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The Accounting Information Processing

System

The Accounting Information Processing

System

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BASIC ACCOUNTING EQUATION[Corporation]

Assets = Liabilities + Stockholders’ Equity

Contributed(Paid-in)

Capital

Retained Earnings

Net Income (+)Net loss (-) Dividends (-)

Declared

Revenues & Gains (+) Expenses & Losses (-)

ParValue

ExcessOverPar

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Financial Accounting InformationFinancial Accounting Information

Permanent AccountsAssets

Liabilities

Owners’ Equity

Permanent AccountsAssets

Liabilities

Owners’ Equity

Temporary AccountsRevenues Dividends

Expenses

Gains & Losses

Temporary AccountsRevenues Dividends

Expenses

Gains & Losses

AccountsAccounts

Accounts and Transaction Recording

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Account Name

Debit Credit

Account Name

Debit Credit

Account Name

Debit Credit

A = L + OE

Application of Debits and Credits Application of Debits and Credits

PERMANENT ACCOUNTS

The balances in PERMANENT accounts

are carried over to future accounting periods.

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ASSETSASSETS

Debit for

Increase

Credit for Decrease

LIABILITIESLIABILITIES

Debit for

Decrease

Credit for Increase

EQUITIESEQUITIES

Debit for

Decrease

Credit for Increase

Application of Debits and Credits Application of Debits and Credits

A = L + OE

PERMANENT ACCOUNTS

The balances in PERMANENT accounts

are carried over to future accounting periods

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Application of debits and credits Application of debits and credits

REVENUES & GAINSREVENUES & GAINS

Debit for

Decrease

Credit for Increase

TEMPORARY ACCOUNTS(Subdivisions of Retained

Earnings)

EXPENSES, LOSSESEXPENSES, LOSSES

& DIVIDENDS & DIVIDENDS DECLAREDDECLARED

Debit for

Increase

Credit for Decrease

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The Accounting Cycle

During Accounting PeriodDuring Accounting Period

Identify transactions or events to be recorded.

ANALYSIS OF TRANSACTION IS THE KEY

Journalize transactions and events.

Posting from journals to ledger.

The Accounting Cycle is a series of sequential steps leading to the financial statements.

The Accounting Cycle is a series of sequential steps leading to the financial statements.

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At the end of the accounting period:At the end of the accounting period:

Prepare unadjusted trial balance. Journalize and post adjusting journal

entries.Prepare adjusted trial balance.Prepare financial statements. Journalize and post closing journal entries.Prepare post-closing trial balance.

The Accounting Cycle

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Source documents

Record in Journal

Financial Statements

Transaction Analysis

Post to Ledger

Unadjusted Trial Balance

Record & Post Adjusting

Entries

Adjusted Trial Balance

Close Temporary Accounts

Post-Closing Trial Balance

The Accounting Processing

Cycle

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UNADJUSTED TRIAL BALANCE

Consists of a listing of each general ledger account and its balance at the end of period.

– Debit balances in one column and credit balances in another

Serves as a convenient means for checking that the sum of debit account balances equals the sum of credit account balances.

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Trial Balance - ExampleTrial Balance - Example

The General Ledger is in

balance!DR = CR

The General Ledger is in

balance!DR = CR

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ADJUSTING JOURNAL ENTRIES

Accruals

Prepayments (Deferrals)

Corrections of errors

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ADJUSTING JOURNAL ENTRIESAccruals

Cash flows that occur AFTER expense and revenue recognition

Recorded when cash is to be paid or received in a future accounting period

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Your company pays its workers every Friday. Year-end ,12/31/X5, falls on

Wednesday. It is estimated that employees have earned salaries of $47,250 through Wednesday of the

week ended 1/2/X6.

AJEs Accrual Example

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ADJUSTING JOURNAL ENTRIES

Prepayments/Deferrals

Cash flows that occur BEFORE expense and revenue recognition

Portion that applies to future periods is deferred as a prepaid expense or unearned revenue

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PREPAYMENTS

Standard Recording Method

Records an asset upon payment of cash and liability upon receipt of cash before goods or services are provided

– Cash paid recorded as an asset (Prepaids)

– Cash received recorded as liability (Unearned revenue)

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Prepayment ExampleStandard Method

On 12/1/X5, your company paid $1,200 for a six-month insurance

policy. The $1,200 was recorded as Prepaid Insurance (an asset).

What AJE is needed on 12/31/X5?

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OTHER PREPAYMENTS

Jax, Inc. purchased equipment on June 30, 19X5, that cost $25,000 (recorded as “Equipment”). The equipment has an estimated useful life of 5 years and no salvage value. Jax uses straight-line

depreciation.

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Here comes something Here comes something that’s A LITTLE BIT that’s A LITTLE BIT

DIFFERENT!DIFFERENT!

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PREPAYMENTS

Expedient

Recording Method

Records an expense upon payment of cash before goods or services are consumed

Records revenue upon receipt of cash before goods or services are provided

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Prepayment ExampleExpedient Method

On 12/1/X5, your company paid $1,200 for a six-month insurance policy. The $1,200 was recorded as Insurance expense.

What AJE is needed on 12/31/X5?

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Prepare Adjusted Trial Balance

Includes all account balances after adjustments have been posted.

Used to produce the financial statements.

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Prepare Financial Statements

The income statement is always prepared first.

Includes the temporary account balances from the adjusted trial balance.

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Prepare Financial Statements The retained

earnings statement explains the changes in retained earnings during the year.

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Prepare Financial Statements

The Balance Sheet includes the permanent accounts.

Retained Earnings is taken from the Retained Earnings Statement.

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Closing Entries

Two purposes of closing journal entries:– Reduce to zero the balances of

temporary accounts related to earnings measurement and dividends

– Increase (or decrease) retained earnings by the net impact of

the temporary accounts for the period

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CLOSING ENTRIESFlow - Chart

Revenues

Expenses

Dividends Declared

Retained Earnings

11,200

11,115

50

11,200

11,115

8550 50

Note: Large type amounts are closing entries

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Prepare Post-Closing Trial Balance

Lists the balances of the permanent accounts after the closing process is finished.

Retained Earnings will show the end of period balance.

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WOW!