1 © copyright 2007 thomson south-western, a part of the thomson corporation. thomson, the star...
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© Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star
Logo, and South-Western are trademarks used herein under license.
FINANCIAL ACCOUNTING
2ND EDITION
BY
DUCHAC, REEVE, & WARREN
4 Accounting Information Systems
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LEARNING GOALS
When you finish this chapter, you should be able to
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1. Describe nature of business information systems.
2. Describe nature of accounting information system.
3. Describe, illustrate basic elements of transaction processing system.
LEARNING GOALSLEARNING GOALS
Continued
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LEARNING GOALSLEARNING GOALS
4. Describe, illustrate basic elements of financial reporting system.
5. Describe accounting cycle for double-entry accounting system.
6. Describe, illustrate computation, use of earning before interest, taxes, depreciation, amortization (EBITDA).
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SOUTHWEST AIRLINES
Southwest Airlines
Developed profitable low-cost airline
Using only Boeing 737s
Using secondary airports
Avoiding commission-based ticket sales
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LEARNING GOALSLEARNING GOALS
1Describe nature of business information system.
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BUSINESS INFORMATION SYSTEM
Collects, processes data
Distributes information to stakeholders
Collects, processes data
Distributes information to stakeholders
LG 1
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LEARNING GOALSLEARNING GOALS
2Describe nature of accounting information system.
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LG 2
EXHIBIT EXHIBIT 22
Financial, operating data
Financial, operating data
Accounting Information Systems
•Management Reporting
•Transactions Processing
•Financial Reporting
Accounting Information Systems
•Management Reporting
•Transactions Processing
•Financial Reporting
Stakeholders
Stakeholders
Stakeholders
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What information do these 3 systems produce?
LG 2
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MANAGEMENT REPORTING SYSTEM
MANAGEMENT REPORTING SYSTEM
• Provides internal information for decision making– Reports
• Budgets
• Variance analyses
• Provides internal information for decision making– Reports
• Budgets
• Variance analyses
LG 2
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TRANSACTION PROCESSING SYSTEM
TRANSACTION PROCESSING SYSTEM
• Records, summarizes effects of financial transactions into accounts
• Divides transactions into cycles– Revenue cycle– Purchasing cycle– Payroll cycle– Inventory cycle– Treasury cycle
• Records, summarizes effects of financial transactions into accounts
• Divides transactions into cycles– Revenue cycle– Purchasing cycle– Payroll cycle– Inventory cycle– Treasury cycle
LG 2
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FINANCIAL REPORTING SYSTEM
FINANCIAL REPORTING SYSTEM
• Produces financial statements– Income statement– Statement of retained earnings– Balance sheet– Statement of cash flows
• Produces financial statements– Income statement– Statement of retained earnings– Balance sheet– Statement of cash flows
LG 2
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LEARNING GOALSLEARNING GOALS
3Describe, illustrate basic elements of transaction processing system.
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THE ACCOUNT
Each account has a
Title
Recording place for debits
Recording place for credits
Each account has a
Title
Recording place for debits
Recording place for credits
LG 3
Left side
Debit
Right side
Credit
Title
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RULES OF DEBIT & CREDIT
• Normal balance of account is side used to increase
• Asset accounts have debit balances
• Example: cashCASH
DEBITS INCREASE
LG 3
Continued
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RULES OF DEBIT & CREDIT• Normal balance of account is side used to
increase
• Liability, Equity accounts have credit balances
• Example: Retained EarningsRETAINED EARNINGS
LG 3
CREDITS INCREASE
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BALANCE SHEET EQUATION
A = L + E
LG 3
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RULE 2 OF DEBIT & CREDIT: Assets
• Asset accounts on left side of equation are – Increased by debits and – Have debit balances
DEBIT BALANCE
ASSET ACCTS
+
LG 3
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RULE 2 OF DEBIT & CREDIT: Liability & Equity
• Liability & equity accounts on right side of equation are – Increased by credits and – Have credit balances
LIABILITY & EQUITY ACCTS
CREDIT BALANCE
+
LG 3
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RULE 2 OF DEBIT & CREDIT: Revenue
• Revenue accounts increase equity on right side of equation are – Increased by credits and – Have credit balances
REVENUE ACCOUNTS
CREDIT BALANCE
+
LG 3
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RULE 2 OF DEBIT & CREDIT: Expense
• Expense accounts decrease equity which is on right side of equation are – Increased by debits and – Have debit balances
DEBIT BALANCE
EXPENSE ACCTS
+
LG 3
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RULE 3 OF DEBIT & CREDIT
• For each transaction– Total debits will equal total credits
TRANSACTION
TOTAL CREDITS
TOTAL DEBITS
LG 3
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LG 3
EXHIBIT EXHIBIT 33
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RECORDING TRANSACTIONS
RECORDING TRANSACTIONS
• Transactions recorded in– Journals
• Organized by date
– Ledgers• Organized by account
Click the button to skip journal entries
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ENTRY 11/5: Bought Land
Buying land for cash
Decreases cash flows, investing
Has no effect on balance sheet
Has no effect on income statement
LG 3
11/5 Land
Cash
20,000
20,000
Click the button to skip journal entries
SCF BS IS
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ENTRY 11/10: Bought Supplies
Buying supplies on account
Has no effect on cash flows
Increases assets & liabilities
Has no effect on income statement
LG 3
10 Supplies
Accounts Payable
1,350
1,350
Click the button to skip journal entries
SCF BS IS
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ENTRY 11/18: Earned Fees
Received cash for fees earned
Increases cash flows from operations
Increases assets & equity
Increases revenue
LG 3
18 Cash
Fees Earned
7,500
7,500
Click the button to skip journal entries
SCF BS IS
R
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ENTRY 11/30: Paid Expenses
Paid cash for expenses
Decreases cash flow operations
Decreases assets & equity
Increases expenses on income statement
LG 3
30 Wages Expense
Rent Expense
Utilities Expense
Misc. Expense
Cash
2125
800
450
275
3,650
Click the button to skip journal entries
SCF BS IS
E
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ENTRY 11/30: Paid Account
Paid cash to satisfy accounts payable
Decreases cash flow operations
Decreases assets, liabilities
Has no effect on income statement
LG 3
30 Accounts payable
Cash
950
950
Click the button to skip journal entries
SCF BS IS
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ENTRY 11/30: Paid Dividend
Paid cash dividends
Decreases cash flow financing
Decreases assets, equity
Has no effect on income statement
LG 3
2,000
2,000
30 Dividends
Cash
SCF BS IS
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EXERCISE 4-2a (modified)EXERCISE 4-2a (modified)
Press “Enter” or click left mouse button for answer.
