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The Accounting Information System

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Angela Livernois

on 31 July 2014

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Transcript of The Accounting Information System

Assets
Cash
Accounts receivable
Supplies
Equipment
Less: Accumulated depreciation-equipment
Total assets

Liabilities and Stockholders' Equity
Liabilities
Accounts payable
Unearned advertising revenue
Salaries and wage payable
Total liabilities

Stockholders' equity
Common stock
Retained earnings
Total liabilities and stockholders' equity
One reason accurate records are not provided is because of economic crime or corruption.
Needed: A Reliable Information System
The Accounting Information System
Debits and Credits
Basic Terminology
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.
Reading 10
The Accounting Information System
Accounting Information System:
collects and processes transaction data and then disseminates the financial information to interested parties.
Types of economic crime
A good accounting information system helps management answer such questoins as:
How much and what kind of debt is outstanding?
Were our 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?
Are any of our product lines or divisions operating at a loss?
Is our rate of return on assets increasing?
Can we safely increase our dividends to stockholders?
The Accounting Cycle
Financial Statements and Ownership Structure
The stockholders' equity section for the balance sheet reports common stock and retained earnings.
The income statement reports revenues and expenses.
The statement of retained earnings reports dividends.
Accounting Equation
Adjusting Entries for Deferrals
Prepaid Expenses

Expenses paid in cash before they are used or consumed
Insurance
Supplies


Identifying and Recording
Transactions and Other Events
Although GAAP provides guidelines, no simple rules exist that state which events a company should record.
FASB: "transactions and other events and circumstances that affect a business enterprise"
Two types of events:
External events: involve interaction between an entity and its environment, such as a transaction with another entity.
Internal events occur within an entity, such as using buildings and machinery in operations, or transferring or consuming raw materials in production process
Trial Balance
Debits on the left
Credits on the right
The totals of each column must match
Uncovers errors in journalizing and posting
Does not prove that a company has recorded all transactions or the ledger is correct
An Example
Posting
Transferring journal entries to the ledger accounts is called posting. Posting involves four steps.

In the
ledger
, in the apporpriate columns of the account(s) debited, enter the date, journal page, and debit amount shown in the journal.
In the reference column of the
journal
, write the account number to which the data amount was posted.
In the
ledger
, in the appropriate columns of the account(s) credited, enter the date, journal page, and credit amount shown in the journal.
In the reference column of the
journal
, write the account number to which the credit amount was posted.
Journalizing
A company records in
accounts
those transactions and events that affect its assets, liabilities, and equities.
The general ledger contains all the asset, liability, and stockholders' equity accounts.
A transaction affects two or more accounts, each of which is on a different page in the ledger.
A
general journal
chronologically lists transactions and other events, expressed in terms of debits and credits to accounts.
Adjusting Entries
Services performed and expenses need to be recorded in the period they incurred
Ensure companies follow the revenue recognition and expense recognition principles
Can Occur When:
Events not recorded daily because it is inefficient to do so
Example: Supplies
Costs are not recorded in a period because costs decline over time
Example: Buildings
Items may be a month behind
Example: Utility bill
Usually skilled accountants prepare adjusting entries
Types of Adjusting Entries
Two Types

Deferrals:
Expenses or revenues that are recognized at a date later than the point when cash was originally exchanged
Will decrease a balance sheet and increase an income statement
Accruals:
Entries made to record revenue for services performed and expenses incurred in the current accounting period
Will increase both the balance sheet and an income statement account
Adjusting Entries for Deferrals
Unearned Revenue

Cash received before services are performed
Airline tickets
Sporting events
Preparing Financial Statements
Adjusted Trail Balance
To prove equality of the total debit balances and the total credit balances
Bad Debts
Adjusting Entries for Accruals
Accrued Expenses

Expenses incurred but not yet paid or recorded at the statement date
Rent
Taxes

Increase to an expense account and a credit liability account
Adjusting Entries for Accruals
Accrued Revenues

Revenue for services performed but not yet recorded on the statement date
Interest revenue

If not done, assets and stockholders' equity on the balance sheet and revenues and net income on the statement are understated
The Accounting Cycle Summarized
Reversing Entries-
An Optional Step
Post-Closing Trail Balance
Closing
Basic Process
Journal: The "book of original entry" where the company initially records transactions and selected other events. Various amounts a re transferred from the book of original entry, the journal, to the ledger. Entering transaction data in the journal is known as
journalizing
.
Basic Terminology
Trial Balance: The list of all open accounts in the ledger and their balances. The trial balance taken immediately after all adjustments have been posted is called a
post-closing
(or
after-closing
)
trial balance
. Companies may prepare a trial balance at any time.


