ch03 intermediate accounting ifrs edition vol 1 the accpunting information system

8/20/2019 Ch03 Intermediate Accounting Ifrs Edition Vol 1 the Accpunting Information System

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C H A P T E R 3

THE ACCOUNTING

INFORMATION SYSTEM

Intermediate AccountingIFRS Edition

Kieso, Weygandt, and Warfield


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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.

Learning Objectives


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Identifying and recording

Journalizing

Posting

Trial balance

Adjusting entries

Adjusted trial balancePreparing financialstatements

Closing

Post-closing trial balance

Reversing entries

Summary

Accounting

Information System

The Accounting

Cycle

Financial

Statements For

Merchandisers

Basic terminology

Debits and credits

Accounting equation

Financial statementsand ownershipstructure

Income statement

Statement of retainedearnings

Statement of financialposition

Closing entries

The Accounting Information System


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Collects and processes transaction data.

Disseminates the information to interested parties.

Accounting Information System

Accounting Information System (AIS)


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Basic Terminology

LO 1 Understand basic account ing terminolo gy.

Event

Transaction

Account

Real Account

Nominal Account

Ledger

Journal

Posting

Trial Balance

Adjusting Entries

Financial Statements

Closing Entries


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Debits and Credits

LO 2 Explain dou ble-entry rules.

An Account shows the effect of transactions on agiven asset, liability, equity, revenue, or expenseaccount.

Double-entry accounting system (two-sided effect).

Recording done by debiting at least one account andcrediting another.

DEBITS must equal CREDITS.


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Account Name

Debit / Dr. Credit / Cr.

Debits and Credits

An arrangement that shows theeffect of transactions on anaccount.

Debit = ―Left‖

Credit = ―Right‖

Account


An Account can

be illustrated in a

T-Account form.


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Account Name


Debits and Credits

If Debit entries are greater than Credit entries, theaccount will have a debit balance.


$10,000 Transaction #2$3,000

$15,000

8,000Transaction #3

Balance

Transaction #1


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Chapter

3-23

AssetsAssets


Normal BalanceNormal Balance

Chapter

3-27



ExpenseExpense

Chapter

3-24

LiabilitiesLiabilities



Chapter

3-25



EquityEquity

Chapter

3-26



RevenueRevenue

Normal

BalanceCredit

Normal

BalanceDebit

Debits and Credits Summary

LO 2 Explain doub le-entry rules.


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Statement of Financial Position Income Statement

= + =-Asset Liability Equity Revenue Expense

Debit

Credit

Debits and Credits Summary



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The Accounting Equation


Relationship among the assets, liabilities and equity of abusiness:

The equation must be in balance after every transaction.

For every Debit there must be a Credit.

Illustration 3-3


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Double-Entry System Illustration

Assets Liabilities Equity= +

1. Owners invest $40,000 in exchange for share capital

+ 40,000 + 40,000



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Assets Liabilities= +

2. Disburse $600 cash for secretarial wages.

- 600 - 600(expense)



Equity


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3. Purchase office equipment priced at $5,200, giving a10 percent promissory note in exchange.

+ 5,200 + 5,200


Equity


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4. Received $4,000 cash for services rendered.

+ 4,000 + 4,000(revenue)


Equity


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5. Pay off a short-term liability of $7,000.

- 7,000 - 7,000


Equity


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6. Declared a cash dividend of $5,000.

+ 5,000 - 5,000



Equity


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7. Convert a long-term liability of $80,000 into ordinaryshares.

- 80,000 + 80,000


Equity


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8. Pay cash of $16,000 for a delivery van.


- 16,000

+ 16,000

Note that the accounting equation equality ismaintained after recording each transaction.

Equity


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Ownership structure dictates the types of accounts thatare part of the equity section.

Proprietorship or

Partnership Corporation

Share capital

Share premium

Dividends

Retained Earnings

Financial Statements and Ownership Structure


Capital account

Drawing account


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The Accounting Cycle

LO 3 Ident i fy steps in the acco unt ing cy cle.

