1. McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 7 Accounting Information Systems

2. 7-2 What are the 3 Characteristics of an Accounting Event? Specific to entity Measurable in monetary terms Impact the entity’s assets, liabilities, and/or owners’ equity

3. 7-3 What is the Accounting Equation? Assets = Liabilities + Owners’ equity Assets – Liabilities = Owners’ equity (net assets)

4. 7-4 What are the 9 Basic Combinations of Accounting Events? Assets increase, assets decrease Assets increase, liabilities increase Assets increase, owners’ equity increase Assets decrease, liabilities decrease Assets decrease, owners’ equity decrease

5. 7-5 Basic Combinations Continued Liabilities increase, liabilities decrease Liabilities increase, owners’ equity decrease Liabilities decrease, owners’ equity increase Owners’ equity increase, owners’ equity decrease

6. 7-6 What are Debits and Credits? Debits and credits aren’t good or bad, they’re not happy or sad, rather Debit indicates “left” as in the left side of an account Credit indicates “right” as in the right side of an account

7. 7-7 Debits and Credits Continued Debit Credit

8. 7-8 Asset Account Debit Increase Credit Decrease

9. 7-9 Liability Account Debit Decrease Credit Increase

10. 7-10 Owners’ Equity Account Debit Decrease Credit Increase

11. 7-11 Revenue Account Debit Decrease Credit Increase

12. 7-12 Expense Account Debit Increase Credit Decrease

13. 7-13 How do Debits and Credits Apply to the first 8 Basic Combinations? Assets increase, assets decrease  DR asset account; CR asset account Cash used to purchase inventory DR Inventory, CR Cash Assets increase, liabilities increase  DR asset account; CR liability account Inventory is purchased on account DR Inventory, CR Accounts Payable Assets increase, owners’ equity increase  DR asset account; CR owners’ equity account Services are provided to a client on account DR Accounts Receivable, CR Revenue (fees earned)

14. 7-14 How do Debits and Credits Apply to the first 8 Basic Combinations? Assets decrease, liabilities decrease  DR liability account; CR asset account An obligation to the bank is paid DR Notes Payable, CR Cash Assets decrease, owners’ equity decrease  DR owner’s equity account; CR asset account A bill for utilities is received and immediately paid DR Utilities Expense, CR Cash Liabilities increase, liabilities decrease  DR liability account; CR liability account A note payable is given to a supplier to pay off an account payable DR Accounts Payable, CR Note Payable

15. 7-15 DR and CR Continued Liabilities increase, owners’ equity decrease  DR owners’ equity account; CR liability account A bill is received but not paid DR Expense, CR Accounts Payable Liabilities decrease, owners’ equity increase  DR liability account; CR owners’ equity account An obligation to a customer is fulfilled DR Unearned Revenue, CR Revenue (fees earned)

16. 7-16 What is the Difference between Journalizing and Posting? Journalizing  Recording an event in the journal Purchase $5,000 of supplies on account from an office supply warehouse on March 31, 2008. *Supplies are assets and we increase this asset by making a purchase *We did not pay for the purchase, we owe the supplier; a liability (accounts payable) is increased DateDescriptionDRCR 3-31-08Supplies5,000.00 Accounts Payable5,000.00

17. 7-17 What is the Difference between Journalizing and Posting? On April 5, 2008, we purchase land costing $120,000 and a building for $80,000 by making a down payment of $50,000 cash and signing a note payable for the balance. *We obtain two assets (land and building) by giving up another asset (cash) and incurring a liability (notes payable) DateDescriptionDRCR 4-5-08Building 80,000.00 Land120,000.00 Cash 50,000.00 Note Payable150,000.00

18. 7-18 What is the Difference between Journalizing and Posting? Posting  Recording the appropriate part of an event in the appropriate general ledger account Supplies Account DateDescriptionDRCRBalance Beginning balance0.00 3-31-085,000.00 Accounts Payable Account DateDescriptionDRCRBalance Beginning balance0.00 3-31-085,000.00

19. 7-19 What is the Difference between Journalizing and Posting? Cash Account DateDescriptionDRCRBalance Beginning balance (assumed)180,000.00 4-5-0850,000.00130,000.00 Building Account DateDescriptionDRCRBalance Beginning balance0.00 4-5-0880,000.00 Land Account DateDescriptionDRCRBalance Beginning balance0.00 4-5-08120,000.00 Notes Payable Account DateDescriptionDRCRBalance Beginning balance0.00 4-5-08150,000.00

20. 7-20 What is the Difference between Journalizing and Posting? Cash DRCR Beginning 180,00050,000 Ending 130,000

21. 7-21 More DR and CR If an account increases with a debit, what is its normal balance?  Debit What are the normal balances of assets, liabilities, and owners’ equity  Assets—debit  Liabilities—credit  Owners equity--credit

22. 7-22 Revenues and Expenses What is the normal balance of a revenue account? Why?  Revenue accounts have credit balances because revenues increase income and income belongs to the owners What is the normal balance of an expense account? Why?  Expense accounts have debit balances because expenses decrease income and income belongs to the owners

