Intermediate Accounting, 10th Edition

Kieso, Weygandt, and Warfield

Chapter 3: The Accounting

Information Systems
Prepared by
Drs.Gusnardi,SE.,Ak
Pekanbaru
 The Basic Accounting Equation
• Accounting data is represented by the
following relationship among the assets,
liabilities and owners’ equity of a business:
• Assets = Liabilities and Owners’ Equity
• This relationship must hold good after
every recorded transaction in the system.

05/15/24 Intermediate Accounting, 10th Editio 2

n, Ch.3 (Kieso et al.)
 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.

05/15/24 Intermediate Accounting, 10th Editio 3

n, Ch.3 (Kieso et al.)
 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

05/15/24 Intermediate Accounting, 10th Editio 4

n, Ch.3 (Kieso et al.)
 The Double Entry System

Note that the accounting equation is

maintained after recording
each transaction.

05/15/24 Intermediate Accounting, 10th Editio 5

n, Ch.3 (Kieso et al.)
 The Account and the Debit-Credit Convention

Asset Liability Equity

Debit Credit Credit

Expense Revenue

Debit Credit

05/15/24 Normal balance

Intermediate in 10th
Accounting, account
Editio 6
n, Ch.3 (Kieso et al.)
 The Debit-Credit Convention
Balance increases Balance decreases
• Debit entries in an asset • Credit entries in an asset
account account
• Debit entries in an • Credit entries in an
expense account expense account
• Credit entries in a • Debit entries in a liability
liability account account
• Credit entries in Equity • Debit entries in Equity
account account
• Credit entries in a • Debit entries in a revenue
revenue account account
05/15/24 Intermediate Accounting, 10th Editio 7
n, Ch.3 (Kieso et al.)
 Ownership (Equity) Structure

Investments Dividends or
by Owners Withdrawals

Net Income Net Loss

+ -

Owners’ Equity

05/15/24 Intermediate Accounting, 10th Editio 8

n, Ch.3 (Kieso et al.)
 The Accounting Cycle: Steps
11 Analyze the
Analyze the transaction
transaction
22 Journalize the
Journalize the transaction
transaction
33 Post the
Post the transaction
transaction to to accounts
accounts in in ledger
ledger
44 Prepare the
Prepare the (unadjusted)
(unadjusted) trial
trial balance
balance
55 Prepare necessary
Prepare necessary adjusting
adjusting journal
journal entries
entries
66 Prepare the
Prepare the (adjusted)
(adjusted) trial
trial balance
balance
77 Prepare financial
Prepare financial statements
statements
88 Prepare closing
Prepare closing journal
journal entries
entries for
for the
the year
year
05/15/24 Intermediate Accounting, 10th Editio 9
n, Ch.3 (Kieso et al.)
 The Accounting Cycle
Accounting year

Begin End
1 2 4 Adjusted
Originating Unadjusted Trial
Trial Balance
journal
Balance
entries
5
+ Financial
3 Statements
Post to Adjusting
Ledger Journal
Entries
6 Closing
Start over Entries
05/15/24 Intermediate Accounting, 10th Editio 10
n, Ch.3 (Kieso et al.)
 Adjusting Journal Entries
• Adjusting entries are needed for:
* recognizing revenue for the period
* matching expenses with the
period.
• Adjusting entries are required every time
financial statements are prepared.

05/15/24 Intermediate Accounting, 10th Editio 11

n, Ch.3 (Kieso et al.)
 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

05/15/24 Intermediate Accounting, 10th Editio 12

n, Ch.3 (Kieso et al.)
 Adjusting Unearned Revenue
On Dec 1, 1999, Mr. Landlord receives $800 as
advance payment toward rent. The rental term
begins on December 1, 1999, with monthly rental
of $400.