Transactions

1. Journalization

6. Financial Statements

7. Closing entries

8. Post-closing trail balance

9. Reversing entries

3. Trial balance

2. Posting

5. Adjusted trial balance

4. AdjustmentsWorkSheet

Illustration 3-6


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Identify and Recording Transactions

What to Record?

An item should be recognized in the financial

statements if it is an element, is measurable,

and is relevant and afaithful representation.

LO 3 Ident i fy steps in the acco unt ing cy cle.


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General Journal – a chronological record of transactions.Journal Entries are recorded in the journal.

1. Journalizing

LO 4 Record transact ions in journals, post toledger accou nts, and pr epare a tr ial balance.

September 1: Shareholders invested $15,000 cash in the

corporation in exchange for ordinary shares.Illustration 3-7


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Posting – the process of transferring amounts from the journalto the ledger accounts.

2. Posting


Illustration 3-7

Illustration 3-8


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Posting – Transferring amounts from journal to ledger.

2. Posting

LO 4

Illustration 3-8


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Expanded Example


2. Posting

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, equity, revenues, or expense.


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1. October 1: Shareholders invest $100,000 cash in anadvertising venture to be known as Pioneer Advertising Agency Inc.

Share capital - ordinary 100,000

Cash 100,000Oct. 1

Debit Credit

Cash

100,000 100,000

Debit Credit

Share Capital - Ordinary

2. Posting


Illustration 3-9


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2. October 1: Pioneer Advertising purchases office equipmentcosting $50,000 by signing a 3-month, 12%, $50,000 notepayable.

Notes payable 50,000

Office equipment 50,000Oct. 1

Debit Credit

Office Equipment

50,000 50,000

Debit Credit

Notes Payable

2. Posting


Illustration 3-10


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3. October 2: Pioneer Advertising receives a $12,000 cashadvance from KC, a client, for advertising services that areexpected to be completed by December 31.

Unearned service revenue 12,000

Cash 12,000Oct. 2

Debit Credit

Cash

100,000 12,000

Debit Credit

Unearned Service Revenue

2. Posting

12,000


Illustration 3-11


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4. October 3: Pioneer Advertising pays $9,000 office rent, incash, for October.

Cash 9,000

Rent expense 9,000Oct. 3

Debit Credit

Cash

100,000 9,000

Debit Credit

Rent Expense

2. Posting

12,000

9,000

LO 4 Record transact ions in journals, post to

ledger accou nts, and pr epare a tr ial balance.

Illustration 3-12


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5. October 4: Pioneer Advertising pays $6,000 for a one-year

insurance policy that will expire next year on September 30.

Cash 6,000

Prepaid insurance 6,000Oct. 4

Debit Credit

Cash

100,000 6,000

Debit Credit

Prepaid Insurance

2. Posting

12,000

9,000

6,000



Illustration 3-13


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6. October 5: Pioneer Advertising purchases, for $25,000 onaccount, an estimated 3-month supply of advertisingmaterials from Aero Supply.

Accounts payable 25,000

Advertising supplies 25,000Oct. 5

Debit Credit

Advertising Supplies

25,000 25,000

Debit Credit

Accounts Payable

2. Posting



Illustration 3-14


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7. October 9: Pioneer Advertising signs a contract with a localnewspaper for advertising inserts (flyers) to be distributedstarting the last Sunday in November. Pioneer will startwork on the content of the flyers in November. Payment of$7,000 is due following delivery of the Sunday papers

containing the flyers.

2. Posting



Illustration 3-15


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8. October 20: Pioneer Advertising’s board of directorsdeclares and pays a $5,000 cash dividend to shareholders.

Cash 5,000

Dividends 5,000Oct. 20

Debit Credit

Cash

100,000 5,000

Debit Credit

Dividends

2. Posting

12,000

9,000

6,000

5,000



Illustration 3-16


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9. October 26: Employees are paid every four weeks. Thetotal payroll is $2,000 per day. The pay period ended onFriday, October 26, with salaries of $40,000 being paid.

Cash 40,000

Salaries expense 40,000Oct. 26

Debit Credit

Cash

100,000 40,000

Debit Credit

Salaries Expense

2. Posting

12,0009,0006,000

5,000

40,000



Illustration 3-17


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10. October 31: Pioneer Advertising receives $28,000 in cash

and bills Copa Company $72,000 for advertising servicesof $100,000 provided in October.

