1 Chapter 3: The Accounting Information System

2 Effect of Debits and Credits Expanded rules for debits and credits based on financial statement relationships: Assets = Liabilities + Stockholders’ Equity Retained Common Earnings Stock Net Income Dividends Revenues Expenses DRCR DR

3 The Format of a Journal Entry To initially record transactions, we use a journal entry to represent the debits and credits. For example, if investors contribute $20,000 into the company, and receive common stock, the transaction is recorded as follows: Debit Credit Cash 20,000 Common Stock 20,000 This transaction INCREASES cash with a DEBIT, and INCREASES common stock with a CREDIT. Note that the debit is to the left and the credit is to the right. First we list the account (left hand entry on top), then the amount.

4 Additional Entries Purchase $20,000 of equipment with the payment of $8,000 cash, and finance the balance with a Notes Payable: Equip.20,000 Cash 8,000 Notes Pay. 12,000

5 Additional Entries Perform services for customer on account, and bill the customer $5,000: A/Rec.5,000 Service Revenue 5,000 Collect $4,000 on accounts receivable: Cash4,000 A/Rec. 4,000 Pay current month’s rent of $1,000: Rent Expense1,000 Cash 1,000

6 Back to Class Problem: Posting to G/L Now post transactions (for Cash) to “T” account: Cash 20,000 8,000 1,0004,000 Bal. 15,000

7 1. Accrual of Expenses - Example 1 Raider Company borrowed $10,000 on October 1, The note included a 5 percent annual interest rate, payable each September 30, starting Sept. 30, How much interest must Raider accrue at Dec. 31, 2012 before financial statements are prepared? Calc: Principal x rate x time P x R x T AJE: Interest Expense125 Interest Payable125 10,000 x.05 x 3/12 of a year = $125

8 3.Prepaid Expenses - Example 3 Raider Company purchased a 1-year insurance policy on April 1, 2012 at a cost of $2,400 General JE at time of purchase (to asset): Prepaid Insurance2,400 Cash 2,400 Calculation for AJE at December 31 to recognize the portion that has been used up: 2,400 /12 = 200 per month x 9 months= $1,800 AJE: Insurance Expense 1,800 Prepaid Insurance 1,800

9 3.Prepaid Expenses – Example 4 Raider Company purchased a 1-year insurance policy on April 1, 2012 at a cost of $2,400 General JE at time of purchase (to expense): Insurance Expense 2,400 Cash 2,400 Calculation for AJE at December 31 to create asset for the portion that was not used up: 2,400 /12 = 200 per month x 3 months= $600 AJE: Prepaid Insurance 600 Insurance Expense 600

10 4.Unearned Revenues – Example 5 Raider Company received $6,000 on November 30, 2012 for subscriptions to be delivered over the next 12 months, starting in December of General JE at time cash received (credit to liability): Cash6,000 Unearned Revenues6,000 AJE at end of the period (for portion earned): 6,000 / 12 = 500 per month, so 1 month earned. Unearned Revenues500 Subscription Revenues 500

11 4.Unearned Revenues – Example 6 Raider Company received $6,000 on November 30, 2012 for subscriptions to be delivered over the next 12 months, starting in December of General JE at time cash received (credit to revenue): Cash6,000 Subscription Revenues6,000 AJE at end of the period (for portion earned): 6,000 / 12 = 500 per month, so 1 month earned. Subscription Revenues5,500 Unearned Revenues 5,500

12 5. Depreciation Exp. – Example 7 Raider Company purchased equipment in 2010 at a cost of $30,000. The equipment has a useful life of 10 years and no salvage value. Calculation for AJE at December 31, 2012 for the current year’s depreciation. 30,000/10 = 3,000 per year AJE: Depr. Exp.3,000 A/D 3,000

Exercise 3-16 Closing JEs Close revenues and expenses to Retained Earn.: Sales Revenue410,000 Sales Discounts15,000 Sales Returns & Allowances 12,000 COGS 225,700 Selling Expenses 16,000* Administrative Expenses 38,000* Income Tax Expense 30,000 Close dividends to Retained Earnings: Dividends 18,000 Ending RE? *Note: close individual account titles. Retained Earnings 73,300 Retained Earnings 18,000 45, ,300 – 18,000 = 100,300 13

Exercise 3-1 4/2 Cash32,000 Equipment 14,000 Capital 46,000 4/2 No JE 4/3 Supplies 700 A/Pay700 4/7 Rent Expense 600 Cash600 4/11 A/Rec 1,100 Service Revenue 1,100 4/12 Cash 3,200 Unearned Revenue 3,200

Exercise 3-1 4/17 Cash 2,300 Service Rev. 2,300 4/21 Insurance Exp. 110 Cash 110 4/30 Salaries Exp. 1,160 Cash 1,160 4/30 Supplies Exp. 120 Supplies 120 4/30 Computer 6,100 Capital 6,100 Back to Power Points.

Exercise 3-5 (AJEs for 3 months) 1.Depr. Exp. 750 Accum. Depr Unearned Rent Rev.3,100 (1/3 x 9,300) Rent Rev.3,100 3.Interest Exp. 500 Interest Pay Supplies Exp.1,950( ) Supplies1,950 5.Insurance Exp. 900 Prepaid Ins. 900

Exercise 3-6 (AJEs only) 1. A/R750 Service Rev Utility Exp.520 A/P Depr. Exp.400 A/D 400 Int. Exp.500 Int. Pay Ins. Exp. 1,000 Prepaid Ins. 1, Supplies Exp. 1,100 Supplies1,100