The Accounting Information System: Learning Objectives

The Accounting CHAPTER 3
Information System
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe the basic accounting 4. Prepare financial statements
information system. from the adjusted trial
2. Record and summarize basic balance and prepare closing
transactions. entries.
3. Identify and prepare adjusting 5. Prepare financial statements

entries. for a merchandising
company.
3-1
PREVIEW OF CHAPTER 3
Intermediate Accounting
IFRS 3rd Edition
Kieso ● Weygandt ● Warfield
3-2
Accounting LEARNING OBJECTIVE 1
Describe the basic accounting
Information System information system.
Accounting Information System

 Collects and processes transaction data.
 Disseminates financial information to interested parties.
 Varies widely from business to business.
► Nature of business
► Type of transactions
► Size of business
► Volume of data to be handled
► Informational demands
3-3 LO 1
Helps management answer such questions as:

 How much and what kind of debt is outstanding?
 Were our sales higher this period than last?
 What assets do we have?
 What were our cash inflows and outflows?
 Did we make a profit last period?
 Are any of our product lines or divisions operating at a loss?
 Can we safely increase our dividends to shareholders?
 Is our rate of return on net assets increasing?
3-4 LO 1
Basic Terminology
 Event  Journal
 Transaction  Posting
 Account  Trial Balance
 Real Account  Adjusting Entries
 Nominal Account  Financial Statements
 Ledger  Closing Entries
3-5 LO 1
Debits and Credits

 An account shows the effect of transactions on a given
asset, liability, equity, revenue, or expense account.
 Double-entry accounting system (two-sided effect).
 Recording done by debiting at least one account and
crediting another.
 DEBITS must equal CREDITS.
3-6 LO 1
Debits and Credits
 An arrangement that shows the

Account
effect of transactions on an
account.
 Debit = “Left”
 Credit = “Right”
An Account can Account Name

be illustrated in a Debit / Dr. Credit / Cr.
T-Account form.
3-7 LO 1
Debits and Credits
If the sum of Debit entries are greater than the sum of

Credit entries, the account will have a debit balance.
Account Name
Debit / Dr. Credit / Cr.
Transaction #1 $10,000 $3,000 Transaction #2

Transaction #3 8,000
Balance $15,000
3-8 LO 1
Debits and Credits
If the sum of Debit entries are less than the sum of

Credit entries, the account will have a credit balance.
Account Name
Transaction #1 $10,000 $3,000 Transaction #2

8,000 Transaction #3
Balance $1,000
3-9 LO 1
Debits and Credits Summary
Liabilities
Normal
Normal Normal
Normal
Balance
Balance Balance
Balance
Debit
Debit Credit
Credit Normal Balance
Chapter
3-24
Assets Equity
Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.
Normal Balance Normal Balance
Chapter Chapter
3-23
Expense
3-25
Revenue
Normal Balance
Normal Balance
Chapter
Chapter 3-26
3-27
3-10 LO 1
Debits and Credits Summary
Statement of Financial
Position Income Statement
Asset = Liability + Equity Revenue - Expense
Debit
Credit
3-11 LO 1
The Accounting Equation
Relationship among the assets, liabilities and equity of a

business: ILLUSTRATION 3.3
Expanded Equation and
Debit/Credit Rules and Effects
The equation must be in balance after every transaction.

For every Debit there must be a Credit.
3-12 LO 1
Double-Entry System
1. Owners invest $40,000 in exchange for ordinary

shares.
Assets = Liabilities + Equity
+ 40,000 + 40,000
3-13 LO 1
Double-Entry System
2. Disburse $600 cash for secretarial wages.
- 600 - 600
(expense)
3-14 LO 1
Double-Entry System
3. Purchase office equipment priced at $5,200, giving a

6 percent promissory note in exchange.
+ 5,200 + 5,200
3-15 LO 1
Double-Entry System
4. Received $4,000 cash for services performed.
+ 4,000 + 4,000
(revenue)
3-16 LO 1
Double-Entry System
5. Pay off a short-term liability of $7,000.
- 7,000 - 7,000
3-17 LO 1
Double-Entry System
6. Declared a cash dividend of $5,000.
+ 5,000 - 5,000
3-18 LO 1
Double-Entry System
7. Convert a non-current liability of $80,000 into ordinary

shares.
- 80,000 + 80,000
3-19 LO 1
Double-Entry System
8. Pay cash of $16,000 for a delivery van.
- 16,000
+ 16,000
Note
Notethat
thatthe
theaccounting
accountingequation
equationequality
equalityisis
maintained
maintainedafter
afterrecording
recordingeach
eachtransaction.
transaction.
3-20 LO 1
Financial Statements and Ownership Structure
Ownership structure dictates the types of accounts that are

part of the equity section.
Proprietorship
Proprietorship or
or Corporation
Corporation
Partnership
Partnership
 Owner’s Capital  Share capital