Accounts receivable 72,000

Cash 28,000Oct. 31

Debit Credit

Cash

100,000 72,000

Debit Credit

Accounts Receivable

2. Posting

12,0009,0006,000

5,000

40,000

Service revenue 100,000

100,000

Debit Credit

Service Revenue

28,000

80,000

Illustration 3-18


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Trial Balance – A list of each

account and its

balance; used

to proveequality of debit

and credit

balances.

3. Trial Balance



Illustration 3-19


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4. Adjusting Entries

LO 5 Expla in the reason s for prepar ing adjust ing entr ies.

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.


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Types of Adjusting Entries

1. Prepaid Expenses.

Expenses paid in cash and

recorded as assets before they are used or consumed.

Deferrals

3. Accrued Revenues.

Revenues earned but not

yet received in cash orrecorded.

4. Accrued Expenses.

Expenses incurred but not

yet paid in cash or recorded.

2. Unearned Revenues.

Revenues received in cash

and recorded as liabilitiesbefore they are earned.

Accruals


Illustration 3-20


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Deferrals areeither

prepaid

expenses

or

unearned

revenues.

Adjusting Entries for Deferrals

Illustration 3-21



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Payment of cash that is recorded as an asset becauseservice or benefit will be received in the future.

Adjusting Entries for “Prepaid Expenses”

insurance

supplies

advertising

Cash Payment Expense RecordedBEFORE

rent

purchasing buildings andequipment

Prepayments often occur in regard to:



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Suppl ies. Pioneer purchased advertising supplies costing

$25,000 on October 5. Prepare the journal entry to record the

purchase of the supplies.

Cash 25,000

Advertising supplies 25,000Oct. 5

Debit Credit


25,000 25,000

Debit Credit

Cash




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Suppl ies. An inventory count at the close of business on

October 31 reveals that $10,000 of the advertising supplies are

still on hand.

Advertising supplies 15,000

Advertising supplies expense 15,000Oct. 31

Debit Credit


25,000 15,000

Debit Credit

Advertising SuppliesExpense

15,000


10,000



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StatementPresentation:

Advertising

supplies identifiesthat portion of the

asset’s cost that

will provide future

economic benefit.


Illustration 3-35



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Insurance. On Oct. 4th, Pioneer paid $6,000 for a one-year fire

insurance policy, beginning October 1. Show the entry to

record the purchase of the insurance.

Cash 6,000

Prepaid insurance 6,000Oct. 4

Debit Credit

Prepaid Insurance

6,000 6,000

Debit Credit

Cash




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Insurance. An analysis of the policy reveals that $500 ($6,000 /

12) of insurance expires each month. Thus, Pioneer makes the

following adjusting entry.

Prepaid insurance 500

Insurance expense 500Oct. 31

Debit Credit

Prepaid Insurance

6,000 500

Debit Credit

Insurance Expense


500

5,500



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Insurance

expense identifiesthat portion of the

asset’s cost that

expired in

October.


Illustration 3-34



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Depreciat ion. Pioneer Advertising estimates depreciation on its

office equipment to be $400 per month. Accordingly, Pioneer

recognizes depreciation for October by the following adjusting

entry.

Accumulated depreciation 400Depreciation expense 400Oct. 31

Debit Credit

Depreciation Expense

400 400

Debit Credit

Accumulated Depreciation




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Accumulated

Depreciation—is acontra asset

account.


Illustration 3-35



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Depreciation

expense identifiesthat portion of the

asset’s cost that

expired in

October.


Illustration 3-34



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Receipt of cash that is recorded as a liability because therevenue has not been earned.

Adjusting Entries for “Unearned Revenues”

rent

airline tickets

school tuition

Cash Receipt Revenue RecordedBEFORE

magazine subscriptions

customer deposits

Unearned revenues often occur in regard to:



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Unearned Revenue.

Pioneer Advertising received $12,000 on

October 2 from KC for advertising services expected to becompleted by December 31. Show the journal entry to recordthe receipt on Oct. 2nd.

