1. 3-1 ©2006 Prentice Hall, Inc.

2. 3-2 ©2006 Prentice Hall, Inc. THE ACCTG INFO SYSTEM AND THE ACCTG CYCLE (1 of 2)  Learning objectives Learning objectives  Keeping track of business transactions Keeping track of business transactions  Recording balance sheet account transactions—debits and credits Recording balance sheet account transactions—debits and credits  Journals and the General Ledger Journals and the General Ledger  Recording Income Statement Transactions Recording Income Statement Transactions

3. 3-3 ©2006 Prentice Hall, Inc. THE ACCTG INFO SYSTEM AND THE ACCTG CYCLE (2 of 2)  The accounting cycle The accounting cycle  Recording, posting, and trial balance Recording, posting, and trial balance  Financial statement analysis Financial statement analysis  Business risk, control, and ethics Business risk, control, and ethics

4. 3-4 ©2006 Prentice Hall, Inc. Learning Objectives (1 of 2)  Explain the general ledger system and use debits and credits to record balance sheet transactions  Use debits and credits to record income statement transactions  Explain the first three steps in the accounting cycle and the purpose of each step

5. 3-5 ©2006 Prentice Hall, Inc. Learning Objectives (2 of 2)  Post journal entries to the general ledger and prepare a trial balance  Compute and explain working capital and the quick ratio  Recognize the risks associated with using a traditional accounting system

6. 3-6 ©2006 Prentice Hall, Inc. Keeping Track of Business Transactions  Enterprise Resource Planning (ERP) systems  A single, integrated information system whereby data is entered once and used by the entire enterprise  Traditional general ledger system  An accounting system separate from other information systems in an enterprise

7. 3-7 ©2006 Prentice Hall, Inc. Balance Sheet Accounts and Debits & Credits  Double-entry bookkeeping Double-entry bookkeeping  Debit an credit definitions Debit an credit definitions  T-accounts T-accounts  T-accounts and the accounting equation T-accounts and the accounting equation

8. 3-8 ©2006 Prentice Hall, Inc. Double-entry Bookkeeping  Double-entry bookkeeping  Financial information record-keeping using debit-credit accounting system  All transactions affect at least two accounts  Keeps the accounting equation in balance  Assets = Liabs + Equity + Rev - Exp

9. 3-9 ©2006 Prentice Hall, Inc. Debit and Credit Definitions  Debit means left.  Positive items on the left side of the accounting equation increase with debits.  Credit means right.  Positive items on the right side of the accounting equation increase with credits.

10. 3-10 ©2006 Prentice Hall, Inc. T-Accounts  T-Accounts  Represent a single general ledger account Account Debit (Dr.)Credit (Cr.)

11. 3-11 ©2006 Prentice Hall, Inc. T-accounts and the Accounting Equation Liabilities Equity Assets = = Dr.Cr. + - Liabilities Dr.Cr. - + + + Since assets increase with debits, why does the bank credit your account when you make a deposit into your bank account? Contr Cap Dr.Cr. - + Ret Earn Dr.Cr. - + +

12. 3-12 ©2006 Prentice Hall, Inc. Journals and the General Ledger  Characteristics of a general ledger system  Journals Journals  General ledger General ledger  Posting Posting  Chart of accounts Chart of accounts

13. 3-13 ©2006 Prentice Hall, Inc. Journals (1 of 3)  Place where transactions are initially recorded in chronological order  Why are there several different types of journals? What information do they record?

14. 3-14 ©2006 Prentice Hall, Inc. Journals (2 of 3)  Journal entry  Record of a single transaction that is entered in a company’s journal using debits and credits  Parts of a journal entry  Date or other form of reference  Debit accounts written first  Amounts written in the left column

15. 3-15 ©2006 Prentice Hall, Inc. Journals (3 of 3)  Parts of a journal entry (continued)  Credit accounts written below debit accounts and indented  Amount written in the right column  Brief explanation of the transaction DateTransactionDebitCredit Feb 2Land200,000 Notes Payable200,000 Record land purchase on acct

16. 3-16 ©2006 Prentice Hall, Inc. General ledger  Primary record of a company’s financial information  Organized by accounts  An account is the basic classification unit of accounting  Accumulate increases and decreases in all accounts

17. 3-17 ©2006 Prentice Hall, Inc. Posting  Process of transferring financial information about accounts from journals to the general ledger  Why aren’t transactions recorded directly into the general ledger?  Why are they first recorded in a journal?