23. 7-23 What are Adjusting Entries? Journal Entry Posting General Journal DateDescriptionDRCR 1-2-08Prepaid Rent24,000.00 Cash24,000.00 Prepaid Rent Account DateDescriptionDRCRBalance Beginning balance0.00 1-02-0824,000.00 Cash Account DateDescriptionDRCRBalance Beginning balance (assumed)180,000.00 1-2-0824,000.00156,000.00

24. 7-24 What are Adjusting Entries? Adjusting Entry Rent Expense Account DateDescriptionDRCRBalance Beginning balance0.00 1-31-082,000.00 Prepaid Rent Account DateDescriptionDRCRBalance Beginning balance0.00 1-2-0824,000.00 1-31-082,000.0022,000.00 General Journal: Adjusting Entry DateDescriptionDRCR 1-31-08Rent Expense2,000.00 Prepaid Rent2,000.00 Posting of Adjusting Entry

25. 7-25 What are Adjusting Entries? Revenue accrual  Increase revenue, increase asset General Journal DateDescriptionDRCR 11-1-08Note Receivable10,000.00 Cash10,000.00 General Journal: Adjusting Entry DateDescriptionDRCR 12-31-08Interest Receivable98.63 Interest Earned98.63

26. 7-26 What are Adjusting Entries? Revenue deferral  Increase revenue, decrease liability General Journal DateDescriptionDRCR 12-1-08Cash9,000.00 Unearned Revenue9,000.00 General Journal: Adjusting Entry DateDescriptionDRCR 12-31-08Unearned Revenue6,000.00 Service Fees Earned6,000.00

27. 7-27 What are Adjusting Entries? Expense accrual  Increase expense, increase liability General Journal DateDescriptionDRCR 11-10-08Cash12,000.00 Note Payable12,000.00 General Journal: Adjusting Entry DateDescriptionDRCR 12-31-08Interest Expense115.07 Interest Payable115.07

28. 7-28 What are Adjusting Entries? Expense deferral  Increase expense, decrease asset General Journal DateDescriptionDRCR 1-2-08Truck35,000.00 Cash35,000.00 General Journal: Adjusting Entry DateDescriptionDRCR 12-31-08Depreciation Expense7,000.00 Accumulated Depreciation7,000.00

29. 7-29 What are Examples of Each Type of Adjusting Entry? Revenue accrual  Interest earned on an investment Revenue deferral  Fees earned by completing work that a customer paid for in advance Expense accrual  Interest incurred on a bank loan Expense deferral  Rent that was prepaid is used (time passed)

30. 7-30 What are Closing Entries?

31. 7-31 What are Closing Entries? Fee Revenue Account DateDescriptionDRCRBalance 12-31-0850,000.00 Depreciation Expense Account DateDescriptionDRCRBalance 12-31-0830,000.00 Rent Expense Account DateDescriptionDRCRBalance 12-31-082,000.00 Salary Expense Account DateDescriptionDRCRBalance 12-31-088,000.00

32. 7-32 What are Closing Entries? General Journal: Closing Entries DateDescriptionDRCR 12-31-08Fee Revenue50,000.00 Retained Earnings50,000.00 12-31-08Retained Earnings40,000.00 Depreciation Expense30,000.00 Rent Expense2,000.00 Salary Expense8,000.00

33. 7-33 What are Closing Entries? Retained Earnings Account DateDescriptionDRCRBalance 1-1-080.00 12-31-0850,000.00 12-31-0840,000.0010,000.00 Fee Revenue Account DateDescriptionDRCRBalance 50,000.00 12-31-0850,000.000.00 Depreciation Expense Account DateDescriptionDRCRBalance 30,000.00 12-31-0830,000.000.00

34. 7-34 What are Closing Entries? Salary Expense Account DateDescriptionDRCRBalance 8,000.00 12-31-088,000.000.00 Rent Expense Account DateDescriptionDRCRBalance 2,000.00 12-31-082,000.000.00

35. 7-35 Income Statement Included on the Statement of Retained Earnings

36. 7-36 Statement of Retained Earnings Included on the Balance Sheet From Income Statement

37. 7-37 Statement of Cash Flows Reflected on the Balance Sheet

38. 7-38 Balance Sheet From Statement of Retained Earnings From Statement of Cash Flows

39. 7-39 Post-Closing Trial Balance

40. 7-40 What are the Advantages of Computer- Based Transaction Systems? Transactions posted quickly—no journalizing required Detailed listing can be printed at any time Internal controls A wide variety of reports can be generated

41. 7-41 What are Transaction Files and Master Files? Transaction files  Similar to journals Master files  Similar to ledgers

42. 7-42 What are the Advantages of Database Systems? Business events can be recognized in addition to accounting events Reduced operating inefficiencies Elimination of redundant data throughout the company

43. 7-43 What is a Business Event? Any activity that the company wishes to plan and evaluate. Includes accounting events and other events

44. 7-44 Which of the Following is a Business, but not an Accounting Event? Determine the need for inventory Receive inventory Pay for inventory Sell inventory  Answer: determine the need for inventory