Date Account Dr Cr

Dec 01, 1999 Cash 800

Unearned Rent Revenue 800

Adjusting Entry:
Dec 31, 1999 Unearned Revenue 400
Rent Revenue 400

05/15/24 Intermediate Accounting, 10th Editio 13

n, Ch.3 (Kieso et al.)
 Adjusting Accrued Revenue
On Dec 1, 1999, Mr. Lender makes a loan of $8,000 to
Mr. Borrower. The loan term is 3 months. The interest
rate is 12% per year. Lender receives a note.

Date Account Dr Cr

Dec 01, 1999 Note Receivable 8,000

Cash 8,000

Adjusting Entry:
Dec 31, 1999 Interest Receivable 80
Interest Revenue 80
(Accrue one month’s interest)

05/15/24 Intermediate Accounting, 10th Editio 14

n, Ch.3 (Kieso et al.)
 Adjusting Entries: Matching Expenses

Adjusting
Recording
Prepayments for
Expenses Accrued Expense

Prepayments made Expense incurred

in cash but not yet
and recorded
recorded as assets in books
05/15/24 Intermediate Accounting, 10th Editio 15
n, Ch.3 (Kieso et al.)
 Adjusting Prepayments
On Dec 1, 1999, Mr. Tenant pays $800 as
advance payment toward rent. The rental term
begins on December 1, 1999, with monthly rental
of $400.

Date Account Dr Cr

Dec 01, 1999 Prepaid Rent 800

Cash 800

Adjusting Entry:
Dec 31, 1999 Rent Expense 400
Prepaid Rent 400

05/15/24 Intermediate Accounting, 10th Editio 16

n, Ch.3 (Kieso et al.)
 Adjusting Accrued Expenses
On Dec 1, 1999, Mr. Borrower takes a loan of $8,000
from Mr. Lender. The loan term is 3 months.
The interest rate is 12% per year. Lender receives a
note for the amount.
Date Account Dr Cr

Dec 01, 1999 Cash 8,000

Note Payable 8,000

Adjusting Entry:
Dec 31, 1999 Interest Expense 80
Interest Payable 80
(Accrue one month’s interest)
05/15/24 Intermediate Accounting, 10th Editio 17
n, Ch.3 (Kieso et al.)
 Adjusting Entries: Supplies (1of 2)
Amber company bought supplies costing $5,600 on
January 1, 2000. On January 31, supplies on hand
were $4,200.

Record supplies expense for January, 2000.

Amber debits all purchases of supplies to the

appropriate asset account.

05/15/24 Intermediate Accounting, 10th Editio 18

n, Ch.3 (Kieso et al.)
 Recording supplies expense (2 of 2)

Pur: $5,600 Account Dr Cr

End: ($4,200)
Supplies Expense $1,400
Expense: $1,400
Supplies $1,400

Supplies Supplies Expense

$5,600 $1,400 $1,400

$4,200
05/15/24 Intermediate Accounting, 10th Editio 19
n, Ch.3 (Kieso et al.)
 Adjusting Entry: Depreciation Expense
(1 of 2)
Mabel company has the following information:

1.1.1997: Truck purchased, $21,500

Salvage value end of four years, $1,500

Depreciation method: straight line

Show necessary accounts and adjusting journal

entries for 1997 and 1998.

05/15/24 Intermediate Accounting, 10th Editio 20

n, Ch.3 (Kieso et al.)
 Adjusting Entry: Depreciation Expense (2 of 2)

1997 1998 1998

Dep Expense Dep Expense Adjusting Entry

5,000 5,000 Dep Exp 5,000
Acc Dep 5,000
Acc Deprecn Acc Deprecn
5,000 10,000
Book value
Truck Truck =
21,500 21,500 $11,500