18. 3-18 ©2006 Prentice Hall, Inc. Chart of accounts  A list of all of the accounts in a firm’s accounting records  Each account is numbered  Account numbers correspond to the type of account  E.g., assets use 100’s, liabilities use 200’s, equity use 300’s, revenues use 400’s, and expenses use 500’s

19. 3-19 ©2006 Prentice Hall, Inc. Recording Income Statement Transactions  Expanded accounting equation with T-accounts Expanded accounting equation with T-accounts  Recording revenue Recording revenue  Recording expenses Recording expenses

20. 3-20 ©2006 Prentice Hall, Inc. Expanded Accounting Equation with T-Accounts Liabilities Equity Assets = = Dr.Cr. + - Liabilities Dr.Cr. - + + + Dr.Cr. Revenues - + + - Dr.Cr. Expenses + - - + Dr.Cr. Common Stock Dr.Cr. Dividends + - Dr.Cr. Retained Earnings - + +- Why do expenses and dividends increase with debits instead of credits? Hint: what effect to dividends and expenses have on retained earnings?

21. 3-21 ©2006 Prentice Hall, Inc. Recording Revenue (1 of 3)  Revenue increases retained earnings  Positive on the right side of the accounting equation  Increase with credits  Decrease with debits  Revenue is NOT recorded directly into the retained earnings account

22. 3-22 ©2006 Prentice Hall, Inc. Recording Revenue (2 of 3)  Types of revenue accounts  Operating revenue  Revenue from normal operations  Examples: service revenue, sales revenue  Non-operating revenue  Revenue that is not related to company’s primary business  Example: interest revenue

23. 3-23 ©2006 Prentice Hall, Inc. Recording Revenue (3 of 3)  Example: Pylon Consultants, Inc. provides $5,000 of services for cash  What accounts are affected?  Do they increase or decrease?  Do they increase with debits or credits? Dr. Cr.

24. 3-24 ©2006 Prentice Hall, Inc. Recording Expenses (1 of 3)  Expenses decrease retained earnings  Negative on the right side of the accounting equation  Would be positive on the left side  Increase with debits  Decrease with credits  Expenses are NOT recorded directly into the retained earnings account

25. 3-25 ©2006 Prentice Hall, Inc. Recording Expenses (2 of 3)  Types of expense accounts  Operating expenses  Cost of sales  Other operating expenses  Examples: salaries expense, advertising expense  Non-operating expenses  Expenses not related to company’s primary business  Example: interest expense, income tax expense

26. 3-26 ©2006 Prentice Hall, Inc. Recording Expenses (3 of 3)  Example: Pylon Consultants, Inc. pays $5,000 for advertising expense  What accounts are affected?  Do they increase or decrease?  Do they increase with debits or credits? Dr. Cr.

27. 3-27 ©2006 Prentice Hall, Inc. The Accounting Cycle (1 of 3)  Timeline for an accounting period  Shows what an accounting information system must accomplish from the beginning to end of an accounting period

28. 3-28 ©2006 Prentice Hall, Inc. The Accounting Cycle (2 of 3)  Steps in the accounting cycle 1. Analyze and record transactions in journal Analyze and record transactions in journal 2. Post journal entries to general ledger Post journal entries to general ledger 3. Prepare unadjusted trial balance Prepare unadjusted trial balance  At end of the accounting period 4. Prepare adjusting journal entries  Post them to general ledger

29. 3-29 ©2006 Prentice Hall, Inc. The Accounting Cycle (3 of 3)  Steps in the accounting cycle (cont’d) 5. Prepare an adjusted trial balance 6. Prepare the financial statements 7. Prepare closing entries  Close temporary accounts  Post temporary accounts to general ledger 8. Prepare post-closing trial balance sheet

30. 3-30 ©2006 Prentice Hall, Inc. Analyze and Record Transactions in Journal (1 of 2)  Goal is to get financial information recorded accurately on a timely basis  Analyzing transactions  Which accounts are affected?  Assets, liabilities, equity revenue, expenses?  Which specific accounts are affected?

31. 3-31 ©2006 Prentice Hall, Inc. Analyze and Record Transactions in Journal (2 of 2)  Is the amount of revenue earned affected by when the cash is collected?  What is the relationship between expenses and revenue?

32. 3-32 ©2006 Prentice Hall, Inc. Post Journal Entries to General Ledger  Posting  Transferring the amounts from journal entries to the general ledger accounts?  Why is posting important?

33. 3-33 ©2006 Prentice Hall, Inc. Prepare Unadjusted Trial Balance  Trial balance  A list of all accounts in the ledger with debit and credit balances  At a given point in time  Unadjusted trial balance done before adjusting entries prepared and posted  What errors could be present when the trial balance balances?

