1. Gabriela H. Schneider, CMA; Grant MacEwan College
INTERMEDIATE ACCOUNTING Sixth Canadian Edition KIESO, WEYGANDT, WARFIELD, IRVINE, SILVESTER, YOUNG, WIECEK
Prepared by:
Gabriela H. Schneider, CMA; Grant MacEwan College 2

2. The Accounting Information System
C H A P T E R 3
The Accounting Information System

3. Learning Objectives 1. Understand basic accounting terminology.
2. Explain double-entry rules.
3. Identify steps in the accounting cycle.
4. Records transactions in journals, post to ledger accounts, and prepare a trial balance.
5. Explain the reasons for preparing adjusting entries.

4. Learning Objectives 6. Prepare closing entries.
7. Explain how inventory accounts are adjusted at year-end.
8. Prepare a 10-column work sheet.

5. The Accounting Information System
Basic terminology
Debits and credits
Basic equation
Financial statements and ownership structure
The Accounting Cycle
Identification and recording
Journalizing
Posting
Trial Balance
Adjusting entries
Adjusted trial balance
Closing
Post-closing trial balance
Reversing entries
Using a Worksheet
Adjustments entered
Work sheet columns
Preparing financial statements from a work sheet
Closing entries
Monthly statements, yearly closing

6. Basic Terminology Event Transaction Account
The source/cause of a change in assets, liabilities and equity
May be internal or external
Transaction
Transfer or exchange between two or more entities
Account
A summary of the transactions for each type of asset, liability and equity item

7. Basic Terminology Permanent account Temporary account
Also known as a real account
Asset, liability and equity accounts
Appear on the balance sheet
Permanent accounts are not closed at year-end
Temporary account
Also known as a nominal account
Revenue and expense accounts
Appear on the income statement
Temporary accounts are closed at year-end

8. Basic Terminology Ledger Journal Posting Trial balance
Book containing all accounts
Each account has a separate page
Journal
Book of original entry for all transactions
Posting
Process of transferring transaction information from the journal to the ledger
Trial balance
Listing of all accounts and their balances from the general ledger
Tool used to ensure that the general ledger is in balance

9. Basic Terminology Adjusting entries
Record the effects of accrual accounting
Ensure that revenue recognition and the matching principle are followed
Five classifications of adjusting entries:
Prepaid expenses
Unearned revenues
Accrued revenues
Accrued expenses
Amortization

10. Basic Terminology Financial statements Closing entries
Final summaries of the accounting data for a specific period of time
Four statements:
Balance Sheet
Income Statement
Statement of Cash Flows
Statement of Owners’ Equity
Closing entries
Process where all temporary accounts are reduced to zero
Summary balance (= net income) transferred to owners’ equity account

11. Debits and Credits Debit (Dr.) Credit (Cr.)
To record or enter an amount on the left side
Credit (Cr.)
To record or enter an amount on the right side
This system of recording transactions
is referred to as the double-entry system.
When a transaction is ‘in balance’ the debits equal the credits.

12. The Accounting Equation
Assets =
Liabilities +
Shareholders’ Equity
Assets =
Liabilities +
Common Shares + Retained Earnings
Retained Earnings =
Revenues – Expenses - Dividends
Assets = Liabilities + Common Shares + Revenue – Expenses - Dividends

13. The Rules of Debit and Credit
To increase the balance of any account, record the amount in the normal balance column
To decrease the balance of any account, record the amount in the column opposite to its normal balance
When any transaction is correctly recorded, the accounting equation will remain in balance

14. The Rules of Debit and Credit
Account
Debit
Credit
Assets
Increase
Decrease
Liabilities
Shareholders’ Equity
Revenue
Expenses

15. Ownership Structure Owners’ Equity Net Income + Investments by Owners
Common Shares–Corp.
Capital – Proprietor
or Partnership
Net Loss -
Dividends (Corp.) or
Withdrawals (Proprietor or
Partnership)
Owners’ Equity

16. The Accounting Cycle: Steps
Analyse the transaction
Journalize the transaction
Post the transaction to general ledger (and sub-ledgers) accounts
Prepare the (unadjusted) trial balance
Prepare necessary adjusting journal entries
Prepare the (adjusted) trial balance
Prepare financial statements
Prepare closing journal entries for the year
Prepare post-closing trial balance (optional)
Prepare reversing entries (optional)

