1. Chapter 7 The Accounting Information System

2. The Accounting Cycle

3. 3 Financial Accounting, 7e Stice/Stice, 2006 © Thomson The Accounting Cycle 1.Analyze transactions

4. 4 Financial Accounting, 7e Stice/Stice, 2006 © Thomson The Accounting Cycle 1.Analyze transactions 2.Record the effect of transactions in a journal entry

5. 5 Financial Accounting, 7e Stice/Stice, 2006 © Thomson The Accounting Cycle 1.Analyze transactions 2.Record the effect of transactions in a journal entry 3.Summarize the effects of transactions a.Post journal entries to the ledger b.Prepare a trial balance

6. 6 Financial Accounting, 7e Stice/Stice, 2006 © Thomson The Accounting Cycle 1.Analyze transactions 2.Record the effect of transactions in a journal entry 3.Summarize the effects of transactions a.Post journal entries to the ledger b.Prepare a trial balance 4.Prepare reports a.Make adjusting entries b.Prepare financial statements c.Close the books

7. Transaction Analysis Using Debits and Credits

8. 8 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Transaction Analysis Using Debits and Credits The accounting equation Assets = Liabilities + Owners’ Equity The spreadsheet analysis format based on the accounting equation is not practical when a company has thousands of transactions

9. 9 Financial Accounting, 7e Stice/Stice, 2006 © Thomson All transactions relating to a specific item are recorded in an account Transaction Analysis Using Debits and Credits The most simple form of an account is called a T- account

10. 10 Financial Accounting, 7e Stice/Stice, 2006 © Thomson The T- Account ACCOUNT TITLE DEBITCREDIT (Left Side)(Right Side)

11. 11 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Debits and Credits: Balance Sheet Accounts IncreaseDecrease Assets Debit Liabilities Credit Equity Credit Left Right

12. 12 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Debits and Credits: Balance Sheet Accounts IncreaseDecrease Assets DebitCredit Liabilities CreditDebit Equity CreditDebit Left Right Left Right

13. 13 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Debits and Credits: Balance Sheet Accounts ASSETLIABILITYEQUITY DEBITCREDITDEBITDEBITCREDITCREDIT +++ ---

14. 14 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Debits and Credits: Revenues, Expenses, and Dividends IncreaseDecrease Revenues Credit Expenses Debit Dividends Debit Right Left

15. 15 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Debits and Credits: Revenues, Expenses, and Dividends IncreaseDecrease Revenues CreditDebit Expenses DebitCredit Dividends DebitCredit Right Left Right

16. 16 Financial Accounting, 7e Stice/Stice, 2006 © Thomson REVENUEEXPENSEDIVIDEND DEBITCREDITDEBITDEBITCREDITCREDIT +++ - -- Debits and Credits: Revenues, Expenses, and Dividends

17. 17 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Debits and Credits — All Accounts AssetsLiabilities Owners’ Equity Dr.Dr.Dr.Cr.Cr.Cr. + + + - -- Paid-in Capital Retained Earnings Dr.Dr.Cr.Cr. + + - - ExpensesRevenues Dividends Dr.Dr. Dr. Cr.Cr. Cr. ++ + -- - =+

18. Recording Journal Entries

19. 19 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Recording the Effects of Transactions The journal is a book in which all transactions are recorded in chronological order Each journal entry has its debit amounts equal to its credit amounts to ensure that the accounting equation remains in balance DR = CR

20. 20 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Recording the Effects of Transactions Journalizing involves a three-step process: 1.Identify which accounts are involved 2.For each account, determine if it is increased or decreased 3.For each account, determine by how much it changed

21. 21 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Recording the Effects of Transactions The account debited is always listed first, followed by the account credited The credit entry is indented Some selected transactions from Veda Landscape Solutions are presented next as examples…

22. 22 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Transaction 1 Investment of $700,000 cash into the business.

23. 23 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Transaction 2 Borrowed $300,000 cash from the bank.

24. 24 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Transaction 3 Purchased land costing $50,000 and buildings costing $400,000. Paid $100,000 in cash and signed a mortgage for the balance.

25. 25 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Transaction 4 Purchased equipment for $650,000 in cash.

