Chapter

3-1
 Warfield
Weygandt
Kieso

CHAPTER 3
THE ACCOUNTING
INFORMATION SYSTEM

INTERMEDIATE ACCOUNTING
Principles and Analysis
2nd Edition
Chapter
3-2
 Learning
Learning Objectives
Objectives

1. Understand basic accounting terminology.

2. Explain double-entry rules.
3. Identify steps in the accounting cycle.
4. Record transactions in journals, post to ledger
accounts, and prepare a trial balance.
5. Explain the reasons for preparing adjusting entries.
6. Prepare financial statement from the adjusted trial
balance.
7. Prepare closing entries.
8. Explain how to adjust inventory accounts at year-end.
Chapter
3-3
 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
Chapter merchandisers
3-4
 Accounting
Accounting Information
Information System
System

An Accounting Information System (AIS)

Collects and processes transaction data.
Disseminates information to interested
parties.

Chapter
3-5
 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?

Chapter
3-6 LO 1 Identify the major financial statements and other means of financial reporting ..
 Basic
Basic Terminology
Terminology

Event Journal
Transaction Posting
Account Trial Balance
Real Account Adjusting Entries
Nominal Account Financial Statements
Ledger Closing Entries

Chapter
3-7 LO 1 Understand basic accounting terminology.
 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.

Chapter
3-8 LO 2 Explain double-entry rules.
 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.

Chapter
3-9 LO 2 Explain double-entry rules.
 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

Chapter
3-10 LO 2 Explain double-entry rules.
 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

8,000 Transaction #3

Balance $1,000

Chapter
3-11 LO 2 Explain double-entry rules.
 Debits
Debits and
and Credits
Credits Summary
Summary
Liabilities

Normal
Debit / Dr. Credit / Cr.
Normal Normal
Normal
Balance
Balance Balance
Balance
Debit
Debit Credit
Credit Normal Balance

Assets Chapter

Equity
3-24

Debit / Dr. Credit / Cr.

Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter

Expense
3-23

Revenue
Chapter
3-25

Debit / Dr. Credit / Cr.

Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-27 Chapter
3-26

Chapter
3-12 LO 2 Explain double-entry rules.
 Debits
Debits and
and Credits
Credits Summary
Summary

Balance Sheet Income Statement

Asset = Liability + Equity Revenue - Expense =

Debit

Credit

Chapter
3-13 LO 2 Explain double-entry rules.
 Basic
Basic Accounting
Accounting Equation
Equation

Relationship among the assets, liabilities and

stockholders equity of a business:
Illustration 3-3

The equation must be in balance after every

transaction. For every Debit there must be a Credit.

Chapter
3-14 LO 2 Explain double-entry rules.
 Double-Entry
Double-Entry System
System Exercise
Exercise

1. Invested $32,000 cash and equipment valued at

$14,000 in the business.

Assets Liabilities Stockholders

Stockholders
= + Equity
Equity

+ 32,000 + 46,000

+ 14,000

Chapter
3-15 LO 2 Explain double-entry rules.
 Double-Entry
Double-Entry System
System Exercise
Exercise

2. Paid office rent of $600 for the month.

Assets Liabilities Stockholders

Stockholders
= + Equity
Equity

- 600 - 600
(expense)

Chapter
3-16 LO 2 Explain double-entry rules.
 Double-Entry
Double-Entry System
System Exercise
Exercise

3. Received $3,200 advance on a management

consulting engagement.

Assets Liabilities Stockholders

Stockholders
= + Equity
Equity

+ 3,200 + 3,200

Chapter
3-17 LO 2 Explain double-entry rules.
 Double-Entry
Double-Entry System
System Exercise
Exercise

4. Received cash of $2,300 for services completed

for Shuler Co.

