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Accounting
Accounting Information
Information System
System

Accounting Information
The Accounting Cycle
System

Basic terminology Identification and recording

Debits and credits Journalizing
Basic equation Posting
Financial statements and Trial balance
ownership structure Adjusting entries
Adjusted trial balance
Preparing financial
statements
Closing
Post-closing trial balance
Reversing entries
Financial statements for
merchandisers
Accounting
Accounting Information
Information System
System
Helps management answer such questions as:
How much and what kind of debt is outstanding?
Were sales higher this period than last?
What assets do we have?
What were our cash inflows and outflows?
Did we make a profit last period?
 Influence of Accounting
is a
Accounting
Accounting Identifies
Identifies
system that

Records
Records

information
Relevant
Relevant Communicates
Communicates
that is

Reliable
Reliable
to
tohelp
helpusers
usersmake
make
Comparable better
betterdecisions.
decisions.
Comparable
Accounting
Accounting Information
Information System
System
An Accounting Information System (AIS)
collects and processes transaction data and
disseminates the information to interested
parties.
 Basic
Basic Terminology
Terminology
Event Ledger
Transaction Posting
Account Trial Balance
Debit Adjusting Entries
Credit Financial
Real Account Statements
Nominal Account Closing Entries
Personal Account
Journal
 Basic
Basic Terminology
Terminology
• Event- happening of a consequence
• Transaction – An event that affects the
financial position of a particular entity and
can be recorded reliably.
• Accounts are simply established to provide a
record of individual business transactions as
they apply to a certain area or item.
• Asset – An economic resource that is
expected to be of benefit in the future.
• Liability – An economic obligation such as a
debt payable.
 Basic
Basic Terminology
Terminology
• Debit is a transaction of value “added” to an account.
• Credit is a transaction of value “removed” from an
account. 
• Increases in assets are recorded on the left side (debit)
of the account.
Decreases in assets are recorded on the right side
(credit) of the account.
Increases in liabilities and owners equity are recorded as
a (credit).
Decreases in liabilities and owners equity are recorded as
a (debit).
 Basic
Basic Terminology
Terminology
• Real accounts are accounts related to assets,
which can be tangible or intangible.
• Nominal accounts are accounts related to expenses
and incomes.
• Personal accounts are accounts related to persons
which can be natural, artificial and representative.
• Journal- The chronological accounting record of an
entity’s transactions.
• Ledger- Book containing various accounts.
• Posting – the process of transferring amounts from
the journal to the ledger accounts.
 Basic
Basic Terminology
Terminology
• Trial Balance – a list of each account and its
balance; used to prove equality of debit and
credit balances.
• Adjusting entries- these are the entries made
for outstanding and prepaid entries etc.
• Financial statements include income
statements and position statements.
 Exh.
1.3

Focus of Accounting
 Identifying
 Recording
& Measuring

Reporting
& Analyzing
 Transactions and Events
Exchanges of economic consideration
between two parties.

External Transactions Internal Transactions

occur between the occur within the
organization and an organization.
outside party.
 Exh.
1.8

Users of Accounting Information

Managerial
ManagerialAccounting
Accounting Financial
Financial Accounting
Accountingis
is
is
isaimed
aimedatat Internal
Internal aimed
aimed at
at External
ExternalUsers
Users
Users
Users

Managers Lenders
Officers Shareholders
Internal Auditors Governments
Sales Staff Labor Unions
Budget Officers External Auditors
Controllers Customers
 Exh.
2.2

The Accounting Process

Source
Transaction documents Analysis
or event

Reporting
Trial balance Recording &
posting
 Source Documents
Cheques Purchase
Orders

Bank
Statement

Sales
Invoices
 Transactions
Transactions and
and Events
Events
What to Record?
Financial Accounting Standards Board (FASB)
states, “transactions and other events and
circumstances that affect a business enterprise.”