05/15/24 Intermediate Accounting, 10th Editio 21

n, Ch.3 (Kieso et al.)
 Adjusting and Reversing Entries
•• Thornton
Thornton company
company pays pays its
its employees
employees on on aa
weekly basis,
weekly basis, the
the week
week after
after the
the work
work week.
week.
•• ItIt owed
owed $3,400
$3,400 inin salaries
salaries for
for the
the last
last work
work
week in
week in December.
December.
•• The
The payment
payment was
was made
made onon January
January 33 ofof the
the
following year.
following year.
•• Thornton
Thornton has
has the
the calendar
calendar year
year asas the
the fiscal
fiscal
year.
year.
05/15/24 Intermediate Accounting, 10th Editio 22
n, Ch.3 (Kieso et al.)
 Adjusting and Reversing Entries
• Dec 31 (current year): Dr
Cr Salaries Expense $3,400
Salaries Payable $3,400

• January 03 (following year): Salaries

Payable $3,400 Cash
$3,400

05/15/24 Intermediate Accounting, 10th Editio 23

n, Ch.3 (Kieso et al.)
 Closing Journal Entries

• Closing entries are made to close all

nominal accounts (revenue and expense
accounts) for the year.
• Real (or Permanent) accounts are not
closed.
• Dividends account is closed to Retained
Earnings account.

05/15/24 Intermediate Accounting, 10th Editio 24

n, Ch.3 (Kieso et al.)
 Closing Entries
• The following closing entries are made:
1 Income Summary Account $
Expense Account (individually) $
2 Revenue Account (Individually) $
Income Summary Account $
3 Income Summary Account $
Retained Earnings $
4 Retained Earnings Account $
Dividends Account $

05/15/24 Intermediate Accounting, 10th Editio 25

n, Ch.3 (Kieso et al.)
 Closing Entries: Periodic Inventory
System
•• In
In aa periodic
periodic inventory
inventory system,
system, closing
closing
entries are
entries are made
made to to record
record cost
cost of
of goods
goods
sold and
sold and ending
ending inventory.
inventory.
•• In
In aa perpetual
perpetual inventory
inventory system,
system, such
such
entries are
entries are not
not required.
required.
•• See
See the
the scheme
scheme of of entries
entries (next
(next slide)
slide)

05/15/24 Intermediate Accounting, 10th Editio 26

n, Ch.3 (Kieso et al.)
 Scheme of Closing Entries
Ret.Earnings
Ret. Earnings

Dividends
Dividends IncomeSummary
Income Summary

4 3

Expense
Expense Revenue
Revenue

1 2

05/15/24 Intermediate Accounting, 10th Editio 27

n, Ch.3 (Kieso et al.)
 Periodic Inventory: Closing Entry

• Intell company has the following balances on

December 31, 2000. The company uses a periodic
inventory system.
• Purchases (gross), $400,000;
Purchases Returns, $27,000;
Freight-in, $12,000;
Inventory (1.1.2000), $62,000;
• Inventory count on December 31, 2000 was
$46,000.
05/15/24 Intermediate Accounting, 10th Editio 28
n, Ch.3 (Kieso et al.)
 Periodic Inventory: Closing Entry
Account Dr Cr

Cost of Goods Sold (plug figure) $ 369,000

Inventory (Ending balance) $ 62,000
Purchases Returns $ 27,000

Purchases (Gross) $ 400,000

Freight-in $ 12,000
Inventory (Beginning balance) $ 46,000

05/15/24 Intermediate Accounting, 10th Editio 29

n, Ch.3 (Kieso et al.)
 Closing Entry: Periodic Inventory System
Dr Cr
To record Inventory (ending) $ Inventory
ending balance
$
Purchases Returns
Purchases Returns $
Cost of Goods sold $ $

Freight-In
$ Freight-in $

Purchases

$ Purchases $ To remove
05/15/24 Inventory
Intermediate (Begin)
Accounting, $
10th Editio beginning balance
30
n, Ch.3 (Kieso et al.)
 Chapter 3:
Chapter 3: Appendix
Appendix A
A