Assets Liabilities Stockholders

Stockholders
= + Equity
Equity

+ 2,300 + 2,300
(revenue)

Chapter
3-18 LO 2 Explain double-entry rules.
 Double-Entry
Double-Entry System
System Exercise
Exercise

5. Purchased a computer for $6,100.

Assets Liabilities Stockholders

Stockholders
= + Equity
Equity

+ 6,100

- 6,100

Chapter
3-19 LO 2 Explain double-entry rules.
 Double-Entry
Double-Entry System
System Exercise
Exercise

6. Paid off liabilities of $7,000.

Assets Liabilities Stockholders

Stockholders
= + Equity
Equity

- 7,000 - 7,000

Chapter
3-20 LO 2 Explain double-entry rules.
 Double-Entry
Double-Entry System
System Exercise
Exercise

7. Declared a cash dividend of $10,000.

Assets Liabilities Stockholders

Stockholders
= + Equity
Equity

+ 10,000 - 10,000

Note
Notethat
thatthe
theaccounting
accountingequation
equationequality
equalityisis
maintained
maintainedafter
afterrecording
recordingeach
eachtransaction.
transaction.

Chapter
3-21 LO 2 Explain double-entry rules.
 Ownership
Ownership Structure
Structure

Ownership structure dictates the types of accounts

that are part of the equity section.

Proprietorship
Proprietorship
or
or Corporation
Corporation
Partnership
Partnership

Capital Account Common Stock

Drawing Account Additional Paid-in
Capital
Dividends Declared
Retained Earnings

Chapter
3-22 LO 2 Explain double-entry rules.
 Corporation
Corporation Ownership
Ownership Structure
Structure
Illustration 3-4
Balance Sheet
Stockholders Equity

Common
Common Stock
Stock (Investment
(Investment Retained
Retained Earnings
Earnings
by
by stockholders)
stockholders) (Net
(Net income
income retained
retained in
in business)
business)

Net income or Net loss

Dividends (Revenues
(Revenues less
less expenses)
expenses)
Income
Income Statement
Statement

Statement of Retained Earnings

Chapter
3-23 LO 2 Explain double-entry rules.
 The
The Accounting
Accounting Cycle
Cycle
Illustration 3-6
Transactions

9. Reversing entries 1. Journalization

8. Post-closing trail balance 2. Posting

7. Closing entries 3. Trial balance

Work
6. Financial Statements Sheet 4. Adjustments

5. Adjusted trial balance

Chapter
3-24 LO 3 Identify steps in the accounting cycle.
 Transactions
Transactions and
and Events
Events

What to Record?

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.

Chapter
3-25 LO 3 Identify steps in the accounting cycle.
 Review
Review Transactions
Transactions and
and Events
Events
External Internal Not Recorded

1. A supplier of a companys 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.

Chapter
3-26 LO 3 Identify steps in the accounting cycle.
 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

Chapter LO 4 Record transactions in journals, post to

3-27 ledger accounts, and prepare a trial balance.
 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

Chapter LO 4 Record transactions in journals, post to

3-28 ledger accounts, and prepare a trial balance.
 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

Chapter LO 4 Record transactions in journals, post to

3-29 ledger accounts, and prepare a trial balance.
 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.

Chapter
3-30 LO 5 Explain the reasons for preparing adjusting entries.
 Classes
Classes of
of Adjusting
Adjusting Entries
Entries
Illustration 3-20

Prepayments Accruals
1. Prepaid Expenses. 3. Accrued Revenues.
Expenses paid in cash and Revenues earned but not
recorded as assets before yet received in cash or
they are used or consumed. recorded.

2. Unearned Revenues. 4. Accrued Expenses.

Revenues received in cash Expenses incurred but not
and recorded as liabilities yet paid in cash or
before they are earned. recorded.

Chapter
3-31 LO 5 Explain the reasons for preparing adjusting entries.
 Adjusting
Adjusting Entries
Entries Prepaid
Prepaid Expenses
Expenses

Payment of cash that is recorded as an asset because

service or benefit will be received in the future.