Types of Events:
External – between a business and its environment.
Internal – event occurring entirely within a business.
 Review
Review “Transactions
“Transactions and
and
Events”
Events”
External Internal Not Recorded
1. A supplier of a company‘s raw material is paid
External
an amount owed on account.
2. A customer pays its open account. External

3. A new chief executive officer is hired. Not Recorded

4. The biweekly payroll is paid. External

5. Raw materials are entered into production. Internal

6. A new advertising agency is hired. Not Recorded

7. The accountant determines the federal income

Internal
taxes owed based on the income earned.
 Debits
Debits and
and Credits
Credits
An Account shows the effect of transactions on a
given asset, liability, equity, revenue, or expense
account.
Double-entry accounting system (two-sided
effect).
Recording done by debiting at least one account
and crediting another.

DEBITS must equal CREDITS.

 The Account
Detailed
Detailed record
record of
of
increases
increases and
and
decreases
decreases inin
specific
specific assets,
assets,
liabilities,
liabilities, equities,
equities,
revenues,
revenues, or
or
expenses.
expenses.
Separate
Separate accounts
accounts are
are
maintained
maintained forfor each
each
item
item of
of importance.
importance.
 Debits
Debits and
and Credits
Credits
An arrangement that shows
Account the effect of transactions on
an account.
Debit = “Left”
Credit = “Right”

An Account can Account Name

be illustrated in a Debit / Dr. Credit / Cr.
T-Account
form.
 Debits
Debits and
and Credits
Credits
If Debit entries are greater than Credit entries,
the account will have a debit balance.

Account Name
Debit / Dr. Credit / Cr.

Transaction #1 10,000 3,000 Transaction #2

Transaction #3 8,000

Balance 15,000
 Debits
Debits and
and Credits
Credits
If Credit entries are greater than Debit entries,
the account will have a credit balance.

Account Name
Debit / Dr. Credit / Cr.

Transaction #1 10,000 3,000 Transaction #2

8,000 Transaction #3

Balance 1,000
 Basic
Basic Accounting
Accounting Equation
Equation
Relationship among the assets, liabilities and
stockholders’ equity of a business:

The equation must be in balance after

every transaction. For every Debit there
must be a Credit.
Expanded Accounting Equation

Assets
Assets = Liabilities
Liabilities + Equity
Equity

+ + + –
Common
Common Retained
Retained Revenues
Revenues Expenses
Expenses
Stock
Stock Earnings
Earnings
 Debits
Debits and
and Credits
Credits Summary
Summary
Balance Sheet Income Statement

Asset = Liability + Equity Revenue - Expense =

Debit

Credit
 Asset Accounts
Prepaid
Prepaid Cash
Cash Notes
Notes
Insurance
Insurance Receivable
Receivable

Accounts
Accounts Prepaid
Prepaid
Receivable
Receivable Expenses
Expenses

Office
ASSETS
ASSETS
Office
Supplies
Supplies Land
Land

Store
Store
Supplies Buildings
Buildings
Supplies
Equipment
Equipment
 LiabilityAccounts

Accounts
Accounts Notes
Notes
Payable
Payable Payable
Payable

LIABILITIES
LIABILITIES

Accrued
Accrued Unearned
Unearned
Liabilities
Liabilities Revenues
Revenues
 Equity Accounts

Common
Common
Stock Dividends
Dividends
Stock

Equities
Equities
Revenues
Revenues Expenses
Expenses

Retained
Retained
Earnings
Earnings
 Analyzing Transactions
Analyze the transaction
and its source.
Identify the impact of
the transaction on
account balances.
 Also identify the
financial statements that
are impacted by the
transaction.
 Intangible Assets
Noncurrent
Noncurrent assets
assets Often
Oftenprovide
provide
without
withoutphysical
physical exclusive
exclusiverights
rights
substance.
substance. or
or privileges.
privileges.

Intangible
Assets

Useful
Usefullife
lifeis
is Usually
Usuallyacquired
acquired
often
oftendifficult
difficult for
foroperational
operational
to
todetermine.
determine. use.
use.
 Exh.
9.1

Characteristics of Liabilities

...comes
From a past a present ...for future
event... obligation... sacrifices.

