Chapter 3 The Accounting Information System ACCT-30301

1. Accounting Equation A = L + SE ALSE Expanded: A = L + SE + R + G - E - L Definitions of elements ACCT-30302

2. Financial Statements Balance Sheet Income Statement Statement of Stockholders’ Equity (or Retained Earnings Statement) Cash Flow Statement Articulation ACCT-30303

3. Accounts Definition Number needed T account General ledger ACCT-30304

4. Debits and Credits Definitions Increases and decreases Normal balance Balance of an account ACCT-30305

5. Journal Entries Journalizing Format Posting Special journals Analyzing transactions E 3-1 ACCT-30306

6. Trial Balance Definition Purpose When prepared? Order of accounts ACCT-30307

7. Adjusting Entries Purpose Types ◦ Deferrals – cash flow occurs before revenue/expense recognition  Expense, Revenue ◦ Accruals – cash flow occurs after revenue/expense recognition  Expense, Revenue ◦ Other  Bad debts, Depreciation, Cost of goods sold ACCT-30308

8. Deferred Expense Adjustments On January 1 you paid $1,800 for three months’ rent in advance. ACCT-30309

9. Deferred Revenue Adjustments On May 1 your tenant pays you $3,600 for four months’ rent in advance. ACCT

10. Accrued Expense Adjustments On December 31 your employees have earned wages of $10,000 but they will not be paid until January 5. ◦ Without reversing ◦ With reversing ACCT

11. Accrued Revenue Adjustments As of December 31 another of your apartment building tenants has not paid his December rent of $700. ◦ Without reversing ◦ With reversing ACCT

12. Reversing Entries Purpose If you choose to use reversing entries, what adjustments should be reversed? ◦ All accruals ◦ Deferrals initially recorded as a revenue or expense ACCT

13. Other Adjusting Entries Bad Debts Adjustment Depreciation Expense Inventory and cost of good sold adjustments ◦ Perpetual inventory system ◦ Periodic inventory system ACCT

14. Closing Entries Purpose Entries ◦ Using income summary account  Close temporary accounts with Cr balances to income summary  Close temporary accounts with Dr balances to income summary  Close income summary to retained earnings  Close dividends account to retained earnings ◦ Making one entry ACCT

15. Cash Basis of Accounting Definition GAAP requirements Conversion to accrual basis ACCT