1 © Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license. FINANCIAL ACCOUNTING 2 ND EDITION BY DUCHAC, REEVE, & WARREN 4 Accounting Information Systems

2 LEARNING GOALS When you finish this chapter, you should be able to

3 1.Describe nature of business information systems. 2.Describe nature of accounting information system. 3.Describe, illustrate basic elements of transaction processing system. LEARNING GOALS Continued

4 LEARNING GOALS 4. Describe, illustrate basic elements of financial reporting system. 5. Describe accounting cycle for double- entry accounting system. 6.Describe, illustrate computation, use of earning before interest, taxes, depreciation, amortization (EBITDA).

5 SOUTHWEST AIRLINES Southwest Airlines  Developed profitable low-cost airline  Using only Boeing 737s  Using secondary airports  Avoiding commission-based ticket sales

6 LEARNING GOALS 1 Describe nature of business information system.

7 BUSINESS INFORMATION SYSTEM Collects, processes data Distributes information to stakeholders Collects, processes data Distributes information to stakeholders LG 1

8 LEARNING GOALS 2 Describe nature of accounting information system.

9 LG 2 EXHIBIT 2 Financial, operating data Accounting Information Systems Management Reporting Transactions Processing Financial Reporting Accounting Information Systems Management Reporting Transactions Processing Financial Reporting Stakeholders

10 What information do these 3 systems produce? LG 2

11 MANAGEMENT REPORTING SYSTEM Provides internal information for decision making –Reports Budgets Variance analyses Provides internal information for decision making –Reports Budgets Variance analyses LG 2

12 TRANSACTION PROCESSING SYSTEM Records, summarizes effects of financial transactions into accounts Divides transactions into cycles –Revenue cycle –Purchasing cycle –Payroll cycle –Inventory cycle –Treasury cycle Records, summarizes effects of financial transactions into accounts Divides transactions into cycles –Revenue cycle –Purchasing cycle –Payroll cycle –Inventory cycle –Treasury cycle LG 2

13 FINANCIAL REPORTING SYSTEM Produces financial statements –Income statement –Statement of retained earnings –Balance sheet –Statement of cash flows Produces financial statements –Income statement –Statement of retained earnings –Balance sheet –Statement of cash flows LG 2

14 LEARNING GOALS 3 Describe, illustrate basic elements of transaction processing system.

15 THE ACCOUNT Each account has a Title Recording place for debits Recording place for credits Each account has a Title Recording place for debits Recording place for credits LG 3 Left side Debit Right side Credit Title

16 RULES OF DEBIT & CREDIT Normal balance of account is side used to increase Asset accounts have debit balances Example: cash CASH DEBITS INCREASE LG 3 Continued

17 RULES OF DEBIT & CREDIT Normal balance of account is side used to increase Liability, Equity accounts have credit balances Example: Retained Earnings RETAINED EARNINGS LG 3 CREDITS INCREASE

18 BALANCE SHEET EQUATION A = L + E LG 3

19 RULE 2 OF DEBIT & CREDIT: Assets Asset accounts on left side of equation are –Increased by debits and –Have debit balances DEBIT BALANCE ASSET ACCTS + LG 3

20 RULE 2 OF DEBIT & CREDIT: Liability & Equity Liability & equity accounts on right side of equation are –Increased by credits and –Have credit balances LIABILITY & EQUITY ACCTS CREDIT BALANCE + LG 3

21 RULE 2 OF DEBIT & CREDIT: Revenue Revenue accounts increase equity on right side of equation are –Increased by credits and –Have credit balances REVENUE ACCOUNTS CREDIT BALANCE + LG 3

22 RULE 2 OF DEBIT & CREDIT: Expense Expense accounts decrease equity which is on right side of equation are –Increased by debits and –Have debit balances DEBIT BALANCE EXPENSE ACCTS + LG 3

23 RULE 3 OF DEBIT & CREDIT For each transaction –Total debits will equal total credits TRANSACTION TOTAL CREDITS TOTAL DEBITS LG 3

24 LG 3 EXHIBIT 3

25 RECORDING TRANSACTIONS Transactions recorded in –Journals Organized by date –Ledgers Organized by account Click the button to skip journal entries

26 ENTRY 11/5: Bought Land Buying land for cash Decreases cash flows, investing Has no effect on balance sheet Has no effect on income statement LG 3 11/5 Land Cash 20,000 Click the button to skip journal entries SCFBSIS

27 ENTRY 11/10: Bought Supplies Buying supplies on account Has no effect on cash flows Increases assets & liabilities Has no effect on income statement LG 3 10 Supplies Accounts Payable 1,350 Click the button to skip journal entries SCFBSIS