UNADJUSTED ADJUSTED


Cash
Accounts Receivable
Supplies
Equipment
Accumulated Depreciation-Equipment
Accounts Payable
Unearned Advertising Revenue
Salaries and Wages Payable
Common Stock
Retained Earnings
Advertising Revenue
Salaries and Wages Expense
Depreciation Expense
Supplies Expense
Rent Expense
Dr.

$11,000
21,500
5,000
60,000







11,300
7,000
3,400
4,000
$113,400
Cr.





$35,000
5,000
5,600
1,300
10,000
4,800
61,500




$113,400
Demonstration Problem
Journalize the annual adjusting entries that were made.
NALENZY ADVERTISING AGENCY
TRAIL BALANCE
DECEMBER 31, 2014
Dr.

$11,000
20,000
8,400
60,000







10,000


4,000
$113,400
Cr.





$28,000
5,000
7,000
-0-
10,000
4,800
58,600




$113,400
Dec. 31 Accounts Receivable
Advertising Revenue
31 Unearned Advertising Revenue
Advertising Revenue
31 Supplies Expense
Supplies
31 Depreciation Expense
Accumulated Depreciation-Equipment
31 Salaries and Wages Expense
Salaries and Wages Payable




JOURNAL ENTRIES
1,500
1,500
1,400
1,400
3,400
3,400
7,000
7,000
1,300
1,300


UNADJUSTED ADJUSTED


Cash
Accounts Receivable
Supplies
Equipment
Accumulated Depreciation-Equipment
Accounts Payable
Unearned Advertising Revenue
Salaries and Wages Payable
Common Stock
Retained Earnings
Advertising Revenue
Salaries and Wages Expense
Depreciation Expense
Supplies Expense
Rent Expense
Dr.

$11,000
21,500
5,000
60,000







11,300
7,000
3,400
4,000
$113,400
Cr.





$35,000
5,000
5,600
1,300
10,000
4,800
61,500




$113,400
Demonstration Problem
Nalezny Advertising Agency was founded by Casey Hayward in January 2005. Presented below are both the adjusted and unadjusted trial balances as of December 31, 2014.
NALENZY ADVERTISING AGENCY
TRAIL BALANCE
DECEMBER 31, 2014
Dr.

$11,000
20,000
8,400
60,000







10,000


4,000
$113,400
Cr.





$28,000
5,000
7,000
-0-
10,000
4,800
58,600




$113,400


UNADJUSTED ADJUSTED


Cash
Accounts Receivable
Supplies
Equipment
Accumulated Depreciation-Equipment
Accounts Payable
Unearned Advertising Revenue
Salaries and Wages Payable
Common Stock
Retained Earnings
Advertising Revenue
Salaries and Wages Expense
Depreciation Expense
Supplies Expense
Rent Expense
Dr.

$11,000
21,500
5,000
60,000







11,300
7,000
3,400
4,000
$113,400
Cr.





$35,000
5,000
5,600
1,300
10,000
4,800
61,500




$113,400
Demonstration Problem
Prepare an income statement for the year ending December 31, 2014.
NALENZY ADVERTISING AGENCY
TRAIL BALANCE
DECEMBER 31, 2014
Dr.

$11,000
20,000
8,400
60,000







10,000


4,000
$113,400
Cr.





$28,000
5,000
7,000
-0-
10,000
4,800
58,600




$113,400
$61,500


$11,300
7,000
4,000
3,400
25,700

$35,800
NALENZY ADVERTISING AGENCY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2014
Revenues
Advertising revenue

Expenses
Salaries and wage expense
Depreciation expense
Rent expense
Supplies expense
Total expenses

Net Income


UNADJUSTED ADJUSTED


Cash
Accounts Receivable
Supplies
Equipment
Accumulated Depreciation-Equipment
Accounts Payable
Unearned Advertising Revenue
Salaries and Wages Payable
Common Stock
Retained Earnings
Advertising Revenue
Salaries and Wages Expense
Depreciation Expense
Supplies Expense
Rent Expense
Dr.

$11,000
21,500
5,000
60,000







11,300
7,000
3,400
4,000
$113,400
Cr.