34. 3-34 ©2006 Prentice Hall, Inc. Recording Posting and Trial Balance  Recording transactions Recording transactions  Posting transactions to the general ledger Posting transactions to the general ledger  Preparing a trial balance Preparing a trial balance  Preparing an income statement and balance sheet Preparing an income statement and balance sheet

35. 3-35 ©2006 Prentice Hall, Inc. Recording Transactions (1 of 2) 1. Stockholders invested $40,000 cash to start Bull Riders, a rodeo training school Stockholders invested $40,000 cash to start Bull Riders, a rodeo training school 2. Paid $2,000 for advertising expenses Paid $2,000 for advertising expenses 3. Paid $2,400 for a 1-year insurance policy Paid $2,400 for a 1-year insurance policy 4. Performed $9,000 or rodeo training on account Performed $9,000 or rodeo training on account 5. Received the electric bill for March. Bill is due on April 12 Received the electric bill for March. Bill is due on April 12

36. 3-36 ©2006 Prentice Hall, Inc. Recording Transactions (2 of 2) 6. Paid $1,350 for Miscellaneous expenses Paid $1,350 for Miscellaneous expenses 7. Received $6,500 from customers for services provided in transaction 4 Received $6,500 from customers for services provided in transaction 4 8. Purchased a mechanical bull machine for $3,500 by signing a note payable due on December 31 Purchased a mechanical bull machine for $3,500 by signing a note payable due on December 31

37. 3-37 ©2006 Prentice Hall, Inc. Transaction 1 March 1  Stockholders invested $40,000 cash to start Bull Riders, a rodeo training school DateTransactionDebitCredit Assets = Liab. + Cont. Cap. + R/E

38. 3-38 ©2006 Prentice Hall, Inc. Transaction 2 March 6  Paid $2,000 for advertising expenses DateTransactionDebitCredit Assets = Liab. + Cont. Cap. + R/E

39. 3-39 ©2006 Prentice Hall, Inc. Transaction 3 March 9  Paid $2,400 for a 1-year insurance policy DateTransactionDebitCredit Assets = Liab. + Cont. Cap. + R/E

40. 3-40 ©2006 Prentice Hall, Inc. Transaction 4 March 14  Performed $9,000 or rodeo training on account DateTransactionDebitCredit Assets = Liab. + Cont. Cap. + R/E

41. 3-41 ©2006 Prentice Hall, Inc. Transaction 5 March 18  Received the electric bill for March. Bill is due on April 12 DateTransactionDebitCredit Assets = Liab. + Cont. Cap. + R/E

42. 3-42 ©2006 Prentice Hall, Inc. Transaction 6 March 21  Paid $1,350 for Miscellaneous expenses DateTransactionDebitCredit Assets = Liab. + Cont. Cap. + R/E

43. 3-43 ©2006 Prentice Hall, Inc. Transaction 7 March 24  Received $6,500 from customers for services provided on March 14 (t/a 4) DateTransactionDebitCredit Assets = Liab. + Cont. Cap. + R/E

44. 3-44 ©2006 Prentice Hall, Inc. Transaction 8 March 28  Purchased a mechanical bull machine for $3,500 by signing a note payable due on December 31 DateTransactionDebitCredit Assets = Liab. + Cont. Cap. + R/E

45. 3-45 ©2006 Prentice Hall, Inc. Posting Transactions to General Ledger Dr. Cr.

46. 3-46 ©2006 Prentice Hall, Inc. Preparing a Trial Balance AccountDebitCredit

47. 3-47 ©2006 Prentice Hall, Inc. Preparing an Income Statement (1 of 2) Revenue Total Revenues Expenses Total Expenses Net income

48. 3-48 ©2006 Prentice Hall, Inc. Preparing a Balance Sheet (2 of 2) Assets: Cash Accounts Receivable Prepaid Insurance Total current assets Office Equipment Total Assets Liabilities and Owners’ Equity Accounts Payable Note Payable Total Current Liabilities Common Stock Retained Earnings Total Liabilities and Equity

49. 3-49 ©2006 Prentice Hall, Inc. Financial Statement Analysis (1 of 2)  Working capital  Absolute measure of liquidity  Current ratio is a relative measure of liquidity  Ability of a company to meet its short- term obligations  Current assets – current liabilities  How can a company increase its working capital?

50. 3-50 ©2006 Prentice Hall, Inc. Financial Statement Analysis (2 of 2)  Quick ratio (acid test)  Relative measure of liquidity  More conservative measure of liquidity than the current ratio  Uses only the most liquid assets in numerator  Easiest to convert to meet current obligations Cash + s-t investments + A/R net Current liabilities

51. 3-51 ©2006 Prentice Hall, Inc. Business Risk, Control, and Ethics  Three most significant risks associated with information systems  Errors in recording an updating information Errors in recording an updating information  Unauthorized access to the system  Loss of data Loss of data

52. 3-52 ©2006 Prentice Hall, Inc. Errors in Recording and Updating Information (1 of 2)  Input and processing controls  Ensure only authorized transactions are entered into the system  Assure the accuracy of the input and processing of the data that are recorded  Reconciliation and control reports  Catch errors in data input and processing

53. 3-53 ©2006 Prentice Hall, Inc. Errors in Recording and Updating Information (2 of 2)  Documentation to provide supporting evidence for recorded transactions  Keep errors from occurring and catch errors that have occurred

54. 3-54 ©2006 Prentice Hall, Inc. Loss of Data  Loss of data can cripple an organization  Need disaster recovery plan  Data backup in off-site facility

55. Comments or questions about PowerPoint Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business richard.newmark@PhDuh.com 3-55 ©2006 Prentice Hall, Inc.