 Owner’s Drawing  Share premium
 Dividends
 Retained Earnings
3-21 LO 1
ILLUSTRATION 3.4
Income Statement and
Equity Relationships
Financial
Statements
and Ownership
Structure
Investments by shareholders
Net income retained in the
business
3-22 LO 1
Financial Statements and Ownership Structure
ILLUSTRATION 3.5
Effects of Transactions on Equity Accounts
3-23 LO 1
THE ACCOUNTING CYCLE
ILLUSTRATION 3.6
Transactions
Transactions
Reversing
Reversing entries
entries Journalization
Journalization
Post-closing
Post-closing trail
trail balance
balance Posting
Posting
Closing
Closing Trial
Trial balance
balance
Work
Statement
Statement preparation
preparation Work
Sheet
Adjustments
Adjustments
Sheet
Adjusted
Adjusted trial
trial balance
balance
3-24 LO 1
Identify and Prepare LEARNING OBJECTIVE 3
Identify and prepare adjusting
Adjusting Entries entries.
Makes it possible to:

 Report on the statement of financial position the
appropriate assets, liabilities, and equity at the statement
date.
 Report on the income statement the proper revenues
and expenses for the period.
 Adjusting entries are required every time a company,
prepares ﬁnancial statements.
 Companies date the entries as of the statement of
ﬁnancial position date.
3-25 LO 3
Identify and Prepare Adjusting Entries
Types of Adjusting Entries
Deferrals Accruals
1. Prepaid Expenses. 3. Accrued Revenues.

Expenses paid in cash Revenues for services
before they are used or performed but not yet
consumed. received in cash or
recorded.
2. Unearned Revenues. 4. Accrued Expenses.
Cash received before Expenses incurred but not
services are performed. yet paid in cash or
recorded.
ILLUSTRATION 3.21
Categories of Adjusting Entries
3-26 LO 3
Adjusting Entries for Deferrals
Deferrals are expenses or revenues that are recognized at a

date later than the point when cash was originally exchanged.
Two types of deferrals

 Prepaid expenses
 Unearned revenues
If a company does not make an adjustment for these deferrals,
 the asset and liability are overstated, and
 the related expense and revenue are understated.
3-27 LO 3
ILLUSTRATION 3.22 Adjusting Entries for Deferrals
3-28 LO 3
Prepaid Expenses. Assets paid for and recorded before a

company uses them.
Cash Payment BEFORE Expense Recorded
Prepayments often occur in regard to:

 Insurance  Rent
 Supplies  Buildings and equipment
 Advertising
3-29 LO 3
Supplies. Yazici Advertising purchased advertising supplies

costing ₺25,000 on October 5. Prepare the journal entry to
record the purchase of the supplies.
Oct. 5 Supplies 25,000

Cash 25,000
Supplies Cash
Debit Credit Debit Credit
25,000 25,000
3-30 LO 3
Supplies. An inventory count at the close of business on

October 31 reveals that ₺10,000 of supplies are still on hand.
Oct. 31 Supplies Expense 15,000

Supplies 15,000
Supplies Supplies Expense

25,000 15,000 15,000
10,000
3-31 LO 3
ILLUSTRATION 3.23
Adjustment for Supplies
3-32 LO 3
Insurance. On Oct. 4th, Yazici Advertising paid ₺6,000 for a one-

year fire insurance policy, beginning October 1. Show the entry
to record the purchase of the insurance.
Oct. 4 Prepaid Insurance 6,000
Cash 6,000
Prepaid Insurance Cash

6,000 6,000
3-33 LO 3
Insurance. An analysis of the policy reveals that ₺500 (₺6,000 ÷

12) of insurance expires each month. Thus, Yazici makes the
following adjusting entry.
Oct. 31 Insurance Expense 500
Prepaid Insurance 500
Prepaid Insurance Insurance Expense

6,000 500 500
5,500
3-34 LO 3
ILLUSTRATION 3.24
Adjustment for Insurance
3-35 LO 3
Depreciation. Yazici Advertising estimates depreciation on its

office equipment to be ₺400 per month. Yazici recognizes
depreciation for October by the following adjusting entry.
Oct. 31 Depreciation Expense 400