Cash Payment BEFORE Expense Recorded

Prepayments often occur in regard to:

insurance rent
supplies maintenance on equipment
advertising fixed assets

Chapter
3-32 LO 5 Explain the reasons for preparing adjusting entries.
 Adjusting
Adjusting Entries
Entries Prepaid
Prepaid Expenses
Expenses
Example: On Jan. 1st, Phoenix Corp. paid $12,000 for 12
months of insurance coverage. Show the journal entry to
record the payment on Jan. 1st.

Jan. 1 Prepaid Insurance 12,000

Cash 12,000

Prepaid Insurance Cash

Debit Credit Debit Credit
12,000 12,000

Chapter
3-33 LO 5 Explain the reasons for preparing adjusting entries.
 Adjusting
Adjusting Entries
Entries Prepaid
Prepaid Expenses
Expenses
Example: On Jan. 1st, Phoenix Corp. paid $12,000 for 12
months of insurance coverage. Show the adjusting journal
entry required at Jan. 31st.

Jan. 31 Insurance Expense 1,000

Prepaid Insurance 1,000

Prepaid Insurance Insurance Expense

Debit Credit Debit Credit
12,000 1,000 1,000

11,000
Chapter
3-34 LO 5 Explain the reasons for preparing adjusting entries.
 Adjusting
Adjusting Entries
Entries Unearned
Unearned Revenues
Revenues

Receipt of cash that is recorded as a liability because

the revenue has not been earned.

Cash Receipt BEFORE Revenue Recorded

Unearned revenues often occur in regard to:

rent magazine subscriptions
airline tickets customer deposits
school tuition

Chapter
3-35 LO 5 Explain the reasons for preparing adjusting entries.
 Adjusting
Adjusting Entries
Entries Unearned
Unearned Revenues
Revenues
Example: On Nov. 1st, Phoenix Corp. received $24,000 from
Arcadia High School for 3 months rent in advance. Show
the journal entry to record the receipt on Nov. 1st.

Nov. 1 Cash 24,000

Unearned Rent Revenue 24,000

Cash Unearned Rent Revenue

Debit Credit Debit Credit
24,000 24,000

Chapter
3-36 LO 5 Explain the reasons for preparing adjusting entries.
 Adjusting
Adjusting Entries
Entries Unearned
Unearned Revenues
Revenues
Example: On Nov. 1st, Phoenix Corp. received $24,000 from
Arcadia High School for 3 months rent in advance. Show
the journal entry to record the receipt on Nov. 1st.

Nov. 30 Unearned Rent Revenue 8,000

Rent Revenue 8,000

Rent Revenue Unearned Rent Revenue

Debit Credit Debit Credit
8,000 8,000 24,000

16,000
Chapter
3-37 LO 5 Explain the reasons for preparing adjusting entries.
 Adjusting
Adjusting Entries
Entries Accrued
Accrued Revenues
Revenues

Revenues earned but not yet received in cash or

recorded.

Adjusting entry results in:

Revenue Recorded BEFORE Cash Receipt

Accrued revenues often occur in regard to:

rent
interest
services performed

Chapter
3-38 LO 5 Explain the reasons for preparing adjusting entries.
 Adjusting
Adjusting Entries
Entries Accrued
Accrued Revenues
Revenues
Example: On July 1st, Phoenix Corp. invested $300,000 in
securities that return 5% interest per year. Show the
journal entry to record the investment on July 1st.

July 1 Investments 300,00

Cash 0 300,000

Investments Cash
Debit Credit Debit Credit
300,000 300,000

Chapter
3-39 LO 5 Explain the reasons for preparing adjusting entries.
 Adjusting
Adjusting Entries
Entries Accrued
Accrued Revenues
Revenues
Example: On July 1st, Phoenix Corp. invested $300,000 in
securities that return 5% interest per year. Show the
journal entry to record the investment on July 1st.

