1. ACTG 3110 Chapter 3 – The Accounting Information System

2. Accounting Information Systems Proper system accurately records all transactions Accurately reports information to users Reports relevant and reliable information in a timely manner System should be tailored to meet each company’s needs

3. Objectives Collect data Classify and process data Summarize data for reports

4. Basic Model Identify economic events that need to be recorded External events –Exchange between the company and a separate economic entity –Recorded with journal entries Internal events –Affect the financial position of the company but do not involve an exchange with another company –Recorded with adjusting entries

5. Double-entry System Double Entry System –$Debits = $Credits –Every transaction affects two or more accounts –Rules of debits and credits Basic Accounting equation: Assets = liabilities + owner’s equity Accounting equation must ALWAYS be in balance

6. Accounting Cycle 1- Identifying and recording transactions and other events 2- Journalizing –Chronological record of transactions –Includes debits and credits for each transaction in a journal entry –General journal –Special journals

7. Accounting Cycle 3-Posting –Ledger is a book of accounts listed in the order of the chart of accounts –Ledger account details information about one particular account; shows balances –General ledger –Subsidiary ledgers

8. Accounting Cycle 4- Trial balance. –List of each account and their balance –Ensures equality of $debits and $credits –If it does not balance, you have an error. –If it does balance, this does not necessarily mean you do not have an error You could have omitted transactions. You could have incorrect postings.

9. Accounting Cycle 5- Adjusting Journal Entries –Made every time financial statements are prepared –Recorded due to matching principle Revenues are earned (but not yet recorded) Expenses are incurred (but not yet recorded) –Generally there is no source document; internal transactions –Generally affects one permanent and one temporary account –Cash is generally not involved!!!!

10. Accounting Cycle - Adjusting Entries – continued -Prepayments – cash has been prepaid or received Prepaid expenses (assets) – insurance, rent, supplies, depreciation – set up when cash is paid –Adjusting entry is to adjust the prepaid asset to the correct balance Debit expense Credit prepaid asset

11. Accounting Cycle Adjusting Entries – continued –Prepayments Unearned revenues (liability) – subscription revenue, airline ticket receipts, season ticket sales – set up when cash is received –Adjusting entry is to adjust the liability to the correct balance Debit liability (unearned revenue) Credit revenue (earned portion)

12. Accounting Cycle Adjusting Entries – continued –Accruals -- cash not paid or received yet Accrued revenues – rent revenue, interest revenue –Revenues earned but no cash received Debit receivable Credit revenue Accrued expenses – interest, wages, bad debts, taxes expenses –Expenses incurred but no cash paid Debit expense Credit payable

13. Accounting Cycle 6- Adjusted trial balance –List of accounts and debit/credit balance –Prepared after adjusting entries posted 7- Preparing financial statements 8- Prepare closing entries for all temporary accounts –Transfer ending balance to retained earnings 9- Post-closing trial balance –Only balance sheet (permanent) accounts left

14. Accounting Cycle 10- Prepare and post reversing entries (if desired) –Reversal of certain adjusting entries –Preparing these entries helps ease bookkeeping burden –Only prepare a reversing entry if the entry increases the balance in an asset or liability account.