chapter 3-1 c h a p t e r 3 the accounting information system intermediate accounting 13th edition...

Chapter 3-1

C H A P T E R C H A P T E R 33

THE ACCOUNTING THE ACCOUNTING INFORMATION SYSTEMINFORMATION SYSTEM

Intermediate Accounting13th Edition

Kieso, Weygandt, and Warfield

Chapter 3-2

Identifying and recordingIdentifying and recording

JournalizingJournalizing

PostingPosting

Trial balanceTrial balance

Adjusting entriesAdjusting entries

Adjusted trial balanceAdjusted trial balance

Preparing financial Preparing financial statementsstatements

ClosingClosing

Post-closing trial balancePost-closing trial balance

Reversing entriesReversing entries

Accounting Accounting Information SystemInformation System

The Accounting The Accounting CycleCycle

Financial Financial Statements for Statements for MerchandisersMerchandisers

Basic terminologyBasic terminology

Debits and creditsDebits and credits

Accounting equationAccounting equation

Financial statements Financial statements and ownership and ownership structurestructure

Income statementIncome statement

Statement of retained Statement of retained earningsearnings

Balance sheetBalance sheet

Closing entriesClosing entries

The Accounting Information SystemThe Accounting Information SystemThe Accounting Information SystemThe Accounting Information System

Chapter 3-3

Collects and processes transaction data.

Disseminates the information to interested parties.

Accounting Information SystemAccounting Information SystemAccounting Information SystemAccounting Information System

Accounting Information System (AIS)

Chapter 3-4

Basic TerminologyBasic TerminologyBasic TerminologyBasic Terminology

LO 1 Understand basic accounting LO 1 Understand basic accounting terminology.terminology.

EventEvent

TransactionTransaction

AccountAccount

Real AccountReal Account

Nominal AccountNominal Account

LedgerLedger

JournalJournal

PostingPosting

Trial BalanceTrial Balance

Adjusting EntriesAdjusting Entries

Financial Financial StatementsStatements

Closing EntriesClosing Entries

Chapter 3-5

Debits and CreditsDebits and CreditsDebits and CreditsDebits and Credits

LO 2 Explain double-entry rules.LO 2 Explain double-entry rules.

An AccountAccount shows the effect of transactions on a given asset, liability, equity, revenue, or expense account.

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

Recording done by debiting at least one account and crediting another.

DEBITS must equalmust equal CREDITS.

Chapter 3-6

Account Name

Debit / Dr. Credit / Cr.


An arrangement that shows the effect of transactions on an account.

Debit = “Left”

Credit = “Right”

AccounAccountt


An Account can An Account can be illustrated be illustrated

in a T-Account in a T-Account form.form.

Chapter 3-7

Account Name



If Debit entries are greater thangreater than Credit entries, the account will have a debit balance.


$10,000 Transaction #2$3,000

$15,000$15,000

8,000Transaction #3

Balance

Transaction #1

Chapter 3-8

Account Name



If Credit entries are greater thangreater than Debit entries, the account will have a credit balance.


$10,000 Transaction #2$3,000

$1,000$1,000

8,000 Transaction #3

Balance

Transaction #1

Chapter 3-9

Chapter 3-23

AssetsAssets


Normal BalanceNormal Balance

Chapter 3-27



ExpenseExpense

Chapter 3-24

LiabilitiesLiabilities



Chapter 3-25



EquityEquity

Chapter 3-26



RevenueRevenue

Normal Balance Credit

Normal Balance Credit

Normal Balance Debit

Normal Balance Debit

Debits and Credits Debits and Credits SummarySummary

Debits and Credits Debits and Credits SummarySummary


Chapter 3-10

The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation


Relationship among the assets, liabilities and Relationship among the assets, liabilities and stockholders’ equity of a business: stockholders’ equity of a business:

The equation must be in balance after every The equation must be in balance after every transaction. For every transaction. For every DebitDebit there must be a there must be a CreditCredit..

Illustration 3-3

Chapter 3-11

Double-Entry System IllustrationDouble-Entry System IllustrationDouble-Entry System IllustrationDouble-Entry System Illustration

AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesStockholdersStockholders

’ Equity’ EquityStockholdersStockholders

’ Equity’ Equity= +

1.1. Owners invest $40,000 in exchange for Owners invest $40,000 in exchange for common stock.common stock.

+ 40,000 + 40,000


Chapter 3-12




2. 2. Disburse $600 cash for secretarial wages.Disburse $600 cash for secretarial wages.

