Chapter 3: The Accounting Information Systems
• Understand basic accounting terminology.
• Explain double entry rules.
• Identify steps in the accounting cycle.
• Record transactions in journals, post to ledger accounts, and prepare a trial balance.
Chapter 3: The Accounting Information Systems• Explain the reasons for preparing adjusting entries.
• Prepare closing entries.
• Explain how inventory accounts are adjusted at year-end.
• 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 Double Entry System
The Account and the Debit-Credit Convention
Expanded Basic Equation and Debit/Credit Rules and Effects
The Debit-Credit Convention
Ownership (Equity) Structure
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
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 Entries: Matching Expenses
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
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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