July 31 Interest Receivable 1,250

Interest Revenue 1,250

Interest Receivable Interest Revenue

Debit Credit Debit Credit
1,250 1,250

Chapter
3-40 LO 5 Explain the reasons for preparing adjusting entries.
 Adjusting
Adjusting Entries
Entries Accrued
Accrued Expenses
Expenses

Expenses incurred but not yet paid in cash or

recorded.
Adjusting entry results in:

Expense Recorded BEFORE Cash Payment, if any*

Accrued expenses often occur in regard to:

rent salaries
interest bad debts*
taxes

Chapter
3-41 LO 5 Explain the reasons for preparing adjusting entries.
 Adjusting
Adjusting Entries
Entries Accrued
Accrued Expenses
Expenses
Example: On Feb. 2nd, Phoenix Corp. borrowed $200,000 at a
rate of 9% per year. Interest is due on first of each month.
Show the journal entry to record the borrowing on Feb. 2nd.

Feb. 2 Cash 200,00

Notes Payable 0 200,000

Cash Notes Payable

Debit Credit Debit Credit
200,000 200,000

Chapter
3-42 LO 5 Explain the reasons for preparing adjusting entries.
 Adjusting
Adjusting Entries
Entries Accrued
Accrued Expenses
Expenses
Example: On Feb. 2nd, Phoenix Corp. borrowed $200,000 at a
rate of 9% per year. Interest is due on first of each month.
Show the adjusting journal entry required on Feb. 28th.

Feb. 28 Interest Expense 1,500

Interest Payable 1,500

Interest Expense Interest Payable

Debit Credit Debit Credit
1,500 1,500

Chapter
3-43 LO 5 Explain the reasons for preparing adjusting entries.
 5.
5. Adjusted
Adjusted Trial
Trial Balance
Balance

Shows the balance of all accounts, after adjusting

entries, at the end of the accounting period.

Chapter
3-44 LO 5 Explain the reasons for preparing adjusting entries.
 6.
6. Preparing
Preparing Financial
Financial Statements
Statements

Financial
Financial Statements
Statements are
are prepared
prepared directly
directly from
from the
the
Adjusted
Adjusted Trial
Trial Balance.
Balance.

Statement
Statement
Balance Income of
of Cash
Sheet Statement Retained
Flows
Earnings

Chapter
3-45 LO 6 Prepare financial statement from the adjusted trial balance.
 6.
6. Preparing
Preparing Financial
Financial Statements
Statements
Assume the following
Adjusted Trial Balance Balance Sheet

Adjusted Trial Balance Debit Credit Balance Sheet

Cash $ 140,000 Assets
Accounts receivable 35,000
Cash $ 140,000
Building 190,000
Note payable $ 150,000 Accounts receivable 35,000
Common stock 100,000 Building 190,000
Retained earnings 38,000 Total assets $ 365,000
Dividends declared 10,000 Liabilities
Sales 185,000 Note payable 150,000
Interest income 17,000
Stockholders' equity
Cost of goods sold 47,000
Salary expense 25,000
Common stock 100,000
Depreciation expense 43,000 Retained earnings 115,000
$ 490,000 $ 490,000 Total liab. & equity $ 365,000

Chapter
3-46 LO 6 Prepare financial statement from the adjusted trial balance.
 6.
6. Preparing
Preparing Financial
Financial Statements
Statements
Assume the following
Adjusted Trial Balance Income Statement

Adjusted Trial Balance Debit Credit Income Statement

Cash $ 140,000
Revenues:
Accounts receivable 35,000
Sales $ 185,000
Building 190,000
Note payable $ 150,000 Interest income 17,000
Common stock 100,000 Total revenue 202,000
Retained earnings 38,000 Expenses:
Dividends declared 10,000 Cost of goods sold 47,000
Sales 185,000 Salary expense 25,000
Interest income 17,000
Depreciation expense 43,000
Cost of goods sold 47,000
Total expenses 115,000
Salary expense 25,000
Depreciation expense 43,000 Net income $ 87,000
$ 490,000 $ 490,000