Identify accounts of Continental Airlines with normal debit balance.
1. Accounts payable
2. Fuel expense
3. Traffic liability
4. Cargo revenue
5. Commissions expense
6. Flight equipment
7. Passenger revenue
8. Spare parts & supplies
LG 3
Click the button to skip this exercise
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EXERCISE 4-2b (modified)EXERCISE 4-2b (modified)
Press “Enter” or click left mouse button for answer.
Identify accounts of Continental Airlines with normal credit balance.
1. Accounts payable
2. Fuel expense
3. Traffic liability
4. Cargo revenue
5. Commissions expense
6. Flight equipment
7. Passenger revenue
8. Spare parts & supplies
LG 3
Click the button to skip this exercise
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POSTING TO LEDGERSome Examples
CASH LAND
REVENUE
11/1 25,000 20,000 11/5 11/5 20,000
11/18 7,500
7,500 11/18
LG 3
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LG 3
Trial balance lists accounts, balances in debit, credit columns to check recording process.
EXHIBIT EXHIBIT 77
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LEARNING GOALSLEARNING GOALS
4Describe, illustrate basic elements of financial reporting system.
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END OF YEAR: 12/31/2007END OF YEAR: 12/31/2007
• Transactions for December recorded– Journals, ledgers
• Trial balance for December transactions• Adjustments recorded
– Supplies, insurance used– Revenue earned– Wages owed– Depreciation
• Transactions for December recorded– Journals, ledgers
• Trial balance for December transactions• Adjustments recorded
– Supplies, insurance used– Revenue earned– Wages owed– Depreciation
Continued
LG 4
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END OF YEAR: 12/31/2007END OF YEAR: 12/31/2007
• Adjusted trial balance– Final check before financial statements
• Prepare financial statements– Income statement– Statement retained earnings– Balance sheet– Statement cash flows
• Adjusted trial balance– Final check before financial statements
• Prepare financial statements– Income statement– Statement retained earnings– Balance sheet– Statement cash flows
LG 4
See Exhibit 12 p. 166-167
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• Statement of cash flows linked to cash on balance sheet
• Net income from income statement linked to retained earnings statement
• Retained earnings linked to balance sheet in stockholders’ equity
INTEGRATED FINANCIAL STATEMENTS (IFS)
INTEGRATED FINANCIAL STATEMENTS (IFS)
LG 4
Click the button to skip Exh. 12.
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EXHIBIT EXHIBIT 1212
IFS: Statement of cash flows linked to cash on balance sheet
LG 4
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EXHIBIT EXHIBIT 12 12 (cont.)(cont.)
IFS: Net income from income statement linked to retained
earnings statement
LG 4
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EXHIBIT EXHIBIT 12 12 (cont.)(cont.)
IFS: Retained earnings linked to balance sheet in stockholders’ equity
LG 4
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AFTER FINANCIAL STATEMENTS
• Closing entries– Transfer balances of temporary (revenue,
expense, dividends) accounts to retained earnings
– Zero balances of temporary accounts to carry forward
• Post-closing trial balance– Final check for asset, liability, equity account
balances
• Closing entries– Transfer balances of temporary (revenue,
expense, dividends) accounts to retained earnings
– Zero balances of temporary accounts to carry forward
• Post-closing trial balance– Final check for asset, liability, equity account
balances
LG 4
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LEARNING GOALSLEARNING GOALS
5Describe accounting cycle for double-entry accounting system.
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ACCOUNTING CYCLEACCOUNTING CYCLE
1. Transactions analyzed, recorded in journals
2. Transactions posted to ledgers3. Unadjusted trial balance prepared4. Adjustment data assembled, analyzed5. Adjusting entries prepared, recorded in
journal
Continued
LG 5
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ACCOUNTING CYCLEACCOUNTING CYCLE
6. Adjusting entries posted to ledger
7. Adjusted trial balance prepared
8. Financial statements prepared
9. Closing entries recorded in journal
10. Closing entries posted to ledgers
11. Post-closing trial balance prepared
LG 5
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THE END
CHAPTER 4