The Accounting Information System Chapter 7 The Accounting Information System

The Accounting Cycle

The Accounting Cycle Analyze transactions Financial Accounting, 7e Stice/Stice, 2006 © Thomson

The Accounting Cycle Analyze transactions Record the effect of transactions in a journal entry Financial Accounting, 7e Stice/Stice, 2006 © Thomson

The Accounting Cycle Analyze transactions Record the effect of transactions in a journal entry Summarize the effects of transactions Post journal entries to the ledger Prepare a trial balance Financial Accounting, 7e Stice/Stice, 2006 © Thomson

The Accounting Cycle Analyze transactions Record the effect of transactions in a journal entry Summarize the effects of transactions Post journal entries to the ledger Prepare a trial balance Prepare reports Make adjusting entries Prepare financial statements Close the books Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Transaction Analysis Using Debits and Credits

Transaction Analysis Using Debits and Credits The accounting equation Assets = Liabilities + Owners’ Equity The spreadsheet analysis format based on the accounting equation is not practical when a company has thousands of transactions Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Transaction Analysis Using Debits and Credits All transactions relating to a specific item are recorded in an account The most simple form of an account is called a T- account Financial Accounting, 7e Stice/Stice, 2006 © Thomson

The T- Account ACCOUNT TITLE DEBIT CREDIT (Left Side)‏ (Right Side)‏ Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Debits and Credits: Balance Sheet Accounts Equity Liabilities Debit Assets Decrease Increase Left Right Right Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Debits and Credits: Balance Sheet Accounts Equity Liabilities Assets Decrease Increase Left Right Left Right Right Left Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Debits and Credits: Balance Sheet Accounts ASSET LIABILITY EQUITY DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT - - - + + + Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Debits and Credits: Revenues, Expenses, and Dividends Decrease Debit Dividends Expenses Credit Revenues Increase Right Left Left Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Debits and Credits: Revenues, Expenses, and Dividends Decrease Dividends Expenses Revenues Increase Right Left Left Right Left Right Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Debits and Credits: Revenues, Expenses, and Dividends - + + - + - Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Debits and Credits — All Accounts Owners’ Equity Assets = Liabilities + Dr. Cr. Dr. Cr. Dr. Cr. - + - + + - Paid-in Capital Retained Earnings Dr. Cr. + - Expenses Revenues Dividends Dr. Cr. + - Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Recording Journal Entries

Recording the Effects of Transactions The journal is a book in which all transactions are recorded in chronological order DR = CR Each journal entry has its debit amounts equal to its credit amounts to ensure that the accounting equation remains in balance Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Recording the Effects of Transactions Journalizing involves a three-step process: Identify which accounts are involved For each account, determine if it is increased or decreased For each account, determine by how much it changed Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Recording the Effects of Transactions The account debited is always listed first, followed by the account credited The credit entry is indented Some selected transactions from Veda Landscape Solutions are presented next as examples… Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Transaction 1 Investment of $700,000 cash into the business. Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Transaction 2 Borrowed $300,000 cash from the bank. Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Transaction 3 Purchased land costing $50,000 and buildings costing $400,000. Paid $100,000 in cash and signed a mortgage for the balance. Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Transaction 4 Purchased equipment for $650,000 in cash. Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Transaction 7 Purchased inventory costing $90,000 for $10,000 in cash and the remaining $80,000 on account. Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Transaction 8 Paid $15,000 cash for an insurance policy. Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Transaction 10 Sold inventory costing $800,000 to customers for $1,100,000. The customers paid $200,000 in cash and the remaining $900,000 was put on the customers’ accounts. Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Transaction 11 Performed landscaping consulting services and billed clients $200,000 for these services. Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Transaction 14 Collected $820,000 cash from customers as payment on their accounts. Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Transaction 15 Paid $1,200,000 in cash to suppliers as payment on account. Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Transaction 18 Paid cash of $150,000 for advertising, utilities, and office supplies. Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Transaction 23 Paid cash dividends of $5,000. Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Posting and the Trial Balance

Posting Posting involves transferring the the debits and credits from the journal entries to the individual accounts Posting is purely mechanical in nature and requires no analysis The collection of all of a company’s accounts is called a ledger Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Example: Posting Transaction 1 Cash 700,000 Paid-in Capital 700,000 700,000 700,000 Cash Paid-in Capital Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Trial Balance A trial balance is a listing of all of the ledger accounts and their balances The total of the debit balance accounts should equal the total of the credit balance accounts The equality of the debits and credits provides some assurance that the posting process has been completed correctly DR = CR Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Adjusting and Closing Entries

Adjusting Entries Adjusting entries are made at the end of the accounting period to properly reflect the balances of all asset, liability, and owners’ equity accounts to recognize all revenues and expenses on an accrual basis Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Adjustments result from one of two sequences of events: Adjusting Entries Adjustments result from one of two sequences of events: New information requires an adjustment to a transaction that has already been recorded A transaction has not yet been recorded even though a business event has occurred Financial Accounting, 7e Stice/Stice, 2006 © Thomson

An Event Already Recorded Assume a company purchases a one- year insurance policy paying $1,200 on October 1, 2006, resulting in the following journal entry Prepaid Insurance 1,200 Cash 1,200 Financial Accounting, 7e Stice/Stice, 2006 © Thomson

An Event Already Recorded At December 31, 2006, the following adjusting journal entry is required: Insurance Expense 300 Prepaid Insurance 300 Financial Accounting, 7e Stice/Stice, 2006 © Thomson

An Event Not Yet Recorded Assume that a chemical spill during November 2006 at a factory will require a cleanup costing $23,000. The cleanup will take place in 2007, and nothing yet has been recorded. The following adjustment is necessary at December 31, 2006: Chemical Cleanup Expense 23,000 Chemical Cleanup Liability 23,000 Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Closing Entries Closing entries Transfer the amounts in the revenue, expense, and dividend accounts to Retained Earnings Zero-out these “temporary accounts” for the start of the next accounting period Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Closing Entries Comprised of three journal entries: Close the revenue accounts to Retained Earnings Close the expense accounts to Retained Earnings Close the dividends account to Retained Earnings Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Closing Entries: Veda Landscape Solutions Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Computers and Accounting The time spent performing routine tasks within the accounting cycle has been greatly reduced as a result of using computers Personal computers are being used for financial analysis accounting functions word processing database management inventory control credit analysis of customers Financial Accounting, 7e Stice/Stice, 2006 © Thomson

Computers and Accounting Through networking (Internet and intranet), personal computers are speeding up the exchange of information among users It is still important, however, to be familiar with the accounting cycle in order to understand the flow of information within an organization Financial Accounting, 7e Stice/Stice, 2006 © Thomson

In Summary ... The accounting cycle consists of analysis, recording, summarizing, and reporting financial transactions Journal entries use debits and credits to describe and chronologically record business transactions The trial balance lists all accounts of a business and their balances Adjusting entries are used to (a) update information previously recorded and (b) record previously unrecognized transactions Closing entries transfer the balances of revenues, expenses, and dividend accounts to Retained Earnings Financial Accounting, 7e Stice/Stice, 2006 © Thomson