28 ENTRY 11/18: Earned Fees Received cash for fees earned Increases cash flows from operations Increases assets & equity Increases revenue LG 3 18 Cash Fees Earned 7,500 Click the button to skip journal entries SCFBSIS R

29 ENTRY 11/30: Paid Expenses Paid cash for expenses Decreases cash flow operations Decreases assets & equity Increases expenses on income statement LG 3 30Wages Expense Rent Expense Utilities Expense Misc. Expense Cash ,650 Click the button to skip journal entries SCFBSIS E

30 ENTRY 11/30: Paid Account Paid cash to satisfy accounts payable Decreases cash flow operations Decreases assets, liabilities Has no effect on income statement LG 3 30 Accounts payable Cash 950 Click the button to skip journal entries SCFBSIS

31 ENTRY 11/30: Paid Dividend Paid cash dividends Decreases cash flow financing Decreases assets, equity Has no effect on income statement LG 3 2, Dividends Cash SCFBSIS

32 EXERCISE 4-2a (modified) Press “Enter” or click left mouse button for answer. Identify accounts of Continental Airlines with normal debit balance. 1.Accounts payable 2.Fuel expense 3.Traffic liability 4.Cargo revenue 5.Commissions expense 6.Flight equipment 7.Passenger revenue 8.Spare parts & supplies LG 3 Click the button to skip this exercise

33 EXERCISE 4-2b (modified) Press “Enter” or click left mouse button for answer. Identify accounts of Continental Airlines with normal credit balance. 1.Accounts payable 2.Fuel expense 3.Traffic liability 4.Cargo revenue 5.Commissions expense 6.Flight equipment 7.Passenger revenue 8.Spare parts & supplies LG 3 Click the button to skip this exercise

34 POSTING TO LEDGER Some Examples CASHLAND REVENUE 11/1 25,000 20,000 11/511/5 20,000 11/18 7,500 7,500 11/18 LG 3

35 LG 3 Trial balance lists accounts, balances in debit, credit columns to check recording process. EXHIBIT 7

36 LEARNING GOALS 4 Describe, illustrate basic elements of financial reporting system.

37 END OF YEAR: 12/31/2007 Transactions for December recorded –Journals, ledgers Trial balance for December transactions Adjustments recorded –Supplies, insurance used –Revenue earned –Wages owed –Depreciation Transactions for December recorded –Journals, ledgers Trial balance for December transactions Adjustments recorded –Supplies, insurance used –Revenue earned –Wages owed –Depreciation Continued LG 4

38 END OF YEAR: 12/31/2007 Adjusted trial balance –Final check before financial statements Prepare financial statements –Income statement –Statement retained earnings –Balance sheet –Statement cash flows Adjusted trial balance –Final check before financial statements Prepare financial statements –Income statement –Statement retained earnings –Balance sheet –Statement cash flows LG 4 See Exhibit 12 p

39 Statement of cash flows linked to cash on balance sheet Net income from income statement linked to retained earnings statement Retained earnings linked to balance sheet in stockholders’ equity INTEGRATED FINANCIAL STATEMENTS (IFS) LG 4 Click the button to skip Exh. 12.

40 EXHIBIT 12 IFS: Statement of cash flows linked to cash on balance sheet LG 4

41 EXHIBIT 12 (cont.) IFS: Net income from income statement linked to retained earnings statement LG 4

42 EXHIBIT 12 (cont.) IFS: Retained earnings linked to balance sheet in stockholders’ equity LG 4

43 AFTER FINANCIAL STATEMENTS Closing entries –Transfer balances of temporary (revenue, expense, dividends) accounts to retained earnings –Zero balances of temporary accounts to carry forward Post-closing trial balance –Final check for asset, liability, equity account balances Closing entries –Transfer balances of temporary (revenue, expense, dividends) accounts to retained earnings –Zero balances of temporary accounts to carry forward Post-closing trial balance –Final check for asset, liability, equity account balances LG 4

44 LEARNING GOALS 5 Describe accounting cycle for double-entry accounting system.

45 ACCOUNTING CYCLE 1.Transactions analyzed, recorded in journals 2.Transactions posted to ledgers 3.Unadjusted trial balance prepared 4.Adjustment data assembled, analyzed 5.Adjusting entries prepared, recorded in journal Continued LG 5

46 ACCOUNTING CYCLE 6.Adjusting entries posted to ledger 7.Adjusted trial balance prepared 8.Financial statements prepared 9.Closing entries recorded in journal 10.Closing entries posted to ledgers 11.Post-closing trial balance prepared LG 5

47 THE END CHAPTER 4