$35,000
5,000
5,600
1,300
10,000
4,800
61,500




$113,400
Demonstration Problem
Prepare a balance sheet at December 31,
NALENZY ADVERTISING AGENCY
TRAIL BALANCE
DECEMBER 31, 2014
Dr.

$11,000
20,000
8,400
60,000







10,000


4,000
$113,400
Cr.





$28,000
5,000
7,000
-0-
10,000
4,800
58,600




$113,400
$11,000
21,500
5,000
$60,000
35,000 25,000
$62,500



$5,000
5,600
1,300
11,900


$10,000
40,600* 50,600
$62,500
NALENZY ADVERTISING AGENCY
BALANCE SHEET
DECEMBER 31, 2014
*Retained earnings, Jan. 1, 2014
Add: Net income
Retained earnings, Dec. 31, 2014
$4,800
35,800
$40,600
Demonstration Problem
What are the remaining steps in the accounting cycle to be completed by Nalenzy for 2014?
1. Enter the transactions of the period in appropriate journals.

2. Post from the journals to the ledger (or ledgers).

3. Take an unadjusted trail balance (trail balance).

4. Prepare adjusting journal entries and post to the ledger(s).

5. Take a trail balance after adjusting (adjusting trial balance).

6. Prepare the financial statements from the second trail balance.

7.
Prepare closing journal entries and post to the ledger(s).

8.
Take a post-closing trail balance (
optional
).

9.
Prepare reversing entries (
optional
) and post to the ledger(s).
Assets = Liabilities + Stockholders' Equity
Closing Entries: The formal process by which the enterprise reduced all nominal accounts to zero and determines and transfers the net income or net loss to an owners' equity account.
Financial Statements: Statements that reflect the collection, tabulation, and final summarization of the accounting data.
balance sheet
income statement
statement of cash flows
statement of retained earnings
An expense of the period where company recognizes revenue for services performed
Reduces the balance of nominal accounts to zero
1. Enter the transactions of the period in appropriate journals.
2. Post from the journals to the ledgers.
3. Take an unadjusted trial balance.
4. Prepare adjusting journal entries and post to the ledgers.
5. Take a trial balance after adjusting adjusted trial balance.
7. Prepare closing journal entries and post to the ledgers.
6. Prepare the financial statements from the second trial balance.
8. Take a post-closing trial balance (optional).
9. Prepare reversing entries (optional) and post to the ledgers.
The Accounting Cycle Summarized
Transfer all of the revenue/expense account balances to income summary at the end of each accounting period
Closing Entries
Do not close dividends through the Income Summary account.
-trial balance after closing
Contains only permanent (real)-balance sheet- accounts.
To prove the equality of the permanent account balances that the company carries forward into the next accounting period.
Reverse the effects of certain adjusting entries
Exact opposite of the adjusting entry made in the previous period.
Optional bookkeeping procedure
Debits and Credits mean left and right, respectively.
Describes where a company makes entries in the recording process.
This is system provides a logical method for recording transactions.
Increase to all asset and expense accounts occur on the left and decreases occur on the right side.
Increases to all liability and revenue accounts occur on the right side and decreases on the left side.
In a double-entry system, for every Debit there must be a Credit, and vice versa.
Illustration 3-8

2. Posting

Posting – Transferring amounts from journal to ledger.


Dec. 31 Accounts Receivable
Advertising Revenue
31 Unearned Advertising Revenue
Advertising Revenue
31 Supplies Expense
Supplies
31 Depreciation Expense
Accumulated Depreciation-Equipment
31 Salaries and Wages Expense
Salaries and Wages Payable

JOURNAL ENTRIES
1,500
1,500
1,400
1,400
3,400
3,400
7,000
7,000
1,300
1,300
Assets
Cash
Accounts receivable
Supplies
Equipment
Less: Accumulated depreciation-equipment
Total assets

Liabilities and Stockholders' Equity
Liabilities
Accounts payable
Unearned advertising revenue
Salaries and wage payable
Total liabilities

Stockholders' equity
Common stock
Retained earnings
Total liabilities and stockholders' equity
$11,000
21,500
5,000
$60,000
35,000 25,000
$62,500



$5,000
5,600
1,300
11,900


$10,000
40,600* 50,600
$62,500
NALENZY ADVERTISING AGENCY
BALANCE SHEET
DECEMBER 31, 2014
*Retained earnings, Jan. 1, 2014
Add: Net income
Retained earnings, Dec. 31, 2014
$4,800
35,800
$40,600
Full transcript