Cash and
Cash and Accrual
Accrual Bases
Bases
of Accounting
of Accounting

05/15/24 Intermediate Accounting, 10th Editio 31

n, Ch.3 (Kieso et al.)
 Cash Basis and Accrual Basis
• The cash basis considers only cash receipts and
cash payments for the year.
• The result is:
either an excess of receipts over
payments OR
an excess of payments
over cash.
• Accrual basis considers revenues and expenses in
determining net income.
05/15/24 Intermediate Accounting, 10th Editio 32
n, Ch.3 (Kieso et al.)
 Cash and Accrual Basis: Example
• Johnson company, a retailer, starts operations on
January 1, 2000, and reports the following
information:
• Sales, $200,000 (20% cash and 80% credit).
• Accounts Receivable end of year: $16,000
• Purchases, $120,000 (30% cash and 70% credit).
• Accounts Payable end of year: $8,200
• Depreciation expense for 2000: $3,450
• Ending inventory of goods: $12,000

05/15/24 Intermediate Accounting, 10th Editio 33

n, Ch.3 (Kieso et al.)
 Accrual Basis: Example
Sales Revenue:
Cash sales $40,000
Credit sales: $160,000
Net Sales $200,000
Cost of Goods Sold:
Purchases $ 120,000
less: Ending inventory $ 12,000 ($108,000)

Gross Profit $ 92,000

less: Depreciation Expense ($ 3,450)

Net Income (before taxes) $ 88,550

05/15/24 Intermediate Accounting, 10th Editio 34

n, Ch.3 (Kieso et al.)
 Cash Basis
Cash Receipts:
Cash sales $40,000
Collections from credit sales:
credit sales: $160,000
less: A/Rec: $ 16,000
$144,000 $184,000
Cash Payments:
Cash Purchases $ 36,000
Payments to vendors on account:
credit purchases: $84,000
less: A/Payable: $ 8,200 $ 75,800 ($ 111,800)

Excess of Collections over Receipts $ 72,200

05/15/24 Intermediate Accounting, 10th Editio 35

n, Ch.3 (Kieso et al.)
 Reconciliation of Cash and
Accrual Bases
NetIncome:
Net Income: $88,550
$88,550

less: Uncollected
less: Uncollectedrevenue
revenue ($16,000)
($16,000)

less:Unpaid
less: Unpaidpurchases
purchases ($3,800)
($ 3,800)

Add:Non-cash
Add: Non-cashcharge
charge(depreciation)
(depreciation) $$3,450
3,450

Excessof
Excess ofcollections
collectionsover
overpayments
payments $$72,200
72,200

05/15/24 Intermediate Accounting, 10th Editio 36

n, Ch.3 (Kieso et al.)
 Reconciling Cash Basis Receipts
with Accrual Revenue

Adjustments

- Beginning Accts. REC

Cash received + Ending Accts. REC
Revenue
from from
customers + Beginning Unearned Rev sales
- Ending Unearned Rev

05/15/24 Intermediate Accounting, 10th Editio 37

n, Ch.3 (Kieso et al.)
 Reconciling Cash Basis Payments
with Accrual Expenses

Adjustments

Cash paid + Beginning Prepaid

for - Ending Prepaid Expenses
operating - Beginning Accrued Liabs (accrual)
expenses + Ending Accrued Liabs

05/15/24 Intermediate Accounting, 10th Editio 38

n, Ch.3 (Kieso et al.)
 COPYRIGHT
Copyright © 2001 John Wiley & Sons, Inc. All rights
reserved. Reproduction or translation of this work
beyond that permitted in Section 117 of the 1976
United States Copyright Act without the express
written permission of the copyright owner is unlawful.
Request for further information should be addressed
to the Permissions Department, John Wiley & Sons,
Inc. The purchaser may make back-up copies for
his/her own use only and not for distribution or
resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of
these programs or from the use of the information
contained herein.

05/15/24 Intermediate Accounting, 10th Editio 39

n, Ch.3 (Kieso et al.)