© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-1 2 Accounting Information System

© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin

Slide 2-1

2 Accounting Information System


Slide 2-2

Preparers

ASB

Auditors

Decision makers

GAAP

Financial Statements, Auditing and Users

FinancialStatements

AuditReport

FASB

GAAS


Slide 2-3

International Accounting PrinciplesDespite our growing global economy, countries

continue to maintain their unique set of acceptable accounting practices.


Slide 2-4

Fundamental Principles of Accounting

Business Entity Principle

Business Entity Principle

Objectivity Principle

Objectivity Principle

Cost PrincipleCost Principle

Going-Concern Principle

Going-Concern Principle

Monetary Unit Principle

Monetary Unit Principle

A business is accounted for separately from its owner or owners.

A business is accounted for separately from its owner or owners.

Financial statement information is supported by independent, unbiased

evidence.

Financial statement information is supported by independent, unbiased

evidence.

Financial statements are based on actual costs incurred in business transactions.

Financial statements are based on actual costs incurred in business transactions.

A business continues operating instead of being closed or sold.

A business continues operating instead of being closed or sold.

Express transactions and events in monetary units.

Express transactions and events in monetary units.


Slide 2-5

Source documents

Recording & posting

Trial balanceReporting

Transaction or event

Analysis

The Accounting Process

Exh.2.2


Slide 2-6

External Transactions occur between the

organization and an outside party.

Internal Transactions occur within the

organization.

Transactions and Events

Exchanges of economic consideration between two parties.


Slide 2-7

Sales Invoices

Bank Statement

Purchase Orders

Checks

Source Documents


Slide 2-8

Detailed record of increases and decreases in

specific assets, liabilities, equities,

revenues, or expenses.

Separate accounts are maintained for each item of importance.

Detailed record of increases and decreases in

specific assets, liabilities, equities,

revenues, or expenses.

Separate accounts are maintained for each item of importance.

The Account


Slide 2-9

LiabilitiesLiabilities EquityEquityAssetsAssets = +

Common Stock

Common Stock

Retained EarningsRetained Earnings

RevenuesRevenues ExpensesExpenses

Expanded Accounting Equation

+ ++ –

Exh.2.4


Slide 2-10

LandLand

EquipmentEquipmentBuildingsBuildings

CashCash

Prepaid Expenses

Prepaid Expenses

Office Supplies

Office Supplies

Store Supplies

Store Supplies

Prepaid Insurance

Prepaid Insurance

Notes Receivable

Notes Receivable

Accounts Receivable

Accounts Receivable

ASSETSASSETS

Asset Accounts


Slide 2-11

Accrued Liabilities

Accrued Liabilities

Unearned Revenues

Unearned Revenues

Notes Payable

Notes Payable

Accounts Payable

Accounts Payable

LIABILITIESLIABILITIES

LiabilityAccounts


Slide 2-12

EquitiesEquities

RevenuesRevenues

Common Stock

Common Stock DividendsDividends

ExpensesExpenses

Equity Accounts

Retained Earnings

Retained Earnings


Slide 2-13

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.

Analyzing Transactions


Slide 2-14

Buck Johnson forms a building consulting

business. It is set up as a corporation called

Build-Up, Inc..

Analyze the following transactions.

Transaction Analysis


Slide 2-15

The accounts involved are:

(1) Cash (asset)

(2) Owner’s Equity (equity)

Buck Johnson invests $50,000 in the company in exchange for common stock.

Transaction Analysis


Slide 2-16


(1) Cash (asset)

(2) Supplies (asset)

Transaction AnalysisBuild-Up, Inc. purchased supplies

paying $4,800 cash.


Slide 2-17


(1) Cash (asset)

(2) Equipment (asset)

Transaction AnalysisBuild-Up, Inc. purchased equipment

for $30,000 cash.


Slide 2-18


(1) Supplies (asset)

(2) Accounts Payable (liability)

Transaction AnalysisBuild-Up, Inc. purchased additional

supplies of $9,400 on account.


Slide 2-19

Transaction AnalysisBuild-Up, Inc. purchased additional

supplies of $9,400 on account.


Slide 2-20

Transaction AnalysisThe balances so far appear below. Note that the

Balance Sheet Equation is still in balance.

Now let’s look at transactions involving revenues and expenses.


Slide 2-21


(1) Cash (asset)

(2) Revenues (equity)

Transaction AnalysisRendered consulting services

receiving $9,800 cash.


Slide 2-22

Transaction AnalysisRendered consulting services

receiving $9,800 cash.


Slide 2-23


(1) Cash (asset)

(2) Rent Expense (equity)

Transaction AnalysisPaid $2,800 rent to the landlord of the

building where the business is located.


Slide 2-24

Transaction AnalysisPaid $2,800 rent to the landlord of the

building where the business is located.


Slide 2-25


(1) Cash (asset)

(2) Salary Expense (equity)

Transaction AnalysisPaid Salaries of $2,300.


