3-1 ©2006 prentice hall, inc.. 3-2 ©2006 prentice hall, inc. the acctg info system and the acctg...
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3-1©2006 Prentice Hall, Inc.
3-2©2006 Prentice Hall, Inc.
THE ACCTG INFO SYSTEMTHE ACCTG INFO SYSTEMAND THE ACCTG CYCLEAND THE ACCTG CYCLE (1 of (1 of
2)2)
Learning objectivesKeeping track of business transactio
nsRecording balance sheet account tr
ansactions—debits and creditsJournals and the General LedgerRecording Income Statement Trans
actions
3-3©2006 Prentice Hall, Inc.
THE ACCTG INFO SYSTEMTHE ACCTG INFO SYSTEMAND THE ACCTG CYCLEAND THE ACCTG CYCLE (2 of (2 of
2)2)
The accounting cycleRecording, posting, and trial
balanceFinancial statement analysisBusiness risk, control, and
ethics
3-4©2006 Prentice Hall, Inc.
Learning ObjectivesLearning Objectives(1 of 2)(1 of 2)
Explain the general ledger system and use debits and credits to record balance sheet transactions
Use debits and credits to record income statement transactions
Explain the first three steps in the accounting cycle and the purpose of each step
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Learning ObjectivesLearning Objectives(2 of 2)(2 of 2)
Post journal entries to the general ledger and prepare a trial balance
Compute and explain working capital and the quick ratio
Recognize the risks associated with using a traditional accounting system
3-6©2006 Prentice Hall, Inc.
Keeping Track of Keeping Track of Business TransactionsBusiness Transactions
Enterprise Resource Planning (ERP) systemsA single, integrated information system
whereby data is entered once and used by the entire enterprise
Traditional general ledger systemAn accounting system separate from other
information systems in an enterprise
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Balance Sheet Accounts Balance Sheet Accounts and Debits & Creditsand Debits & Credits
Double-entry bookkeepingDebit an credit definitionsT-accountsT-accounts and the accounting equ
ation
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Double-entry Bookkeeping
Double-entry bookkeepingFinancial information record-keeping
using debit-credit accounting systemAll transactions affect at least two
accountsKeeps the accounting equation in balance
Assets = Liabs + Equity + Rev - Exp
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Debit and Credit Definitions
Debit means left.Positive items on the left side of
the accounting equation increase with debits.
Credit means right. Positive items on the right side of
the accounting equation increase with credits.
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T-Accounts
T-AccountsRepresent a single general ledger
accountAccount
Debit (Dr.) Credit (Cr.)
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T-accounts and the Accounting Equation
Liabilities EquityAssets =
=Assets
Dr. Cr.+ -
Liabilities
Dr. Cr.- +
+
+
Since assets increase with debits, why does the bank credit your account when you make a deposit into your bank account?
Contr Cap
Dr. Cr.- +
Ret Earn
Dr. Cr.- +
+
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©2006 Prentice Hall, Inc.
Journals and the General Journals and the General LedgerLedger
Characteristics of a general ledger systemJournalsGeneral ledgerPostingChart of accounts
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Journals(1 of 3)
Place where transactions are initially recorded in chronological order
Why are there several different types of journals? What information do they record?
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©2006 Prentice Hall, Inc.
Journals(2 of 3)
Journal entryRecord of a single transaction that is
entered in a company’s journal using debits and credits
Parts of a journal entryDate or other form of referenceDebit accounts written first
Amounts written in the left column
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©2006 Prentice Hall, Inc.
Journals(3 of 3)
Parts of a journal entry (continued)Credit accounts written below debit
accounts and indentedAmount written in the right column
Brief explanation of the transactionDate Transaction Debit Credit
Feb 2 Land 200,000
Notes Payable 200,000
Record land purchase on acct
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©2006 Prentice Hall, Inc.
General ledger
Primary record of a company’s financial information
Organized by accountsAn account is the basic
classification unit of accountingAccumulate increases and
decreases in all accounts
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©2006 Prentice Hall, Inc.
Posting
Process of transferring financial information about accounts from journals to the general ledger
Why aren’t transactions recorded directly into the general ledger?Why are they first recorded in a
journal?
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©2006 Prentice Hall, Inc.
