McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 7 Accounting Information Systems

7-2 What are the 3 Characteristics of an Accounting Event? Specific to entity Measurable in monetary terms Impact the entity’s assets, liabilities, and/or owners’ equity

7-3 What is the Accounting Equation? Assets = Liabilities + Owners’ equity Assets – Liabilities = Owners’ equity (net assets)

7-4 What are the 9 Basic Combinations of Accounting Events? Assets increase, assets decrease Assets increase, liabilities increase Assets increase, owners’ equity increase Assets decrease, liabilities decrease Assets decrease, owners’ equity decrease

7-5 Basic Combinations Continued Liabilities increase, liabilities decrease Liabilities increase, owners’ equity decrease Liabilities decrease, owners’ equity increase Owners’ equity increase, owners’ equity decrease

7-6 What are Debits and Credits? Debits and credits aren’t good or bad, they’re not happy or sad, rather Debit indicates “left” as in the left side of an account Credit indicates “right” as in the right side of an account

7-7 Debits and Credits Continued Debit Credit

7-8 Asset Account Debit Increase Credit Decrease

7-9 Liability Account Debit Decrease Credit Increase

7-10 Owners’ Equity Account Debit Decrease Credit Increase

7-11 Revenue Account Debit Decrease Credit Increase

7-12 Expense Account Debit Increase Credit Decrease

7-13 How do Debits and Credits Apply to the first 8 Basic Combinations? Assets increase, assets decrease  DR asset account; CR asset account Assets increase, liabilities increase  DR asset account; CR liability account Assets increase, owners’ equity increase  DR asset account; CR owners’ equity account Assets decrease, liabilities decrease  DR liability account; CR asset account

7-14 DR and CR Continued Assets decrease, owners’ equity decrease  DR owner’s equity account; CR asset account Liabilities increase, liabilities decrease  DR liability account; CR liability account Liabilities increase, owners’ equity decrease  DR owners’ equity account; CR liability account Liabilities decrease, owners’ equity increase  DR liability account; CR owners’ equity account

7-15 What is the Difference between Journalizing and Posting? Journalizing  Recording an event in the journal Posting  Recording the appropriate part of an event in the appropriate general ledger account

7-16 More DR and CR If an account increases with a debit, what is its normal balance?  Debit What are the normal balances of assets, liabilities, and owners’ equity  Assets—debit  Liabilities—credit  Owners equity--credit

7-17 Revenues and Expenses What is the normal balance of a revenue account? Why?  Revenue accounts have credit balances because revenues increase income and income belongs to the owners What is the normal balance of an expense account? Why?  Expense accounts have debit balances because expenses decrease income and income belongs to the owners

7-18 What are Adjusting Entries? Revenue accrual  Increase revenue, increase asset Revenue deferral  Increase revenue, decrease liability Expense accrual  Increase expense, increase liability Expense deferral  Increase expense, decrease asset

7-19 What are Examples of Each Type of Adjusting Entry? Revenue accrual  Interest earned on an investment Revenue deferral  Fees earned by completing work that a customer paid for in advance Expense accrual  Interest incurred on a bank loan Expense deferral  Rent that was prepaid is used (time passed)

7-20 What are Closing Entries? Zero-out income statement accounts Transfer the balances to owners’ equity  Corporation—retained earnings Debit each revenue account for the amount of its balance and credit retained earnings Credit each expense account for the amount of its balance and debit retained earnings The change in retained earnings is the net income (loss) for the period

7-21 What are the Advantages of Computer- Based Transaction Systems? Transactions posted quickly—no journalizing required Detailed listing can be printed at any time Internal controls A wide variety of reports can be generated

7-22 What are Transaction Files and Master Files? Transaction files  Similar to journals Master files  Similar to ledgers

7-23 What are the Advantages of Database Systems? Business events can be recognized in addition to accounting events Reduced operating inefficiencies Elimination of redundant data throughout the company

7-24 What is a Business Event? Any activity that the company wishes to plan and evaluate. Includes accounting events and other events

7-25 Which of the Following is a Business, but not an Accounting Event? Determine the need for inventory Receive inventory Pay for inventory Sell inventory  Answer: determine the need for inventory