- 600 - 600 (expense)



Chapter 3-13





3.3. Purchase office equipment priced at $5,200, Purchase office equipment priced at $5,200, giving a 10 percent promissory note in giving a 10 percent promissory note in exchange.exchange.

+ 5,200 + 5,200


Chapter 3-14





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

+ 4,000 + 4,000 (revenue)


Chapter 3-15





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

- 7,000 - 7,000


Chapter 3-16




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

+ 5,000 - 5,000



Chapter 3-17





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

- 80,000 + 80,000


Chapter 3-18





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


- 16,000

+ 16,000

Note that the accounting equation equality is maintained after recording each transaction.

Note that the accounting equation equality is maintained after recording each transaction.

Chapter 3-19

Ownership structure dictates the types of accounts that are part of the equity section.

Proprietorship Proprietorship or or

PartnershipPartnership

Proprietorship Proprietorship or or

PartnershipPartnershipCorporationCorporationCorporationCorporation

Capital Account Drawing

Account

Common Stock Additional Paid-

in Capital Dividends

Declared Retained

Earnings

Financial Statements and Ownership Financial Statements and Ownership StructureStructure



Chapter 3-20




Stockholders’ EquityStockholders’ Equity

Balance Sheet

Statement of Retained Earnings

Net income or Net loss (Revenues less expenses)(Revenues less expenses)

Income StatementIncome Statement

Net income or Net loss (Revenues less expenses)(Revenues less expenses)

Income StatementIncome StatementDividendsDividends

Retained Earnings Retained Earnings (Net income retained in (Net income retained in

business)business)

Retained Earnings Retained Earnings (Net income retained in (Net income retained in

business)business)

Common Stock Common Stock (Investment by (Investment by stockholders)stockholders)

Common Stock Common Stock (Investment by (Investment by stockholders)stockholders)

Illustration 3-4

Chapter 3-21

The Accounting CycleThe Accounting CycleThe Accounting CycleThe Accounting Cycle

LO 3 Identify steps in the accounting LO 3 Identify steps in the accounting cycle.cycle.

TransactionsTransactions

1. Journalization1. Journalization

6. Financial Statements6. Financial Statements

7. Closing entries7. Closing entries

8. Post-closing trail balance

8. Post-closing trail balance

9. Reversing entries9. Reversing entries

3. Trial balance3. Trial balance

2. Posting2. Posting

5. Adjusted trial balance5. Adjusted trial balance

4. Adjustments4. AdjustmentsWork SheetWork Sheet

Illustration 3-6

Chapter 3-22

Identify and Recording TransactionsIdentify and Recording TransactionsIdentify and Recording TransactionsIdentify and Recording Transactions

What to Record?What to Record?

FASB states, “transactions and other events and circumstances that affect a business enterprise.”

LO 3 Identify steps in the accounting LO 3 Identify steps in the accounting cycle.cycle.

Types of Events:Types of Events:

External – between a business and its environment.

Internal – event occurring entirely within a business.

Chapter 3-23

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

1. Journalizing1. Journalizing1. Journalizing1. Journalizing

LO 4 LO 4 Record transactions in journals, post Record transactions in journals, post to ledger accounts, and prepare a trial to ledger accounts, and prepare a trial balance.balance.

September 1: Stockholders invested $15,000 cash in the corporation in exchange for shares of stock.

Illustration 3-7

Chapter 3-24

Posting Posting – the process of transferring amounts from the journal to the ledger accounts.

2. Posting2. Posting2. Posting2. Posting


Illustration 3-7

Illustration 3-8

Chapter 3-25

Posting Posting – Transferring amounts from journal to ledger.


LO 4 LO 4

Illustration 3-8

Chapter 3-26

Expanded ExampleExpanded Example



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, stockholders’ equity, revenues, or expense.

Chapter 3-27

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

Common stock 100,000

Cash 100,000Oct. 1

Debit Credit

Cash

100,000100,000 100,000100,000

Debit Credit

Common Stock



Chapter 3-28

2. October 1: Pioneer Advertising purchases office equipment costing $50,000 by signing a 3-month, 12%, $50,000 note payable.