Unearned service revenue 12,000

Cash 12,000Oct. 2

Debit Credit

Cash

12,000 12,000

Debit Credit





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Debit Credit

Service Revenue

100,000 12,000

Debit Credit


4,000

8,000


Unearned Revenues. Analysis reveals that Pioneer earned$4,000 of the advertising services in October. Thus, Pioneermakes the following adjusting entry.


Unearned service revenue 4,000Oct. 31

4,000



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Unearned service

revenue identifiesthat portion of the

liability that has

not been earned.

Illustration 3-35




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Service revenue

represents thatportion of the

liability that was

earned in October.

Illustration 3-34




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Revenues earned but not yet received in cash orrecorded.

Adjusting Entries for “Accrued Revenues”

rent

interest

services performed

BEFORE

Accrued revenues often occur in regard to:

Cash ReceiptRevenue Recorded

Adjusting entry results in:



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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.


Accounts receivable 2,000Oct. 31

Debit Credit

Accounts Receivable

72,000


Debit Credit

Service Revenue

100,000

4,000

2,000

106,000

2,000

74,000



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Slide3-65 LO 5

Illustration 3-34


Statement

Presentation

Illustration 3-35


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3-66

Expenses incurred but not yet paid in cash or recorded.

Adjusting Entries for “Accrued Expenses”

rentinterest

BEFORE

Accrued expenses often occur in regard to:

Cash PaymentExpense Recorded

salariestaxes

Adjusting entry results in:



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3-68

Interest payable 500

Interest expense 500Oct. 31

Debit Credit

Interest Expense

500 500

Debit Credit

Interest Payable


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.




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3-69 LO 5

Illustration 3-34

Adjusting Entries for Accrued Expenses

Statement

Presentation

Illustration 3-35


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3-70


Ac crued Salar ies. At October 31, the salaries for these days

represent an accrued expense and a related liability to Pioneer.

The employees receive total salaries of $10,000 for a five-day

work week, or $2,000 per day.



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Slide

3-71

Salaries payable 6,000

Salaries expense 6,000Oct. 31

Debit Credit

Salaries Expense

40,000 6,000

Debit Credit

Salaries Payable


Accrued Salar ies. 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.

6,000

46,000



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Adj ti E t i f “A d E ”


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3-73

Salaries expense 34,000

Salaries payable 6,000Nov. 23

Debit Credit

Salaries Expense

34,000 6,000

Debit Credit

Salaries Payable


Accrued Salar ies. On November 23, Pioneer will again pay total

salaries of $40,000. Prepare the entry to record the payment of

salaries on November 23.

Cash 40,000

6,000


Adj ti E t i f “A d E ”


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3-74


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


5 Adjusted Trial Balance


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Slide

3-75

Shows the balanceof all accounts,

after adjusting

entries, at the end

of the accounting

period.

5. Adjusted Trial Balance

LO 5

Illustration 3-33


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6 Preparing Financial Statements


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Slide

3-78

6. Preparing Financial Statements

LO 6

Illustration 3-35

7 Cl i E t i


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Slide

3-79

7. Closing Entries

LO 7 Prepare clo sing entr ies.

To reduce the balance of the income statement(revenue and expense) accounts to zero.

To transfer net income or net loss to equity.

Statement of financial position (asset, liability, and

equity) accounts are not closed.

Dividends are closed directly to the RetainedEarnings account.

7 Cl i E t i


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3-80

7. Closing Entries

LO 7

Illustration 3-36

7 Closing


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3-81

7. Closing

Entries Illustration 3-37

LO 7

8 Post Closing Trial Balance


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3-82

8. Post-Closing Trial Balance


Illustration 3-38


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Accounting Cycle Summarized


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Slide

3-84

Accounting Cycle Summarized


1. Enter the transactions of the period in appropriate journals.2. Post from the journals to the ledger (or ledgers).

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

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

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

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

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

8. Take a trial balance after closing (post-closing trial balance).

9. Prepare reversing entries (optional) and post to the ledger(s).

Financial Statements for a Merchandising Company


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Slide

3-85

Financial Statements for a Merchandising Company

LO 7

Illustration 3-39

Financial Statements of a Merchandising Company


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Slide

3-86

Financial Statements of a Merchandising Company

Illustration 3-40



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3-88

Internal controls are a system of checks and balances designed to

prevent and detect fraud and errors. Both of these actions arerequired under SOX.