Past Present Future

 Classifying Liabilities

Current
Current Long-Term
Long-Term
Liabilities
Liabilities Liabilities
Liabilities

Due
Due within
within one
one Due
Due after
after one
one year
year
year
year or
or the
the or
or the
the company’s
company’s
company’s
company’s operating
operating cycle,
cycle,
operating
operating cycle,
cycle, whichever
whichever is is
whichever
whichever is is longer.
longer.
longer.
longer.
Known (Determinable) Liabilities
Accounts
Accounts
Payable
Payable

Sales
Sales Taxes
Taxes
Payable
Payable

Unearned
Unearned
Revenues
Revenues

Notes
Notes
Payable
Payable
Double-Entry
Double-Entry System
System Exercise
Exercise
1. Invested 32,000 cash and equipment valued at
14,000 in the business.

Stockholders’
Stockholders’
Assets = Liabilities + Equity
Equity

+ 32,000 + 46,000

+ 14,000
Double-Entry
Double-Entry System
System Exercise
Exercise
2. Paid office rent of 600 for the month.

Stockholders’
Stockholders’
Assets = Liabilities + Equity
Equity

- 600 - 600
(expense)
 Double-Entry
Double-Entry System
System Exercise
Exercise
3. Received 3,200 advance on a management
consulting engagement.

Stockholders’
Stockholders’
Assets = Liabilities + Equity
Equity

+ 3,200 + 3,200
Double-Entry
Double-Entry System
System Exercise
Exercise
4. Received cash of 2,300 for services completed for
Shuler Co.

Stockholders’
Stockholders’
Assets = Liabilities + Equity
Equity

+ 2,300 + 2,300
(revenue)
 Double-Entry
Double-Entry System
System Exercise
Exercise
5. Purchased a computer for 6,100.

Stockholders’
Stockholders’
Assets = Liabilities + Equity
Equity

+ 6,100

- 6,100
Double-Entry
Double-Entry System
System Exercise
Exercise
6. Paid off liabilities of 7,000.

Stockholders’
Stockholders’
Assets = Liabilities + Equity
Equity

- 7,000 - 7,000
 Double-Entry
Double-Entry System
System Exercise
Exercise
7. Declared a cash dividend of $10,000.

Stockholders’
Stockholders’
Assets = Liabilities + Equity
Equity

+ 10,000 - 10,000

Note
Notethat
thatthe
theaccounting
accountingequation
equationequality
equalityisis
maintained
maintainedafter
afterrecording
recordingeach
eachtransaction.
transaction.
 1.
1. Journalizing
Journalizing
General Journal – a chronological record of transactions.
Journal Entries are recorded in the journal.

General Journal
Date Account Title Ref. Debit Credit
Jan. 3 Cash 100 100,000
Common stock 300 100,000

10 Building 130 150,000

Note payable 220 150,000
 2.
2. Posting
Posting
Posting – the process of transferring amounts from the
journal to the ledger accounts.

General Journal GJ1

Date Account Title Ref. Debit Credit
Jan. 3 Cash 100 100,000
Common stock 100,000

General Ledger
Cash Acct. No. 100
Date Explanation Ref. Debit Credit Balance
Jan. 3 Sale of stock GJ1 100,000 100,000
 3.
3. Trial
Trial Balance
Balance
Trial Balance – a list of each account and its balance;
used to prove equality of debit and credit balances.

Acct. No. Account Debit Credit

100 Cash $ 140,000
105 Accounts receivable 35,000
110 Inventory 30,000
130 Building 150,000
200 Accounts payable $ 60,000
220 Note payable 150,000
300 Common stock 100,000
330 Retained earnings
400 Sales 75,000
500 Cost of goods sold 30,000
$ 385,000 $ 385,000
 4.
4. Adjusting
Adjusting Entries
Entries
Revenues - recorded in the period in which they
are earned.
earned
Expenses - recognized in the period in which they
are incurred.
incurred
Adjusting entries - needed to ensure that the
revenue recognition and matching principles are
followed.