Chapter 3The Accounting Information System

*The Accounting EquationAssets = Liabilities + Capital + Retained Earnings*Assets = Liabilities + Shareholders Equity*Retained Earnings = Revenues Expenses DividendsAssets = Liabilities + Capital + Revenues Expenses Dividends

*The Accounting Cycle: StepsJournalize the transactionPost the transaction to general ledger (and sub-ledgers) accountsPrepare the (unadjusted) trial balancePrepare necessary adjusting journal entriesPrepare the (adjusted) trial balancePrepare financial statementsPrepare closing journal entries for the yearPrepare post-closing trial balance (optional)Prepare reversing entries (optional)

*3. Preparation of Trial BalancePIONEER ADVERTISING AGENCY INC. at October 31, 2010Cash80,000Revenue100,000Dividends5,000Notes Payable50,000AccountDebitCreditCash80,000Accounts Receivable72,000Advertising Supplies25,000Prepaid Insurance 6,000Office Equipment50,000Notes Payable 50,000Accounts Payable 25,000Unearned Service Revenue 12,000Common Shares100,000Dividends 5,000Service Revenue100,000Salaries Expense40,000Rent Expense 9,000TOTALS 287,000287,000

*3. Preparation of Trial BalanceThe trial balance only proves the mathematical accuracy of the ledger Errors may still exist such as the following:Transaction not recorded Journal entry posted twiceIncorrect accounts or amounts usedReasons for adjusting entries include:To record those events that are not journalized dailyTo record those costs, which expire with time and are therefore not recordedTo record item previously unrecorded

*4. Adjusting Entries

Adjusting Entries for Prepaid ExpensesPayment of cash that is recorded as an asset because service or benefit will be received in the future.insuranceCash PaymentExpense RecordedBEFORErentPrepayments often occur in regard to:On 12/01/2011 Coca-Cola paid $200m of insurance coverage for certain product liability and other claims that may occur in 2012. What j/e is recorded on Dec. 01, 2011? Jan 2012?advertising

When payment is received from customers for services (or goods) that will be provided in a future accounting period, a liability (unearned revenue) is recognizedMagazine SubscriptionsCash ReceiptRevenue EarnedBEFORErentPrepayments often occur in regard to:CTV receives $3m for advertising on 12/15 for ads that will run in Jan., Feb., and March. What is the j/e to record the cash received? What j/e is recorded by CTV in Jan., Feb., and March?advertisingAdjusting Entries for Unearned Revenues

Adjusting Entries for Accrued RevenuesRevenues earned but not yet received in cash or recorded.Rent Interest Services performedBEFOREAccrued revenues often occur in regard to:Cash ReceiptRevenue RecordedAdjusting entry results in:In January, TDCT earned $231m in interest from customers that has not been received. What is the j/e recorded 1/31?

Adjusting Entries for Accrued ExpensesExpenses incurred but not yet paid in cash or recorded.TaxesBEFOREAccrued expenses often occur in regard to:Cash PaymentExpense RecordedSalariesAdjusting entry results in:Coca-Cola incurred $2.962B in income taxes during 2011 that will be paid March 15th, 2012. What is the j/e recorded 12/31/2011? And 3/15/2012?

*7. Closing EntriesClosing entries are made to close all nominal accounts (revenue and expense accounts) for the yearThe balances in these accounts are transferred to a clearing account (Income Summary)The balance in Income Summary represents net income or net loss for the periodReal (or permanent) accounts are not closed

*7. Closing Entries

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