Notes payable 50,000

Office equipment 50,000Oct. 1

Debit Credit

Office Equipment

50,00050,000 50,00050,000

Debit Credit

Notes Payable



Chapter 3-29

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

Unearned service revenue

12,000

Cash 12,000Oct. 2

Debit Credit

Cash

100,000100,000 12,00012,000

Debit Credit

Unearned Service Revenue


12,00012,000


Chapter 3-30

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

Cash 9,000

Rent expense 9,000Oct. 3

Debit Credit

Cash

100,000100,000 9,0009,000

Debit Credit

Rent Expense


12,00012,0009,0009,000


Chapter 3-31

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

100,000100,000 6,0006,000

Debit Credit

Prepaid Insurance


12,00012,0009,0009,000

6,0006,000


Chapter 3-32

6. October 5: Pioneer Advertising purchases, for $25,000 on account, an estimated 3-month supply of advertising materials from Aero Supply.

Accounts payable 25,000

Advertising supplies 25,000Oct. 5

Debit Credit

Advertising Supplies

25,00025,000 25,00025,000

Debit Credit

Accounts Payable



Chapter 3-33

7. October 9: Pioneer Advertising signs a contract with a local newspaper for advertising inserts (flyers) to be distributed starting the last Sunday in November. Pioneer will start work on the content of the flyers in November. Payment of $7,000 is due following delivery of the Sunday papers containing the flyers.



Chapter 3-34

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

Cash 5,000

Dividends 5,000Oct. 20

Debit Credit

Cash

100,000100,000 5,0005,000

Debit Credit

Dividends


12,00012,0009,0009,000

6,0006,000

5,0005,000


Chapter 3-35

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

Cash 40,000

Salaries expense 40,000Oct. 26

Debit Credit

Cash

100,000100,000 40,00040,000

Debit Credit

Salaries Expense


12,00012,0009,0009,000

6,0006,000

5,0005,000

40,00040,000


Chapter 3-36

10. October 31: Pioneer Advertising receives $28,000 in cash and bills Copa Company $72,000 for advertising services of $100,000 provided in October.

Accounts receivable 72,000Cash 28,000Oct. 31

Debit Credit

Cash

100,000100,000 72,00072,000

Debit Credit

Accounts Receivable


12,00012,0009,0009,000

6,0006,000

5,0005,000

40,00040,000

Service revenue 100,000

100,000100,000

Debit Credit

Service Revenue

28,00028,000

80,00080,000

Chapter 3-37

Trial Trial BalanceBalance – A list of each account and its balance; used to prove equality of debit and credit balances.

3. Trial Balance3. Trial Balance3. Trial Balance3. Trial Balance


Illustration 3-19

Chapter 3-38

4. Adjusting Entries4. Adjusting Entries4. Adjusting Entries4. Adjusting Entries

RevenuesRevenues - recorded in the period in which - recorded in the period in which they are earnedthey are earned.

Expenses Expenses - recognized in the period in which - recognized in the period in which they are incurredthey are incurred.

Adjusting entriesAdjusting entries - needed to ensure that - needed to ensure that the the revenue recognitionrevenue recognition and and matching matching principlesprinciples are followed. are followed.

LO 5 LO 5 Explain the reasons for preparing adjusting Explain the reasons for preparing adjusting entries.entries.

Chapter 3-39

Types of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting Entries

1. Prepaid Expenses. Expenses paid in cash and recorded as assets before they are used or consumed.

Prepayments

3. Accrued Revenues. Revenues earned but not yet received in cash or recorded.

4. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded.

2. Unearned Revenues. Revenues received in cash and recorded as liabilities before they are earned.

Accruals


Illustration 3-20

Chapter 3-40

Deferrals are either prepaid

expenses or

unearned revenues.

Adjusting Entries for DeferralsAdjusting Entries for DeferralsAdjusting Entries for DeferralsAdjusting Entries for Deferrals


Illustration 3-21

Chapter 3-41

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

Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”


insuranceinsurance

suppliessupplies

advertisingadvertising

Cash PaymentCash Payment Expense RecordedExpense RecordedBEFORE


rentrent

maintenance on maintenance on equipmentequipment

fixed assetsfixed assets

Prepayments often occur in regard to:Prepayments often occur in regard to:

Chapter 3-42

Supplies.Supplies. 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 25,000

Oct. 5


Debit Credit


25,00025,000 25,00025,000

Debit Credit

Cash



Chapter 3-43

Supplies. 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

15,000

Oct. 31


Debit Credit


25,00025,000 15,00015,000

Debit Credit

Advertising Supplies Expense

15,00015,000



10,00010,000

Chapter 3-44

Statement Presentation:

Advertising supplies identifies that portion of the asset’s cost that will provide future economic benefit.