Chapter
3-47 LO 6 Prepare financial statement from the adjusted trial balance.
 6.
6. Preparing
Preparing Financial
Financial Statements
Statements
Assume the following Statement of
Adjusted Trial Balance Retained Earnings

Adjusted Trial Balance Debit Credit Statement of Retained Earnings

Cash $ 140,000
Accounts receivable 35,000
Beginning balance $ 38,000
Building 190,000
Note payable $ 150,000 + Net income 87,000
Common stock 100,000 - Dividends (10,000)
Retained earnings 38,000 Ending balance 115,000
Dividends declared 10,000
Sales 185,000
Interest income 17,000
Cost of goods sold 47,000
Salary expense 25,000
Depreciation expense 43,000
$ 490,000 $ 490,000

Chapter
3-48 LO 6 Prepare financial statement from the adjusted trial balance.
 7.
7. Closing
Closing Entries
Entries

To reduce the balance of the income statement

(revenue and expense) accounts to zero.

To transfer net income or net loss to owners

equity.

Balance sheet (asset, liability, and equity)

accounts are not closed.

Dividends are closed directly to the Retained

Earnings account.

Chapter
3-49 LO 7 Prepare closing entries.
 7.
7. Closing
Closing Entries
Entries
Example: Assume the following Adjusted Trial Balance

Acct. No. Account Debit Credit

100 Cash $ 140,000
105 Accounts receivable 35,000
130 Building 190,000
220 Note payable $ 150,000
300 Common stock 100,000
330 Retained earnings 38,000
380 Dividends declared 10,000
400 Sales 185,000
430 Interest income 17,000
500 Cost of goods sold 47,000
520 Salary expense 25,000
550 Depreciation expense 43,000
$ 490,000 $ 490,000

Chapter
3-50 LO 7 Prepare closing entries.
 7.
7. Closing
Closing Entries
Entries
Example: Prepare the Closing journal entry from the
adjusted trial balance on the previous slide.
Sales 185,000
Interest Income 17,000
Income summary 202,000

Income Summary 115,000

Cost of Goods Sold 47,000
Salary Expense 25,000
Depreciation Expense 43,000

Income Summary 87,000

Retained Earnings 87,000

Retained Earnings 10,000

Dividends Declared 10,000
Chapter
3-51 LO 7 Prepare closing entries.
 8.
8. Post-Closing
Post-Closing Trial
Trial Balance
Balance
Example continued:

Acct. No. Account Debit Credit

100 Cash $ 140,000
105 Accounts receivable 35,000
130 Building 190,000
220 Note payable $ 150,000
300 Common stock 100,000
330 Retained earnings 115,000
380 Dividends declared -
400 Sales -
430 Interest income -
500 Cost of goods sold -
520 Salary expense -
550 Depreciation expense -
$ 365,000 $ 365,000

Chapter
3-52 LO 7 Prepare closing entries.
 9.
9. Reversing
Reversing Entries
Entries

Reversing entries is an optional step that

a company may perform at the beginning
of the next accounting period.

Chapter
3-53 LO 7 Prepare closing entries.
 Perpetual
Perpetual Inventory
Inventory System
System

Inventory account increased with each purchase.

Inventory account reduced and Cost of Goods Sold
account increased with each sale.
Balance in Inventory account should equal
inventory amount on hand.
No Adjusting Entries should be needed.
Physical inventory performed to confirm balance in
Inventory account.

Chapter
3-54 LO 8 Explain how to adjust inventory accounts at year-end.
 Periodic
Periodic Inventory
Inventory System
System

Inventory account remains unchanged during

period.
Purchases account increased with each purchase.

At end of accounting period:

Purchases account closed.
Inventory account adjusted to physical count.

Chapter
3-55 LO 8 Explain how to adjust inventory accounts at year-end.
 Copyright
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Chapter
3-56