Course Name:

Intermediate Accounting I
Lecturer: Ahmed Yazin
Faculty Of: MS-ECO
Semester : 3
 Chapter 03
The Accounting Information
System
ACCOUNTING INFORMATION SYSTEM
• An accounting information system collects and
processes transaction data and then disseminates
(Spread) the financial information to interested parties.
Basic Terminology
• You need to understand the basic terminology
employed in collecting accounting data.
• TRANSACTION. An external event involving a transfer
or exchange between two or more entities.
 Continue……….
• ACCOUNT. A systematic arrangement that shows the effect of
transactions and other events on a specific element (asset, liability, and
so on).
• Companies keep a separate account for each asset, liability, revenue, and
expense, and for capital (owners’ equity). Because the format of an
account often resembles the letter T, it is sometimes referred to as a T-
account.
• REAL AND NOMINAL ACCOUNTS. Real (permanent) accounts are
asset, liability, and equity accounts; they appear on the balance sheet.
Nominal (temporary) accounts are revenue, expense, and dividend
accounts; except for dividends, they appear on the income statement.
• Companies periodically close nominal accounts; they do not close real
accounts.
 Continue……….

• LEDGER. The book (or computer printouts) containing the accounts.

A general ledger is a collection of all the asset, liability, owners’
equity, revenue, and expense accounts.
• A subsidiary ledger contains the details related to a given general
ledger account.
• JOURNAL. The “book of original entry” where the company initially
records transactions and selected other events.
• Entering transaction data in the journal is known as journalizing.
• POSTING. The process of transferring the essential facts and figures
from the book of original entry to the ledger accounts.
 Continue……….
• TRIAL BALANCE. The list of all open accounts in the ledger and
their balances.
• ADJUSTING ENTRIES. Entries made at the end of an accounting
period to bring all accounts up to date on an accrual basis, so that the
company can prepare correct financial statements.
• CLOSING ENTRIES. The formal process by which the enterprise
reduces all Nominal accounts to zero and determines and transfers the
net income or net loss to an owners’ equity account.
• Also known as “closing the ledger,” “closing the books,” or merely
“closing.”
Accounting
Accounting Information
Information System
System
Debits and 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
The 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.
 Multiple Choice: The Accounting
Equation
1) Maso Company recorded journal entries for the
issuance of common stock for $40,000, the payment
of $13,000 on accounts payable, and the payment of
salaries expense of $21,000. What net effect do
these entries have on owners’ equity?
a) Increase of $40,000.
b) Increase of $27,000.
c) Increase of $19,000.
d) Increase of $6,000.
 Financial
Financial Statements
Statements and
and 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

3-10
 The
The Accounting
Accounting Cycle
Cycle
Illustration 3-6
Transactions
Transactions

9.
9. Reversing
Reversing entries
entries 1.
1. Journalization
Journalization

8.
8. Post-closing
Post-closing trail
trail balance
balance 2.
2. Posting
Posting

7.
7. Closing
Closing entries
entries 3.
3. Trial
Trial balance
balance

Work
Work
6.
6. Financial
Financial Statements
Statements Sheet
Sheet
4.
4. Adjustments
Adjustments

5.
5. Adjusted
Adjusted trial
trial balance
balance

3-11 LO 3 Identify steps in the accounting cycle.

 ANALYZING
ANALYZING TRANSACTIONS
TRANSACTIONS

Expanded Example
The purpose of transaction analysis is
(1) to identify the type of account involved, and
(2) to determine whether a debit or a credit is
required.
Keep in mind that every journal entry affects one or more of the
following items: assets, liabilities, stockholders’ equity,
revenues, or expense.