26. 26 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Transaction 7 Purchased inventory costing $90,000 for $10,000 in cash and the remaining $80,000 on account.

27. 27 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Transaction 8 Paid $15,000 cash for an insurance policy.

28. 28 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Transaction 10 Sold inventory costing $800,000 to customers for $1,100,000. The customers paid $200,000 in cash and the remaining $900,000 was put on the customers’ accounts.

29. 29 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Transaction 11 Performed landscaping consulting services and billed clients $200,000 for these services.

30. 30 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Transaction 14 Collected $820,000 cash from customers as payment on their accounts.

31. 31 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Transaction 15 Paid $1,200,000 in cash to suppliers as payment on account.

32. 32 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Transaction 18 Paid cash of $150,000 for advertising, utilities, and office supplies.

33. 33 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Transaction 23 Paid cash dividends of $5,000.

34. Posting and the Trial Balance

35. 35 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Posting Posting involves transferring the the debits and credits from the journal entries to the individual accounts Posting is purely mechanical in nature and requires no analysis The collection of all of a company’s accounts is called a ledger

36. 36 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Example: Posting Transaction 1 Cash700,000 Paid-in Capital 700,000 CashPaid-in Capital 700,000

37. 37 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Trial Balance A trial balance is a listing of all of the ledger accounts and their balances The total of the debit balance accounts should equal the total of the credit balance accounts The equality of the debits and credits provides some assurance that the posting process has been completed correctly DR = CR

38. 38 Financial Accounting, 7e Stice/Stice, 2006 © Thomson

39. Adjusting and Closing Entries

40. 40 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Adjusting Entries Adjusting entries are made at the end of the accounting period –to properly reflect the balances of all asset, liability, and owners’ equity accounts –to recognize all revenues and expenses on an accrual basis

41. 41 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Adjusting Entries New information requires an adjustment to a transaction that has already been recorded A transaction has not yet been recorded even though a business event has occurred Adjustments result from one of two sequences of events:

42. 42 Financial Accounting, 7e Stice/Stice, 2006 © Thomson An Event Already Recorded Assume a company purchases a one- year insurance policy paying $1,200 on October 1, 2006, resulting in the following journal entry Prepaid Insurance 1,200 Cash1,200

43. 43 Financial Accounting, 7e Stice/Stice, 2006 © Thomson At December 31, 2006, the following adjusting journal entry is required: Insurance Expense300 Prepaid Insurance300 An Event Already Recorded

44. 44 Financial Accounting, 7e Stice/Stice, 2006 © Thomson An Event Not Yet Recorded Assume that a chemical spill during November 2006 at a factory will require a cleanup costing $23,000. The cleanup will take place in 2007, and nothing yet has been recorded. The following adjustment is necessary at December 31, 2006: Chemical Cleanup Expense23,000 Chemical Cleanup Liability23,000

45. 45 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Closing Entries Closing entries –Transfer the amounts in the revenue, expense, and dividend accounts to Retained Earnings –Zero-out these “temporary accounts” for the start of the next accounting period

46. 46 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Closing Entries Comprised of three journal entries: 1.Close the revenue accounts to Retained Earnings 2.Close the expense accounts to Retained Earnings 3.Close the dividends account to Retained Earnings

47. 47 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Closing Entries: Veda Landscape Solutions

48. 48 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Computers and Accounting The time spent performing routine tasks within the accounting cycle has been greatly reduced as a result of using computers Personal computers are being used for –financial analysis –accounting functions –word processing –database management –inventory control –credit analysis of customers

49. 49 Financial Accounting, 7e Stice/Stice, 2006 © Thomson Computers and Accounting Through networking (Internet and intranet), personal computers are speeding up the exchange of information among users It is still important, however, to be familiar with the accounting cycle in order to understand the flow of information within an organization

50. 50 Financial Accounting, 7e Stice/Stice, 2006 © Thomson In Summary... The accounting cycle consists of analysis, recording, summarizing, and reporting financial transactions Journal entries use debits and credits to describe and chronologically record business transactions The trial balance lists all accounts of a business and their balances Adjusting entries are used to (a) update information previously recorded and (b) record previously unrecognized transactions Closing entries transfer the balances of revenues, expenses, and dividend accounts to Retained Earnings