Slide 2-26

Transaction AnalysisPaid Salaries of $2,300.


Slide 2-27

Account Name

(Left Side) Debit

(Right Side) Credit

Used as a simple tool for illustrating the balance in a

given account.

Chart of Accounts & the T-Account

Typically, a company keeps a

listing of all the accounts is uses. This list is called the Chart of Accounts.

Typically, a company keeps a

listing of all the accounts is uses. This list is called the Chart of Accounts.

Exh.2.8


Slide 2-28

Balance of an AccountAn account balance is the difference between the

increases and decreases in an account.

Exh.2.9


Slide 2-29


Debit Credit Debit Credit Debit Credit

ASSETS

+ -

LIABILITIES

- +

EQUITIES

- +

Double-Entry Accounting

Exh.2.10


Slide 2-30

RevenuesRevenues ExpensesExpensesRetained EarningsRetained Earnings

DividendsDividends_ + _

Debit Credit

Ret. Earnings

- +Debit Credit

Dividends

+ -Debit Credit

Expenses

+ -Debit Credit

Revenues

- +

Double-Entry Accounting - Detail of Effects on Equity

Exh.2.11


Slide 2-31

Step 1: Examine source documents.

Remember these two steps?Now let’s look at some

additional steps.

Steps in Processing Transactions


Step 2: Analyze transactions.


Slide 2-32

ACCOUNT NAME: ACCOUNT No.

Date Description PR Debit Credit Balance

Step 4: Record the journal information in a

ledger.

Step 3: Record transactions in a

journal.

Step 5: Prepare a trial balance.

Steps in Processing Transactions

Step 1: Examine source documents.


Step 2: Analyze transactions.


Slide 2-33

Transaction Date

Transaction Date

Titles of Affected Accounts

Titles of Affected Accounts

Dollar amount of debits and credits

Dollar amount of debits and credits

Transaction explanation

Transaction explanation

General Journal for FastForward


Slide 2-34

T-accounts are useful illustrations, but balance column ledger accounts are used in practice.

Balance Column Ledger


Slide 2-35

Balance Column LedgerNote the the t-account tool is derived from the

debit and credit columns of the ledger.


Slide 2-36

The last line in the balance column shows the current balance in the account.

The last line in the balance column shows the current balance in the account.

Exh. 2.16

Balance Column Ledger


Slide 2-37

1 Identify the account.

Posting Journal Entries - Example


Slide 2-38

2 Enter the date.



Slide 2-39

3Enter the amount.



Slide 2-40

4Enter the journal reference.



Slide 2-41

5

Compute the balance.



Slide 2-42

Enter the ledger reference. 6



Slide 2-43

A Trial Balance is a listing of all

accounts and their

balances at a point in

time.

A Trial Balance is a listing of all

accounts and their

balances at a point in

time.


Slide 2-44

Income Statement

Inflows of assets in exchange for products and

services provided to customers.

Inflows of assets in exchange for products and

services provided to customers.

Outflows or the using up of assets

that result from providing

products and services to customers.

Outflows or the using up of assets

that result from providing

products and services to customers.

Exh.2.19


Slide 2-45

Statement of Retained EarningsBeginning of period Retained Earnings is adjusted for dividends paid and net income (or loss) as reported on

the Income Statement.

Beginning of period Retained Earnings is adjusted for dividends paid and net income (or loss) as reported on

the Income Statement.

Exh.2.19


Slide 2-46

Exh.2.19

Balance SheetAssets are economic resources owned by a

business. They are expected to provide future benefits to the business.

Assets are economic resources owned by a business. They are expected to provide

future benefits to the business.

Liabilities are obligations of the business. They

are claims against the

assets of the business.

Liabilities are obligations of the business. They

are claims against the

assets of the business.

Equity is the owner’s claim on the assets of the business. It is the residual interest in

the assets after deducting liabilities.

Equity is the owner’s claim on the assets of the business. It is the residual interest in

the assets after deducting liabilities.


Slide 2-47

Describesthe

sources and usesof cash

for areportingperiod.

Describesthe

sources and usesof cash

for areportingperiod.

Exh.2.19


Slide 2-48

Generally, dollar signs ($) are not used in the journals

or ledgers.

Generally, dollar signs ($) are not used in the journals

or ledgers.

RoundingRoundingRound numbers in financial

statements to the nearest dollar.

Round numbers in financial statements to the nearest

dollar.

ACCOUNT NAME: ACCOUNT No.

Date Description PR Debit Credit Balance

Formatting Conventions


Slide 2-49

Describes the relationship between net income for the period and average equity.

Helps an owner judge the compnay’s profitability compared to other business or personal opportunities.

Using the Information - Return on Equity


Slide 2-50

End of Chapter 2

Now, was that debits to the left or credits

to the left?I sure wish I had paid

more attention in class!