3-12
 EXAMPLE 1
October 1: Stockholders invest $100,000 cash in an advertising
venture to be known as Pioneer Advertising Agency Inc.
October 1: Pioneer Advertising purchases office equipment costing
$50,000 by signing a 3-month, 12%, $50,000 note payable.
October 2: Pioneer Advertising receives a $12,000 cash advance
from KC, a client, for advertising services that are expected to be
completed by December 31.
October 3: Pioneer Advertising pays $9,000 office rent, in cash, for
October.
October 4: Pioneer Advertising pays $6,000 for a one-year
insurance policy that will expire next year on September 30
3-13
 EXAMPLE 1: CONTINUE……….
October 5: Pioneer Advertising purchases, for $25,000 on account,
an estimated 3-month supply of advertising materials from Aero
Supply.
October 9: Pioneer Advertising signs a contract with a local
newspaper for advertising inserts (flyers) to be distributed starting
the last Sunday in November. Pioneer will start work on the content
of the flyers in November. Payment of $7,000 is due following
delivery of the Sunday papers containing the flyers.

3-14
 EXAMPLE 1: CONTINUE……….
October 20: Pioneer Advertising’s board of directors declares and
pays a $5,000 cash dividend to stockholders.
October 26: Employees are paid every four weeks. salaries of
$40,000 being paid.
October 31: Pioneer Advertising receives $28,000 in cash and bills
Copa Company $72,000 for advertising services of $100,000
provided in October.
Required
1. Journalize the above transactions
2. Prepare posting
3. Prepare trial balance
4. Prepare Income Statement
5. Prepare Retained Earnings
6. Prepare Balance sheet
7. Prepare closing entries
3-15 8. Prepare Post-Closing Trial Balance
 3. Trial Balance

Trial Balance –
A list of each
account and its
balance; used
to prove
equality of debit
and credit
balances.

3-16
 4.
4. Adjusting
Adjusting Entries
Entries

Makes it possible to:

 Report on the statement of financial position the
appropriate assets, liabilities, and equity at the statement
date.
 Report on the income statement the proper revenues
and expenses for the period.
► Revenues are recorded in the period in which they are
earned.
► Expenses are recognized in the period in which they are
incurred.

3-17 LO 5 Explain the reasons for preparing adjusting entries.

 Types
Types of
of Adjusting
Adjusting Entries
Entries
Illustration 3-20

Prepayments Accruals
1. Prepaid Expenses. 3. Accrued Revenues.
Expenses paid in cash Revenues earned but
and recorded as assets not yet received in
before they are used or cash or recorded.
consumed.
2. Unearned Revenues. 4. Accrued Expenses.
Revenues received in Expenses incurred but
cash and recorded as not yet paid in cash or
liabilities before they recorded.
are earned.
3-18
 Adjusting
Adjusting Entries
Entries for
for “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  Buildings And Equipment
 Advertising

3-19 LO 5 Explain the reasons for preparing adjusting entries.

 Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Supplies. An inventory count at the close of business on
October 31 reveals that $10,000 of the advertising supplies are
still on hand.
Oct. 31 Supplies expense 15,000
Supplies 15,000

Supplies Supplies Expense

Debit Credit Debit Credit
25,000 15,000 15,000

10,000

3-20 LO 5 Explain the reasons for preparing adjusting entries.

Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Insurance. An analysis of the policy reveals that $500 ($6,000 /
12) of insurance expires each month. Thus, Pioneer makes the
following adjusting entry.

Oct. 31 Insurance expense 500

Prepaid insurance 500

Prepaid Insurance Insurance Expense

Debit Credit Debit Credit
6,000 500 500

5,500

LO 5 Explain the reasons for preparing adjusting entries.

Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Depreciation. Pioneer Advertising estimates depreciation on its
office equipment to be $400 per month. Accordingly, Pioneer
recognizes depreciation for October by the following adjusting
entry.

Oct. 31 Depreciation expense 400

Accumulated depreciation 400

Depreciation Expense Accumulated Depreciation

Debit Credit Debit Credit
400 400

LO 5 Explain the reasons for preparing adjusting entries.

Adjusting
Adjusting Entries
Entries for
for “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

LO 5 Explain the reasons for preparing adjusting entries.

