1. The Accounting Information System
Chapter 3
Intermediate Accounting
12th Edition
Kieso, Weygandt, and Warfield
Prepared by Coby Harmon, University of California, Santa Barbara

2. Learning Objectives Understand basic accounting terminology.
Explain double-entry rules.
Identify steps in the accounting cycle.
Record transactions in journals, post to ledger accounts, and prepare a trial balance.
Explain the reasons for preparing adjusting entries.
Prepare financial statement from the adjusted trial balance.
Prepare closing entries.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)

3. Accounting Information System
The Accounting Cycle
Basic terminology
Debits and credits
Basic equation
Financial statements and ownership structure
Identification and recording
Journalizing
Posting
Trial balance
Adjusting entries
Adjusted trial balance
Preparing financial statements
Closing
Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation.
Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt.
Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets.
Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees.
Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss:
difference between the actual return and the expected return on plan assets and,
amortization of the unrecognized net gain or loss from previous periods

4. Accounting Information System
An Accounting Information System (AIS)
collects and processes transaction data and
Publish the information to interested parties.

5. Accounting Information System
Helps management answer such questions as:
Were sales higher this period than last?
What assets do we have?
What were our cash inflows and outflows?
Did we make a profit last period?
LO 1 Identify the major financial statements and other means of financial reporting..

6. Basic Terminology Event Journal Transaction Posting Account
Real Account
Nominal Account
Ledger
Journal
Posting
Trial Balance
Adjusting Entries
Financial Statements
Closing Entries
LO 1 Understand basic accounting terminology.

7. Debits and Credits
An Account shows the effect of transactions on a given asset, liability, equity, revenue, or expense account.
Double-entry accounting system (two-sided effect).
Recording done by debiting at least one account and crediting another.
DEBITS must equal CREDITS.
LO 2 Explain double-entry rules.

8. An Account can be illustrated in a T-Account form.
Debits and Credits
An arrangement that shows the effect of transactions on an account.
Debit = “Left”
Credit = “Right”
Account
An Account can be illustrated in a T-Account form.
LO 2 Explain double-entry rules.

9. Debits and Credits
If Debit entries are greater than Credit entries, the account will have a debit balance.
Account Name
Debit / Dr.
Credit / Cr.
Transaction #1
$10,000
$3,000
Transaction #2
Transaction #3
8,000
Balance
$15,000
LO 2 Explain double-entry rules.

10. Debits and Credits
If Credit entries are greater than Debit entries, the account will have a credit balance.
Transaction #1
$10,000
$3,000
Transaction #2
8,000
Transaction #3
Balance
$1,000
LO 2 Explain double-entry rules.

11. Debits and Credits Summary
Normal Balance Debit
Normal Balance Credit
LO 2 Explain double-entry rules.

12. Debits and Credits Summary
Balance Sheet Income Statement
Asset =
Liability +
Equity
Revenue -
Expense =
Debit
Credit
LO 2 Explain double-entry rules.

13. Basic Accounting Equation
Relationship among the assets, liabilities and stockholders’ equity of a business:
Illustration 3-3
The equation must be in balance after every transaction. For every Debit there must be a Credit.
LO 2 Explain double-entry rules.

14. Double-Entry System Exercise
1. Owner Invest $32,000 cash and equipment valued at $14,000 in the business.
Assets
Liabilities
Stockholders’ Equity = +
+ 32,000
+ 46,000
+ 14,000
LO 2 Explain double-entry rules.

15. Double-Entry System Exercise
2. Paid office rent of $600 for the month.
Assets
Liabilities
Stockholders’ Equity = +
- 600
- 600 (expense)
LO 2 Explain double-entry rules.

16. Double-Entry System Exercise
3. Received $3,200 advance on a management consulting engagement.
Assets
Liabilities
Stockholders’ Equity = +
+ 3,200
+ 3,200
LO 2 Explain double-entry rules.

17. Double-Entry System Exercise
4. Received cash of $2,300 for services completed for Shuler Co.
Assets
Liabilities
Stockholders’ Equity = +
+ 2,300
+ 2,300 (revenue)
LO 2 Explain double-entry rules.

18. Double-Entry System Exercise
5. Purchased a computer for $6,100. (cash)
Assets
Liabilities
Stockholders’ Equity = +
+ 6,100
- 6,100
LO 2 Explain double-entry rules.

19. Double-Entry System Exercise
6. Paid off liabilities of $7,000.
Assets
Liabilities
Stockholders’ Equity = +
- 7,000
- 7,000
LO 2 Explain double-entry rules.

20. Double-Entry System Exercise
7. Declared a cash dividend of $10,000.
Assets
Liabilities
Stockholders’ Equity = +
+ 10,000
- 10,000
Note that the accounting equation equality is maintained after recording each transaction.
LO 2 Explain double-entry rules.

21. Proprietorship or Partnership
Ownership Structure
Ownership structure dictates the types of accounts that are part of the equity section.
Proprietorship or Partnership
Corporation
Capital Account
Drawing Account
Common Stock
Additional Paid-in Capital
Dividends Declared
Retained Earnings
LO 2 Explain double-entry rules.

22. Corporation Ownership Structure
Illustration 3-4
Balance Sheet
Stockholders’ Equity
Common Stock (Investment by stockholders)
Retained Earnings (Net income retained in business)
Dividends
Net income or Net loss (Revenues less expenses)
Income Statement
Statement of Retained Earnings
LO 2 Explain double-entry rules.