The Accounting Information System Chapter 3 Intermediate Accounting 12th Edition Kieso, Weygandt, and Warfield Prepared by Coby Harmon, University of California, Santa Barbara

Learning Objectives 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. Explain the reasons for preparing adjusting entries. Prepare financial statement from the adjusted trial balance. Prepare closing entries. 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)

Accounting Information System The Accounting Cycle Basic terminology Debits and credits Basic equation Financial statements and ownership structure Identification and recording Journalizing Posting Trial balance Adjusting entries Adjusted trial balance Preparing financial statements Closing Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods

Accounting Information System An Accounting Information System (AIS) collects and processes transaction data and Publish the information to interested parties.

Accounting Information System Helps management answer such questions as: Were 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? LO 1 Identify the major financial statements and other means of financial reporting..

Basic Terminology Event Journal Transaction Posting Account Real Account Nominal Account Ledger Journal Posting Trial Balance Adjusting Entries Financial Statements Closing Entries LO 1 Understand basic accounting terminology.

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. LO 2 Explain double-entry rules.

An Account can be illustrated in a T-Account form. Debits and Credits An arrangement that shows the effect of transactions on an account. Debit = “Left” Credit = “Right” Account An Account can be illustrated in a T-Account form. LO 2 Explain double-entry rules.

Debits and Credits If Debit entries are greater than 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 LO 2 Explain double-entry rules.

Debits and Credits If Credit entries are greater than Debit entries, the account will have a credit balance. Transaction #1 $10,000 $3,000 Transaction #2 8,000 Transaction #3 Balance $1,000 LO 2 Explain double-entry rules.

Debits and Credits Summary Normal Balance Debit Normal Balance Credit LO 2 Explain double-entry rules.

Debits and Credits Summary Balance Sheet Income Statement Asset = Liability + Equity Revenue - Expense = Debit Credit LO 2 Explain double-entry rules.

Basic Accounting Equation Relationship among the assets, liabilities and stockholders’ equity of a business: Illustration 3-3 The equation must be in balance after every transaction. For every Debit there must be a Credit. LO 2 Explain double-entry rules.

Double-Entry System Exercise 1. Owner Invest $32,000 cash and equipment valued at $14,000 in the business. Assets Liabilities Stockholders’ Equity = + + 32,000 + 46,000 + 14,000 LO 2 Explain double-entry rules.

Double-Entry System Exercise 2. Paid office rent of $600 for the month. Assets Liabilities Stockholders’ Equity = + - 600 - 600 (expense) LO 2 Explain double-entry rules.

Double-Entry System Exercise 3. Received $3,200 advance on a management consulting engagement. Assets Liabilities Stockholders’ Equity = + + 3,200 + 3,200 LO 2 Explain double-entry rules.

Double-Entry System Exercise 4. Received cash of $2,300 for services completed for Shuler Co. Assets Liabilities Stockholders’ Equity = + + 2,300 + 2,300 (revenue) LO 2 Explain double-entry rules.

Double-Entry System Exercise 5. Purchased a computer for $6,100. (cash) Assets Liabilities Stockholders’ Equity = + + 6,100 - 6,100 LO 2 Explain double-entry rules.

Double-Entry System Exercise 6. Paid off liabilities of $7,000. Assets Liabilities Stockholders’ Equity = + - 7,000 - 7,000 LO 2 Explain double-entry rules.

Double-Entry System Exercise 7. Declared a cash dividend of $10,000. Assets Liabilities Stockholders’ Equity = + + 10,000 - 10,000 Note that the accounting equation equality is maintained after recording each transaction. LO 2 Explain double-entry rules.

Proprietorship or Partnership Ownership Structure Ownership structure dictates the types of accounts that are part of the equity section. Proprietorship or Partnership Corporation Capital Account Drawing Account Common Stock Additional Paid-in Capital Dividends Declared Retained Earnings LO 2 Explain double-entry rules.

Corporation Ownership Structure Illustration 3-4 Balance Sheet Stockholders’ Equity Common Stock (Investment by stockholders) Retained Earnings (Net income retained in business) Dividends Net income or Net loss (Revenues less expenses) Income Statement Statement of Retained Earnings LO 2 Explain double-entry rules.