Adjusting
Adjusting Entries
Entries for
for “Unearned
“Unearned Revenues”
Revenues”
Unearned Revenues. Analysis reveals that Pioneer earned
$4,000 of the advertising services in October. Thus, Pioneer
makes the following adjusting entry.
Oct. 31 Unearned service revenue 4,000
Service revenue 4,000

Service Revenue Unearned Service Revenue

Debit Credit Debit Credit
100,000 4,000 12,000
4,000
8,000

LO 5 Explain the reasons for preparing adjusting entries.

Adjusting
Adjusting Entries
Entries for
for “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

LO 5 Explain the reasons for preparing adjusting entries.

Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Revenues”
Revenues”
Accrued Revenues. In October Pioneer earned $2,000 for
advertising services that it did not bill to clients before October
31. Thus, Pioneer makes the following adjusting entry.

Oct. 31 Accounts receivable 2,000

Service revenue 2,000

Accounts Receivable Service Revenue

Debit Credit Debit Credit
72,000 100,000
2,000 4,000
2,000
74,000 106,000
LO 5
Adjusting
Adjusting Entries
Entries for
for “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

LO 5 Explain the reasons for preparing adjusting entries.

Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Accrued Interest. Pioneer signed a three-month, 12%, note
payable in the amount of $50,000 on October 1. The note
requires interest at an annual rate of 12 percent. Three factors
determine the amount of the interest accumulation:

1 2 3 Illustration 3-29

LO 5 Explain the reasons for preparing adjusting entries.

Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Accrued Interest. Pioneer signed a three-month, 12%, note
payable in the amount of $50,000 on October 1. Prepare the
adjusting entry on Oct. 31 to record the accrual of interest.

Oct. 31 Interest expense 500

Interest payable 500

Interest Expense Interest Payable

Debit Credit Debit Credit
500 500

LO 5 Explain the reasons for preparing adjusting entries.

Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Accrued Salaries. Employees receive total salaries of $10,000
for a five-day work week, or $2,000 per day. Prepare the
adjusting entry on Oct. 31 to record accrual for salaries.

Oct. 31 Salaries expense 6,000

Salaries payable 6,000

Salaries Expense Salaries Payable

Debit Credit Debit Credit
40,000 6,000
6,000

46,000

LO 5 Explain the reasons for preparing adjusting entries.

Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Accrued Salaries. On November 23, Pioneer will again pay total
salaries of $40,000. Prepare the entry to record the payment of
salaries on November 23.

Nov. 23 Salaries payable 6,000

Salaries expense 34,000
Cash 40,000

Salaries Expense Salaries Payable

Debit Credit Debit Credit
34,000 6,000 6,000

LO 5 Explain the reasons for preparing adjusting entries.

Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Bad Debts. Assume Pioneer reasonably estimates a bad debt
expense for the month of $1,600. It makes the adjusting entry for
bad debts as follows.

Illustration 3-32

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.

Illustration 3-33
6. Preparing Financial Statements

Financial
FinancialStatements
Statementsare
areprepared
prepareddirectly
directlyfrom
from the
the
Adjusted
AdjustedTrial
TrialBalance.
Balance.

Retained
Income
Earnings Balance Sheet
Statement
Statement

LO 6 Prepare financial statement from the adjusted trial balance.

6. Preparing Financial Statements

Illustration 3-34
LO 6
6. Preparing Financial Statements

LO 6
 7. Closing Entries
 To reduce the balance of the income statement
(revenue and expense) accounts to zero.

 To transfer net income or net loss to Retained

Earnings.

 Balance sheet (asset, liability, and equity)

accounts are not closed.

 Dividends are closed directly to the Retained

Earnings account.
LO 7 Prepare closing entries.
7.
7. Closing
Closing Entries
Entries
Illustration 3-33

Closing Journal Entries:

Retained earnings 5,000

Dividends 5,000
Service revenue 106,000
Salaries & wages expense
46,000
Supplies expense
15,000
Rent expense 9,000
Insurance expense 500
Interest expense 500
Depreciation expense
400
Bad debt expense 1,600
Retained earnings
LO 7 Prepare closing entries.
33,000
8. Post-Closing Trial Balance

Illustration 3-38

LO 7