Accumulated Depreciation 400
Depreciation Expense Accumulated Depreciation

400 400
3-36 LO 3
ILLUSTRATION 3.25 Adjustment for Depreciation
3-37 LO 3
Receipt of cash before the services are performed is recorded

as a liability called unearned revenues.
Cash Receipt BEFORE Revenue Recorded
Unearned revenues often occur in regard to:
 Rent  Magazine subscriptions

 Airline tickets  Customer deposits
 Tuition
3-38 LO 3
Unearned Revenue. Yazici Advertising received ₺12,000 on

October 2 from KC for advertising services expected to be
completed by December 31. Show the journal entry to record
the receipt on Oct. 2nd.
Oct. 2 Cash 12,000

Unearned Service Revenue 12,000
Cash Unearned Service Revenue

12,000 12,000
3-39 LO 3
Unearned Revenues. An evaluation of the service Yazici

performed for KC during October, the company determines that
it should recognize ₺4,000 of revenue in October.
Oct. 31 Unearned Service Revenue 4,000

Service Revenue 4,000
Service Revenue Unearned Service Revenue

100,000 4,000 12,000
4,000
104,000 8,000
3-40 LO 3
ILLUSTRATION 3.27
Adjustment for Unearned Service Revenue
3-41 LO 3
Adjusting Entries for Accruals
Accruals are made to record

 revenues for services performed and
 expenses incurred in the current accounting period.
Without an accrual adjustment, the

 revenue account (and the related asset account) or the
 expense account (and the related liability account) are
understated.
3-42 LO 3
3-43 ILLUSTRATION 3.28 Adjusting Entries for Accruals LO 3
Revenues recorded for services performed for which cash has

yet to be received at statement date are accrued revenues.
Adjusting entry results in:
Revenue Recorded BEFORE Cash Receipt
Accrued revenues often occur in regard to:

 Rent
 Interest
 Services performed
3-44 LO 3
Accrued Revenues. In October Yazici Advertising performed

services worth ₺2,000 that were not billed to clients on or before
October 31. Yazici makes the following adjusting entry.
Oct. 31 Accounts Receivable 2,000
Accounts Receivable Service Revenue

72,000 100,000
2,000 4,000
2,000
74,000 106,000
3-45 LO 3
ILLUSTRATION 3.29
Accrual Adjustment for Receivable and Revenue Accounts LO 3
3-46
Expenses incurred but not yet paid in cash or recorded.
Adjusting entry results in:
Expense Recorded BEFORE Cash Payment
Accrued expenses often occur in regard to:
 Rent  Taxes
 Interest  Salaries
3-47 LO 3
Accrued Interest. Yazici Advertising signed a three-month note

payable in the amount of ₺50,000 on October 1. The note
requires interest at an annual rate of 12 percent. Three factors
determine the amount of the interest accumulation:
1 2 3
ILLUSTRATION 3.30
Formula for Computing Interest for One Month
3-48 LO 3
Accrued Interest. Yazici Advertising signed a three-month,

12%, note payable in the amount of ₺50,000 on October 1.
Prepare the adjusting entry on Oct. 31 to record the accrual of
interest.
Oct. 31 Interest Expense 500
Interest Payable 500
Interest Expense Interest Payable

500 500
3-49 LO 3
ILLUSTRATION 3.31
Adjustment for Interest
3-50 LO 3
Accrued Salaries. At October 31, the salaries and wages for

these days represent an accrued expense and a related liability to
Yazici. The employees receive total salaries of ₺10,000 for a five-
day work week, or ₺2,000 per day.
ILLUSTRATION 3.32
Accrued Salaries and Wages
3-51 LO 3
Accrued Salaries. Employees receive total salaries of ₺10,000

for a five-day work week, or ₺2,000 per day. Prepare the
adjusting entry on Oct. 31 to record accrual for salaries.
Oct. 31 Salaries and Wages Expense 6,000

Salaries and Wages Payable 6,000
Salaries and Wages Expense Salaries and Wages Payable

40,000 6,000
6,000
46,000
3-52 LO 3
ILLUSTRATION 3.33
Adjustment for Salaries and Wages Expense
3-53 LO 3
Accrued Salaries. On November 23, Yazici Advertising will again

pay total salaries of ₺40,000. Prepare the entry to record the
payment of salaries on November 23.
Nov. 23 Salaries and Wages Payable 6,000
Salaries and Wages Expense 34,000
Cash 40,000
Salaries and Wages Expense Salaries and Wages Payable