Chart of accounts
A list of all of the accounts in a firm’s accounting recordsEach account is numbered
Account numbers correspond to the type of account
E.g., assets use 100’s, liabilities use 200’s, equity use 300’s, revenues use 400’s, and expenses use 500’s
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Recording Income Recording Income Statement TransactionsStatement Transactions
Expanded accounting equation with T-accounts
Recording revenueRecording expenses
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©2006 Prentice Hall, Inc.
Expanded Accounting Equation
with T-Accounts
Liabilities EquityAssets =
=Assets
Dr. Cr.+ -
Liabilities
Dr. Cr.- +
+
+
Dr. Cr.
Revenues
- ++ - Dr. Cr.
Expenses
+ -
- +Dr. Cr.
Common Stock
Dr. Cr.
Dividends
+ -Dr. Cr.
Retained Earnings
- +
+ -
Why do expenses and dividends increase with debits instead of credits? Hint: what effect to dividends and expenses have on retained earnings?
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©2006 Prentice Hall, Inc.
Recording Revenue(1 of 3)
Revenue increases retained earningsPositive on the right side of the
accounting equationIncrease with creditsDecrease with debits
Revenue is NOT recorded directly into the retained earnings account
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©2006 Prentice Hall, Inc.
Recording Revenue(2 of 3)
Types of revenue accountsOperating revenue
Revenue from normal operationsExamples: service revenue, sales revenue
Non-operating revenueRevenue that is not related to company’s
primary businessExample: interest revenue
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Recording Revenue(3 of 3)
Example: Pylon Consultants, Inc. provides $5,000 of services for cashWhat accounts are affected?
Do they increase or decrease?Do they increase with debits or
credits?Dr. Cr. Dr. Cr.
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©2006 Prentice Hall, Inc.
Recording Expenses(1 of 3)
Expenses decrease retained earningsNegative on the right side of the
accounting equation Would be positive on the left side
Increase with debitsDecrease with credits
Expenses are NOT recorded directly into the retained earnings account
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©2006 Prentice Hall, Inc.
Recording Expenses(2 of 3)
Types of expense accountsOperating expenses
Cost of salesOther operating expenses
Examples: salaries expense, advertising expenseNon-operating expenses
Expenses not related to company’s primary business
Example: interest expense, income tax expense
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©2006 Prentice Hall, Inc.
Recording Expenses(3 of 3)
Example: Pylon Consultants, Inc. pays $5,000 for advertising expenseWhat accounts are affected?
Do they increase or decrease?Do they increase with debits or
credits?Dr. Cr. Dr. Cr.
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©2006 Prentice Hall, Inc.
The Accounting CycleThe Accounting Cycle(1 of 3)(1 of 3)
Timeline for an accounting period
Shows what an accounting information system must accomplish from the beginning to end of an accounting period
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©2006 Prentice Hall, Inc.
The Accounting CycleThe Accounting Cycle(2 of 3)(2 of 3)
Steps in the accounting cycle1. Analyze and record transactions in
journal2. Post journal entries to general ledg
er3. Prepare unadjusted trial balance
At end of the accounting period
4. Prepare adjusting journal entries Post them to general ledger
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©2006 Prentice Hall, Inc.
The Accounting CycleThe Accounting Cycle(3 of 3)(3 of 3)
Steps in the accounting cycle (cont’d)5. Prepare an adjusted trial balance 6. Prepare the financial statements7. Prepare closing entries
Close temporary accounts Post temporary accounts to general ledger
8. Prepare post-closing trial balance sheet
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Analyze and Record Transactions in Journal (1 of 2)
Goal is to get financial information recorded accurately on a timely basis
Analyzing transactionsWhich accounts are affected?
Assets, liabilities, equity revenue, expenses?
Which specific accounts are affected?
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Analyze and Record Transactions in Journal (2 of 2)
Is the amount of revenue earned affected by when the cash is collected?
What is the relationship between expenses and revenue?
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Post Journal Entries to General Ledger
PostingTransferring the amounts from
journal entries to the general ledger accounts?
Why is posting important?
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Prepare Unadjusted Trial Balance
Trial balanceA list of all accounts in the ledger with
debit and credit balancesAt a given point in time
Unadjusted trial balance done before adjusting entries prepared and posted
What errors could be present when the trial balance balances?
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©2006 Prentice Hall, Inc.
Recording Recording Posting and Trial BalancePosting and Trial Balance
Recording transactionsPosting transactions to the
general ledgerPreparing a trial balancePreparing an income statement
and balance sheet
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©2006 Prentice Hall, Inc.