Companies find that internal control review is a costly process. Onestudy estimates the cost for U.S. companies at over $35 billion,with audit fees doubling in the first year of compliance.

The enhanced internal control standards apply only to large publiccompanies listed on U.S. exchanges. There is continuing debate overwhether foreign issuers should have to comply.


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Slide

3-89

Most companies use accrual-basis accounting recognize revenue when it is earned and

expenses in the period incurred,

without regard to the time of receipt or payment of cash.

Under the strict cash basis, companies

record revenue only when they receive cash, and

record expenses only when they disperse cash.

Cash basis financial statements are not in conformity with IFRS.

LO 8 Dif ferent iate the cash basis of account ing

from the accrual basis of account ing .


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Slide

3-90

Illustration: Quality Contractor signs an agreement to construct agarage for $22,000. In January, Quality begins construction, incurs

costs of $18,000 on credit, and by the end of January delivers a

finished garage to the buyer. In February, Quality collects $22,000

cash from the customer. In March, Quality pays the $18,000 due the

creditors.Illustration 3A-1




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Slide

3-91

Illustration: Quality Contractor signs an agreement to construct agarage for $22,000. In January, Quality begins construction, incurs

costs of $18,000 on credit, and by the end of January delivers a

finished garage to the buyer. In February, Quality collects $22,000

cash from the customer. In March, Quality pays the $18,000 due the

creditors.Illustration 3A-2




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3-92

Conversion From Cash Basis To Accrual Basis

Illustration: Dr. Diane Windsor, like many small business owners,

keeps her accounting records on a cash basis. In the year 2010, Dr.

Windsor received $300,000 from her patients and paid $170,000 for

operating expenses, resulting in an excess of cash receipts over

disbursements of $130,000 ($300,000 - $170,000). At January 1 andDecember 31, 2010, she has accounts receivable, unearned service

revenue, accrued liabilities, and prepaid expenses as shown in

Illustration 3A-5.Illustration 3A-5




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Slide

3-93


Illustration: Calculate service revenue on an accrual basis.

Illustration 3A-5

Illustration 3A-8




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Slide

3-94


Illustration: Calculate operating expenses on an accrual basis.

Illustration 3A-5

Illustration 3A-11




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Slide

3-95

Conversion From Cash Basis To Accrual BasisIllustration 3A-12




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Slide

3-96

Theoretical Weaknesses of the Cash Basis

Today’s economy is considerably more lubricated by credit than

by cash.

The accrual basis, not the cash basis, recognizes all aspects of

the credit phenomenon.

Investors, creditors, and other decision makers seek timely

information about an enterprise’s future cash flows.




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Slide

3-97 LO 9 Ident i fy ing adjust ing entr ies that may be reversed.

Illustration of Reversing Entries—Accruals

Illustration 3B-1


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Slide


Illustration of Reversing Entries—Deferrals

Illustration 3B-2


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Slide


Summary of Reversing Entries

1. All accruals should be reversed.

2. All deferrals for which a company debited or credited the

original cash transaction to an expense or revenue

account should be reversed.

3. Adjusting entries for depreciation and bad debts are not

reversed.

Recognize that reversing entries do not have to be used.Therefore, some accountants avoid them entirely.


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Slide

3-102 LO 10 Prepare a 10-col um n work sh eet.

Adjusted

Trial

Balance

Illustration 3C-1


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Slide

3-103

The Worksheet:

Provides information needed for preparation of the

financial statements.

Sorts data into appropriate columns, which facilitates

the preparation of the statements.

LO 10 Prepare a 10-col um n work sh eet.

Preparing Financial Statements from a Worksheet


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Slide

3-104

Illustration 3-39

LO 10


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Slide

3-105

Illustration 3-40

LO 10 Prepare a 10-col um n work sh eet.


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Slide

3-106

Illustration 3-41

LO 10

Copyright


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