34,000 6,000 6,000
3-54 LO 3
Bad Debts. Assume Yazici Advertising reasonably estimates a

bad debt expense for the month of ₺1,600. It makes the adjusting
entry for bad debts as follows.
Oct. 31 Bad Debt Expense 1,600
Allowance for Doubtful Accounts 1,600
ILLUSTRATION 3.34
Adjustment for Bad Debt
Expense
3-55 LO 3
Adjusted
Trial
Balance
Shows the
balance of all
accounts, after
adjusting entries,
at the end of the
accounting period.
Proves the
equality of the
total debit and
credit balances
ILLUSTRATION 3.35
3-56
Closing
Closing Process
 Reduce the balance of nominal (temporary) accounts to zero
in preparation for the next period’s transactions.
 Transfer all revenue and expense account balances (income
statement accounts) to an account called Income Summary.
 Income Summary balance is then transferred Retained
Earnings.
 Statement of financial position (asset, liability, and equity)
accounts are not closed.
 Dividends are closed directly to Retained Earnings.
3-57 LO 4
Closing Journal Entries
Closing Entries
Income Summary 106,000
Income Summary73,000
Salaries & Wages Expense
46,000
Supplies Expense 15,000
Rent Expense 9,000
Insurance Expense 500
Interest Expense 500
Depreciation Expense 400
Bad Debt Expense 1,600
Income Summary33,000
Retained Earnings 33,000
Retained Earnings 5,000

Dividends 5,000
ILLUSTRATION 3.35
3-58 LO 4
ILLUSTRATION 3.39
Posting of Closing Entries
3-59 LO 4
ILLUSTRATION 3.40
3-60 LO 4

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The Accounting Information System: Learning Objectives

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The Accounting CHAPTER 3

3. Identify and prepare adjusting 5. Prepare financial statements

Accounting Information System

Helps management answer such questions as:

Debits and Credits

 An arrangement that shows the

An Account can Account Name

If the sum of Debit entries are greater than the sum of

Transaction #1 $10,000 $3,000 Transaction #2

If the sum of Debit entries are less than the sum of

Transaction #1 $10,000 $3,000 Transaction #2

Normal Balance Normal Balance

Asset = Liability + Equity Revenue - Expense

Relationship among the assets, liabilities and equity of a

The equation must be in balance after every transaction.

1. Owners invest $40,000 in exchange for ordinary

Assets = Liabilities + Equity

2. Disburse $600 cash for secretarial wages.

Assets = Liabilities + Equity

3. Purchase office equipment priced at $5,200, giving a

Assets = Liabilities + Equity

4. Received $4,000 cash for services performed.

Assets = Liabilities + Equity

5. Pay off a short-term liability of $7,000.

Assets = Liabilities + Equity

6. Declared a cash dividend of $5,000.

Assets = Liabilities + Equity

7. Convert a non-current liability of $80,000 into ordinary

Assets = Liabilities + Equity

8. Pay cash of $16,000 for a delivery van.

Assets = Liabilities + Equity

Ownership structure dictates the types of accounts that are

 Owner’s Capital  Share capital

Makes it possible to:

Types of Adjusting Entries

1. Prepaid Expenses. 3. Accrued Revenues.

Deferrals are expenses or revenues that are recognized at a

Two types of deferrals

If a company does not make an adjustment for these deferrals,

 the asset and liability are overstated, and

 the related expense and revenue are understated.

Prepaid Expenses. Assets paid for and recorded before a

Cash Payment BEFORE Expense Recorded

Prepayments often occur in regard to:

Supplies. Yazici Advertising purchased advertising supplies

Oct. 5 Supplies 25,000

Supplies. An inventory count at the close of business on

Oct. 31 Supplies Expense 15,000

Supplies Supplies Expense

Insurance. On Oct. 4th, Yazici Advertising paid ₺6,000 for a one-

Prepaid Insurance Cash

Insurance. An analysis of the policy reveals that ₺500 (₺6,000 ÷

Prepaid Insurance Insurance Expense

Depreciation. Yazici Advertising estimates depreciation on its

Oct. 31 Depreciation Expense 400

Depreciation Expense Accumulated Depreciation

Receipt of cash before the services are performed is recorded

Cash Receipt BEFORE Revenue Recorded

Unearned revenues often occur in regard to:

 Rent  Magazine subscriptions

Unearned Revenue. Yazici Advertising received ₺12,000 on

Oct. 2 Cash 12,000

Cash Unearned Service Revenue