1. The Accounting Information System
Chapter 7
The Accounting Information System

2. The Accounting Cycle

3. The Accounting Cycle Analyze transactions
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

4. The Accounting Cycle Analyze transactions
Record the effect of transactions in a journal entry
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

5. The Accounting Cycle Analyze transactions
Record the effect of transactions in a journal entry
Summarize the effects of transactions
Post journal entries to the ledger
Prepare a trial balance
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

6. The Accounting Cycle Analyze transactions
Record the effect of transactions in a journal entry
Summarize the effects of transactions
Post journal entries to the ledger
Prepare a trial balance
Prepare reports
Make adjusting entries
Prepare financial statements
Close the books
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

7. Transaction Analysis Using Debits and Credits

8. Transaction Analysis Using Debits and Credits
The accounting equation
Assets = Liabilities + Owners’ Equity
The spreadsheet analysis format based on the accounting equation is not practical when a company has thousands of transactions
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

9. Transaction Analysis Using Debits and Credits
All transactions relating to a specific item are recorded in an account
The most simple form of an account is called a T- account
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

10. The T- Account ACCOUNT TITLE DEBIT CREDIT (Left Side)‏ (Right Side)‏
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

11. Debits and Credits: Balance Sheet Accounts
Equity
Liabilities
Debit
Assets
Decrease
Increase
Left
Right
Right
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

12. Debits and Credits: Balance Sheet Accounts
Equity
Liabilities
Assets
Decrease
Increase
Left
Right
Left
Right
Right
Left
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

13. Debits and Credits: Balance Sheet Accounts
ASSET
LIABILITY
EQUITY
DEBIT
CREDIT
DEBIT
CREDIT
DEBIT
CREDIT - - - + + +
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

14. Debits and Credits: Revenues, Expenses, and Dividends
Decrease
Debit
Dividends
Expenses
Credit
Revenues
Increase
Right
Left
Left
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

15. Debits and Credits: Revenues, Expenses, and Dividends
Decrease
Dividends
Expenses
Revenues
Increase
Right
Left
Left
Right
Left
Right
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

16. Debits and Credits: Revenues, Expenses, and Dividends- + + - + -
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17. Debits and Credits — All Accounts
Owners’ Equity
Assets =
Liabilities +
Dr.
Cr.
Dr.
Cr.
Dr.
Cr. - + - + + -
Paid-in Capital
Retained
Earnings
Dr.
Cr. + -
Expenses
Revenues
Dividends
Dr.
Cr. + -
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

18. Recording Journal Entries

19. Recording the Effects of Transactions
The journal is a book in which all transactions are recorded in chronological order
DR = CR
Each journal entry has its debit amounts equal to its credit amounts to ensure that the accounting equation remains in balance
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

20. Recording the Effects of Transactions
Journalizing involves a three-step process:
Identify which accounts are involved
For each account, determine if it is increased or decreased
For each account, determine by how much it changed
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

21. Recording the Effects of Transactions
The account debited is always listed first, followed by the account credited
The credit entry is indented
Some selected transactions from Veda Landscape Solutions are presented next as examples…
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

22. Transaction 1 Investment of $700,000 cash into the business.
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

23. Transaction 2 Borrowed $300,000 cash from the bank.
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24. Transaction 3
Purchased land costing $50,000 and buildings costing $400,000. Paid $100,000 in cash and signed a mortgage for the balance.
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25. Transaction 4 Purchased equipment for $650,000 in cash.
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26. Transaction 7
Purchased inventory costing $90,000 for $10,000 in cash and the remaining $80,000 on account.
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27. Transaction 8 Paid $15,000 cash for an insurance policy.
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28. Transaction 10
Sold inventory costing $800,000 to customers for $1,100,000.
The customers paid $200,000 in cash and the remaining $900,000 was put on the customers’ accounts.
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29. Transaction 11
Performed landscaping consulting services and billed clients $200,000 for these services.
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30. Transaction 14
Collected $820,000 cash from customers as payment on their accounts.
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31. Transaction 15
Paid $1,200,000 in cash to suppliers as payment on account.
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32. Transaction 18
Paid cash of $150,000 for advertising, utilities, and office supplies.
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33. Transaction 23 Paid cash dividends of $5,000.
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34. Posting and the Trial Balance

35. Posting
Posting involves transferring the the debits and credits from the journal entries to the individual accounts
Posting is purely mechanical in nature and requires no analysis
The collection of all of a company’s accounts is called a ledger
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

36. Example: Posting Transaction 1
Cash 700,000
Paid-in Capital 700,000
700,000
700,000
Cash
Paid-in Capital
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

37. Trial Balance
A trial balance is a listing of all of the ledger accounts and their balances
The total of the debit balance accounts should equal the total of the credit balance accounts
The equality of the debits and credits provides some assurance that the posting process has been completed correctly
DR = CR
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

38. Financial Accounting, 7e Stice/Stice, 2006 © Thomson

39. Adjusting and Closing Entries

40. Adjusting Entries
Adjusting entries are made at the end of the accounting period
to properly reflect the balances of all asset, liability, and owners’ equity accounts
to recognize all revenues and expenses on an accrual basis
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

41. Adjustments result from one of two sequences of events:
Adjusting Entries
Adjustments result from one of two sequences of events:
New information requires an adjustment to a transaction that has already been recorded
A transaction has not yet been recorded even though a business event has occurred
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

42. An Event Already Recorded
Assume a company purchases a one- year insurance policy paying $1,200 on October 1, 2006, resulting in the following journal entry
Prepaid Insurance 1,200
Cash 1,200
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43. An Event Already Recorded
At December 31, 2006, the following adjusting journal entry is required:
Insurance Expense 300
Prepaid Insurance 300
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44. An Event Not Yet Recorded
Assume that a chemical spill during November at a factory will require a cleanup costing $23,000. The cleanup will take place in 2007, and nothing yet has been recorded. The following adjustment is necessary at December 31, 2006:
Chemical Cleanup Expense 23,000
Chemical Cleanup Liability 23,000
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

45. Closing Entries Closing entries
Transfer the amounts in the revenue, expense, and dividend accounts to Retained Earnings
Zero-out these “temporary accounts” for the start of the next accounting period
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

46. Closing Entries Comprised of three journal entries:
Close the revenue accounts to Retained Earnings
Close the expense accounts to Retained Earnings
Close the dividends account to Retained Earnings
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47. Closing Entries: Veda Landscape Solutions
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48. Computers and Accounting
The time spent performing routine tasks within the accounting cycle has been greatly reduced as a result of using computers
Personal computers are being used for
financial analysis
accounting functions
word processing
database management
inventory control
credit analysis of customers
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

49. Computers and Accounting
Through networking (Internet and intranet), personal computers are speeding up the exchange of information among users
It is still important, however, to be familiar with the accounting cycle in order to understand the flow of information within an organization
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

50. In Summary ...
The accounting cycle consists of analysis, recording, summarizing, and reporting financial transactions
Journal entries use debits and credits to describe and chronologically record business transactions
The trial balance lists all accounts of a business and their balances
Adjusting entries are used to (a) update information previously recorded and (b) record previously unrecognized transactions
Closing entries transfer the balances of revenues, expenses, and dividend accounts to Retained Earnings
Financial Accounting, 7e Stice/Stice, 2006 © Thomson