trial balance columns.
• Extend adjusted trial balance amounts to
appropriate financial statement columns.
• Total the statement columns, compute net
income (loss), and complete the worksheet.
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