1 Chapter 3 Accounting Information System and the Accounting Cycle

2 The recording process The recording process  General ledger - track business transactions, organize, summarize  ERP - enterprise resource planning systems - single, A single, integrated information system whereby data is entered once and used by the entire enterprise  T - account, accounting equation  Debit or credit = left or right  Double-entry accounting  Increase or decrease  Asset - increase - debit, decrease - credit Assets = Liabs + Equity + Rev - Exp Assets = Liabs + Equity + Rev - Exp

3 T-Accounts  T-Accounts Represent a single general ledger account Represent a single general ledger account Account Debit (Dr.)Credit (Cr.)

4 T-accounts and the Accounting Equation Liabilities Equity Assets = = Dr.Cr. + - Liabilities Dr.Cr Since assets increase with debits, why does the bank credit your account when you make a deposit into your bank account? Contr Cap Dr.Cr. - + Ret Earn Dr.Cr

5 Journals  Parts of a journal entry Credit accounts written below debit accounts and indented Credit accounts written below debit accounts and indented Amount written in the right columnAmount written in the right column Brief explanation of the transaction Brief explanation of the transaction DateTransactionDebitCredit Feb 2 Land200,000 Notes Payable Notes Payable200,000 Record land purchase on acct

6 Expanded Accounting Equation with T-Accounts Liabilities Equity Assets = = Dr.Cr. + - Liabilities Dr.Cr Dr.Cr. Revenues Dr.Cr. Expenses Dr.Cr. Common Stock Dr.Cr. Dividends + - Dr.Cr. Retained Earnings Why do expenses and dividends increase with debits instead of credits? Hint: what effect to dividends and expenses have on retained earnings?

7 The recording process The recording process  Liability - increase - credit, decrease - debit  Equity - increase - credit, decrease - debit  Journal - journal entry  General ledger, posting - primary record  Chart of accounts  Recording revenue  Recording expenses  Accounting cycle - timeline  Posting transactions  Trial balance

8 Recording Transactions 1. Stockholders invested $40,000 cash to start Bull Riders, a rodeo training school Stockholders invested $40,000 cash to start Bull Riders, a rodeo training school Stockholders invested $40,000 cash to start Bull Riders, a rodeo training school 2. Paid $2,000 for advertising expenses Paid $2,000 for advertising expenses Paid $2,000 for advertising expenses 3. Paid $2,400 for a 1-year insurance policy Paid $2,400 for a 1-year insurance policy Paid $2,400 for a 1-year insurance policy 4. Performed $9,000 or rodeo training on account Performed $9,000 or rodeo training on account Performed $9,000 or rodeo training on account 5. Received the electric bill for March. Bill is due on April 12 Received the electric bill for March. Bill is due on April 12 Received the electric bill for March. Bill is due on April Paid $1,350 for Miscellaneous expenses Paid $1,350 for Miscellaneous expenses Paid $1,350 for Miscellaneous expenses 7. Received $6,500 from customers for services provided in transaction 4 Received $6,500 from customers for services provided in transaction 4 Received $6,500 from customers for services provided in transaction 4 8. Purchased a mechanical bull machine for $3,500 by signing a note payable due on December 31 Purchased a mechanical bull machine for $3,500 by signing a note payable due on December 31 Purchased a mechanical bull machine for $3,500 by signing a note payable due on December 31

9 The recording process  Income statement and balance sheet  Financial statement analysis  Working capital = current assets - current liabilities  Current ratio = current assets / current liabilities  Quick ratio, acid test ratio = (current assets - inventories) / current liabilities

10 Business risk, control and ethics  Errors - recording and updating the general ledger Input and processing controls Input and processing controls Ensure only authorized transactions are entered into the systemEnsure only authorized transactions are entered into the system Assure the accuracy of the input and processing of the data that are recordedAssure the accuracy of the input and processing of the data that are recorded Reconciliation and control reports Reconciliation and control reports Catch errors in data input and processingCatch errors in data input and processing Documentation to provide supporting evidence for the recorded transactions Documentation to provide supporting evidence for the recorded transactions Keep errors from occurring and catch errors that have occurredKeep errors from occurring and catch errors that have occurred  Unauthorized access to general ledger  Loss or destruction of general ledger data Loss of data can cripple an organization Loss of data can cripple an organization Need disaster recovery plan Need disaster recovery plan Data backup in off-site facilityData backup in off-site facility

11 Assign # 5 - pg E3-2A, E3-4A, E3-7A (due 1/24); Assign #6 - pg P3-1A, P3-5A (due 1/29).