Recording Transactions(1 of 2)
1. Stockholders invested $40,000 cash to start Bull Riders, a rodeo training school
2. Paid $2,000 for advertising expenses3. Paid $2,400 for a 1-year insurance
policy4. Performed $9,000 or rodeo training
on account5. Received the electric bill for March.
Bill is due on April 12
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Recording Transactions(2 of 2)
6. Paid $1,350 for Miscellaneous expenses
7. Received $6,500 from customers for services provided in transaction 4
8. Purchased a mechanical bull machine for $3,500 by signing a note payable due on December 31
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Transaction 1March 1
Stockholders invested $40,000 cash to start Bull Riders, a rodeo training school
Date Transaction Debit Credit
Assets = Liab. + Cont. Cap. + R/E
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©2006 Prentice Hall, Inc.
Transaction 2March 6
Paid $2,000 for advertising expenses
Date Transaction Debit Credit
Assets = Liab. + Cont. Cap. + R/E
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Transaction 3March 9
Paid $2,400 for a 1-year insurance policy
Date Transaction Debit Credit
Assets = Liab. + Cont. Cap. + R/E
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Transaction 4March 14
Performed $9,000 or rodeo training on account
Date Transaction Debit Credit
Assets = Liab. + Cont. Cap. + R/E
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©2006 Prentice Hall, Inc.
Transaction 5March 18
Received the electric bill for March. Bill is due on April 12
Date Transaction Debit Credit
Assets = Liab. + Cont. Cap. + R/E
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Transaction 6March 21
Paid $1,350 for Miscellaneous expenses
Date Transaction Debit Credit
Assets = Liab. + Cont. Cap. + R/E
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Transaction 7March 24
Received $6,500 from customers for services provided on March 14 (t/a 4)
Date Transaction Debit Credit
Assets = Liab. + Cont. Cap. + R/E
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Transaction 8March 28
Purchased a mechanical bull machine for $3,500 by signing a note payable due on December 31
Date Transaction Debit Credit
Assets = Liab. + Cont. Cap. + R/E
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Posting Transactions to General Ledger
Dr. Cr. Dr. Cr. Dr. Cr.
Dr. Cr. Dr. Cr. Dr. Cr.
Dr. Cr. Dr. Cr. Dr. Cr.
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Preparing a Trial Balance
Account Debit Credit
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Preparing an Income Statement
(1 of 2)
Revenue
Total RevenuesExpenses
Total ExpensesNet income
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Preparing a Balance Sheet(2 of 2)
Assets:CashAccounts ReceivablePrepaid InsuranceTotal current assetsOffice Equipment
Total Assets Liabilities and Owners’ Equity
Accounts PayableNote PayableTotal Current LiabilitiesCommon StockRetained Earnings
Total Liabilities and Equity
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Financial Statement Financial Statement AnalysisAnalysis
(1 of 2)(1 of 2)
Working capitalAbsolute measure of liquidity
Current ratio is a relative measure of liquidityAbility of a company to meet its short-
term obligationsCurrent assets – current liabilities
How can a company increase its working capital?
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Financial Statement Financial Statement AnalysisAnalysis
(2 of 2)(2 of 2)
Quick ratio (acid test)Relative measure of liquidity
More conservative measure of liquidity than the current ratio
Uses only the most liquid assets in numerator
Easiest to convert to meet current obligations
Cash + s-t investments + A/R net Current liabilities
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Business Risk, Control, Business Risk, Control, and Ethicsand Ethics
Three most significant risks associated with information systemsErrors in recording an updating infor
mationUnauthorized access to the systemLoss of data
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Errors in Recording and Updating Information (1 of 2)
Input and processing controlsEnsure only authorized transactions are
entered into the systemAssure the accuracy of the input and
processing of the data that are recorded Reconciliation and control reports
Catch errors in data input and processing
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Errors in Recording and Updating Information (2 of 2)
Documentation to provide supporting evidence for recorded transactions Keep errors from occurring and
catch errors that have occurred
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Loss of Data
Loss of data can cripple an organization
Need disaster recovery planData backup in off-site facility
Comments or questions about PowerPoint Slides?Contact Dr. Richard Newmark atUniversity of Northern Colorado’s
Kenneth W. Monfort College of [email protected] 3-55
©2006 Prentice Hall, Inc.