ACT 3103 –

Intermediate
Accounting
Lecturer 3

The Accounting Information System

The Accounting Information System
LEARNING OBJECTIVES

1. Describe the basic accounting 4. Prepare financial statements

information system. from the adjusted trial
balance and prepare closing
2. Record and summarize basic
entries.
transactions.
5. Prepare financial statements
3. Identify and prepare adjusting
for a merchandising
entries.
company.
3
Description : 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
Accounting Information System
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?
Accounting Information System
Basic Terminology

 Event  Journal

 Transaction  Posting

 Account  Trial Balance

 Real Account  Adjusting Entries

 Nominal Account  Financial Statements

 Ledger  Closing Entries

Accounting Information System
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.

 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.
 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
 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
Debit / Dr. Credit / Cr.

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

8,000 Transaction #3

Balance $1,000
Debits and Credits Summary
Liabilities
Debit / Dr. Credit / Cr.
Normal Normal
Balance Balance
Debit 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
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
Chapter 3-26
3-27
 Debits and Credits Summary

Statement of Financial Position Income Statement

Asset = Liability + Equity Revenue - Expense

Debit

Credit
 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.
Double-Entry System
1. Owners invest $40,000 in exchange for ordinary shares.

Assets = Liabilities + Equity

+ 40,000 + 40,000

14
Double-Entry System
2. Disburse $600 cash for secretarial wages.

Assets = Liabilities + Equity

- 600 - 600
(expense)

15
Double-Entry System
3. Purchase office equipment priced at $5,200, giving a
6 percent promissory note in exchange.

Assets = Liabilities + Equity

+ 5,200 + 5,200

16
Double-Entry System

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

Assets = Liabilities + Equity

+ 4,000 + 4,000
(revenue)

17
Double-Entry System

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

Assets = Liabilities + Equity

- 7,000 - 7,000

18
Double-Entry System

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

Assets = Liabilities + Equity

+ 5,000 - 5,000

19
Double-Entry System

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

shares.

Assets = Liabilities + Equity

- 80,000 + 80,000

20
Double-Entry System
8. Pay cash of $16,000 for a delivery van.

Assets = Liabilities + Equity

- 16,000
+ 16,000

Note that the accounting equation equality is

maintained after recording each transaction.

21
Financial Statements and Ownership Structure

Ownership structure dictates the types of accounts that are

part of the equity section.

Proprietorship or
Corporation
Partnership

 Owner’s Capital  Share capital

 Owner’s Drawing  Share premium
 Dividends
 Retained Earnings
 ILLUSTRATION 3.4
Income Statement and
Equity Relationships

Financial Statements
and Ownership
Structure

Investments by shareholders
Net income retained in the
business
Financial Statements and Ownership Structure

ILLUSTRATION 3.5
Effects of Transactions on Equity Accounts
THE ACCOUNTING CYCLE
ILLUSTRATION 3.6
Transactions

Reversing entries Journalization

Post-closing trail balance Posting

Closing Trial balance

Work
Statement preparation Sheet
Adjustments

Adjusted trial balance

THE ACCOUNTING CYCLE

Identifying and Recording Transactions and

Other Events
An item should be recognized in the financial statements if
such recognition provides users of financial statements with

(a) relevant information about the asset or the liability

and about any income, expenses, or changes in
equity and

(b) a faithful representation of the asset or the liability

and of any income, expenses, or changes in equity.
Record and Summarize Basic LEARNING OBJECTIVE 2
Record and summarize basic
Transactions transactions.

Journalizing

Recording transactions and events that effect particular asset,

liability, equity, revenue, and expense accounts.

September 1: Shareholders invested $15,000 cash in the

corporation in exchange for ordinary shares.

ILLUSTRATION 3.7
Technique of Journalizing
Posting
Posting – The process of transferring amounts from the
journal to the ledger accounts.
ILLUSTRATION 3.7

ILLUSTRATION 3.8
Posting a Journal Entry
ILLUSTRATION 3.8
Posting a Journal
Entry
Chart of Accounts

Chart of accounts lists the accounts and the account

numbers that identify their location in the ledger.

The numbering system that identifies the accounts

usually starts with the statement of financial position
accounts and follows with the income statement accounts.
Chart of Accounts ILLUSTRATION 3.9
Chart of Accounts for
Times Advertising A.Ş.

Chart of accounts lists the accounts and the account

numbers that identify their location in the ledger.

The numbering system that identifies the accounts

usually starts with the statement of financial position
accounts and follows with the income statement accounts.
Trial Balance
A Trial Balance
 List of each account and its balance in the order in
which they appear in the ledger.

 Debit balances listed in the left column and credit

balance in the right column.

 Used to prove the mathematical equality of debit and

credit balances.

 Uncovers errors in journalizing and posting.

ILLUSTRATION 3.20
Trial Balance (Unadjusted)
 LEARNING OBJECTIVE 3
Identify and Prepare Adjusting Identify and prepare 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.
 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
 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.

ILLUSTRATION 3.22 Adjusting Entries for Deferrals
 Adjusting Entries for Deferrals

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
Adjusting Entries for Deferrals

Supplies. Times 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
Adjusting Entries for Deferrals

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

Debit Credit Debit Credit
25,000 15,000 15,000

10,000
ILLUSTRATION 3.23
Adjustment for Supplies
Adjusting Entries for Deferrals

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