17. The Accounting Cycle
Identification and Measurement of Transactions 1
Record Transaction in Journal 2
Post Journal Entries to the Ledgers 3
Prepare Financial Statement 7
Reversing Entries 10
Prepare Trial Balance 4
Post-Closing Trial Balance 9
Adjusted Trial Balance 6
Record Adjusting Journal Entries to Worksheet (post to the Ledgers as well)
Prepare Adjusting Journal Entries 5
Close Temporary Accounts 8

18. Recording a Transaction From BE3-1
Assets = Liabilities + Common Shares + Revenue – Expenses - Dividends
+ $3,000
To record this transaction as a journal entry:
Dr. Cash $3,000
Cr. Common Shares $3,000
These amounts are then posted to the general ledger
Cash
Common Shares
3,000

19. Recording a Transaction
From the example we can see that:
The accounting equation is in balance because:
the debits = credits within our journal entry
we have posted the debits and credits correctly to our general ledger accounts
The system of double-entry bookkeeping facilitates this process
Errors may still occur
Double-entry simply ensures that the debits = the credits
Incorrect amounts may still be recorded or posted to the incorrect account

20. Preparation of Trial Balance
Trial Balance: list of accounts and their balances at a given point in time
Objective: prove the mathematical equality of debits and credits after posting
List the accounts in the order they appear in the ledger (do not include sub-ledger balances)
All debit balances listed in the left column, credit balances in the right column
Once all accounts listed, and totalled, the two column totals must agree

21. Preparation of Trial Balance
Selected account balances for Pioneer Advertising Agency Inc. at Oct. 31, 2002
Account Debit Credit
Cash 18,000
Accounts Receivable 72,000
Advertising Supplies 25,000
Prepaid Insurance ,000
Office Equipment 50,000
Notes Payable ,000
Accounts Payable ,000
Unearned Service Revenue 12,000
Common Shares 100,000
Dividends 5,000
Service Revenue 100,000
Salaries Expense 40,000
Rent Expense 9,000
TOTALS , ,000
Cash
18,000
Notes Payable
50,000
Dividends
5,000
Revenue
100,000

22. Adjusting Journal Entries
Adjusting entries ensure that:
Revenue recognition and the matching principle are followed within the period
Reasons for adjusting entries include:
To record those events that are not journalized daily
To record those costs, which expire with time and are therefore not recorded
To record item previously unrecorded
Adjusting entries are required each time financial statements are prepared

23. Adjusting Entries: Recognizing Revenue
Unearned Revenue
Recording
Accrued Revenue
Revenues received
in cash
and
recorded as liabilities
before being earned
Revenues earned
but not yet
received in cash
or recorded

24. Adjusting Entries: Matching Expenses
Prepayments for
Expenses
Recording
Accrued Expense
Prepayments made
in cash
and
recorded as assets
Before item is used
Expense incurred
but not yet
paid or recorded

25. Closing Entries
Closing entries are made to close all nominal accounts (revenue and expense accounts) for the year
Real (or Permanent) accounts are not closed
Dividends account is closed to Retained Earnings account

26. Closing Entries The following closing entries are made:
Income Summary Account $$$ Expense Accounts (Individually) $$$
Revenue Accounts (Individually) $$$ Income Summary Account $$$
Income Summary Account $$$ Retained Earnings $$$
Retained Earnings Account $$$ Dividends Account $$$

27. Scheme of Closing Entries
Income Summary
Ret. Earnings
Dividends
Expense
Revenue 4 3 1 2

28. Closing Entries: Inventory
In a periodic inventory system, closing entries are made to record cost of goods sold and ending inventory
In a perpetual inventory system, such entries are not required
See the scheme of entries (next slide)

29. Closing Entry: Periodic Inventory System
Inventory (ending) $
Purchases Returns $
Cost of Goods Sold $
Freight-in $
Purchases $
Inventory (Begin) $ Dr Cr
Inventory $
To record
ending balance
Purchases Returns $
Freight-In $
Purchases $
To remove
beginning balance

30. Periodic Inventory: Closing Entry
Intell Company has the following balances on December 31, The company uses a periodic inventory system.
Purchases (gross) $400,000 Purchases Returns $ 27,000 Freight-in, $ 12,000 Opening Inventory $ 62,000
Inventory count on December 31, 2000 was $46,000.

31. Periodic Inventory: Closing Entry
Account Dr Cr
Cost of Goods Sold $ 369,000
Inventory (Ending balance) $ 62,000
Purchases Returns $ 27,000
Purchases (Gross) $ 400,000
Freight-in $ 12,000
Inventory (Beginning balance) $ 46,000

32. The Worksheet – An Example

33. COPYRIGHT
Copyright © 2002 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by CANCOPY (Canadian Reprography Collective) is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his / her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.