Illustration 3-35

Chapter 3-45


Advertising expense identifies that portion of the asset’s cost thatexpired in October.




Illustration 3-34

Chapter 3-46

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

6,0006,000 6,0006,000

Debit Credit

Cash



Chapter 3-47

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

6,0006,000 500500

Debit Credit

Insurance Expense



500500

5,5005,500

Chapter 3-48


Prepaid insurance identifies that portion of the asset’s cost that will provide future economic benefit.




Illustration 3-35

Chapter 3-49


Insurance expense identifies that portion of the asset’s cost thatexpired in October.




Illustration 3-34

Chapter 3-50

Depreciation. 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 400

Depreciation expense 400Oct. 31


Debit Credit

Depreciation Expense

400400 400400

Debit Credit

Accumulated Depreciation



Chapter 3-51


Accumulated Depreciation—is a contra asset account.




Illustration 3-35

Chapter 3-52


Depreciation expense identifies that portion of the asset’s cost thatexpired in October.




Illustration 3-34

Chapter 3-53

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

Adjusting Entries for “Unearned Adjusting Entries for “Unearned Revenues”Revenues”


rentrent

airline ticketsairline tickets

school tuitionschool tuition

Cash ReceiptCash Receipt Revenue RecordedRevenue RecordedBEFORE


magazine subscriptionsmagazine subscriptions

customer depositscustomer deposits

Unearned revenues often occur in regard to:Unearned revenues often occur in regard to:

Chapter 3-54

Unearned Revenue. Pioneer Advertising received $12,000 on October 2 from KC for advertising services expected to be completed by December 31. Show the journal entry to record the receipt on Oct. 2nd.

Unearned advertising revenue

12,000

Cash 12,000

Oct. 2


Debit Credit

Cash

12,00012,000 12,00012,000

Debit Credit

Unearned Rent Revenue



Chapter 3-55 LO 5 LO 5 Explain the reasons for preparing adjusting Explain the reasons for preparing adjusting

entries.entries.

Debit Credit

Service Revenue

100,000100,000 12,00012,000

Debit Credit

Unearned Service Revenue

4,0004,000

8,0008,000



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


Unearned service revenue

4,000Oct. 31

4,0004,000

Chapter 3-56 LO LO

5 5



Illustration 3-35

Statement Presentation

Unearned service revenue identifies that portion of the liability that has not been earned.

Chapter 3-57

Accruals are either accrued

revenues or

accrued expenses.

Adjusting Entries for AccrualsAdjusting Entries for AccrualsAdjusting Entries for AccrualsAdjusting Entries for Accruals


Illustration 3-27

Chapter 3-58

Revenues earned but not yet received in cash or Revenues earned but not yet received in cash or recorded.recorded.

Adjusting Entries for “Accrued Adjusting Entries for “Accrued Revenues”Revenues”


rentrent

interestinterest

services performedservices performed

BEFORE


Accrued revenues often occur in regard to:Accrued revenues often occur in regard to:

Cash ReceiptCash ReceiptRevenue RecordedRevenue Recorded

Adjusting entry results in:Adjusting entry results in:

Chapter 3-59

Accrued Revenues. In October Pioneer earned $2,000 for advertising services that it did not bill to clientsbefore October 31. Thus, Pioneer makes the following adjusting entry.


Accounts receivable 2,000Oct. 31

Debit Credit

Accounts Receivable

72,00072,000



Debit Credit

Service Revenue

100,000100,000

4,0004,000

2,0002,000

106,000106,000

2,0002,000

74,00074,000

Chapter 3-60 LO LO

5 5

Illustration 3-34



Statement Presentatio

nIllustration 3-

35

Chapter 3-61

Expenses incurred but not yet paid in cash or Expenses incurred but not yet paid in cash or recorded.recorded.

Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”


rentrent

interestinterest

taxestaxes

BEFORE


Accrued expenses often occur in regard to:Accrued expenses often occur in regard to:

Cash Payment, if any*

Cash Payment, if any*

Expense RecordedExpense Recorded

salariessalaries

bad debts*bad debts*

Adjusting entry results in:Adjusting entry results in:


entries.entries.



Accrued Interest. Pioneer signed a three-month, 12%, note payable in the amount of $50,000 on October 1. The note requires interest at an annual rate of 12 percent. Three factors determine the amount of the interest accumulation:

1 2 3 Illustration 3-29

Chapter 3-63

Interest payable 500

Interest expense 500Oct. 31


Debit Credit

Interest Expense

500500 500500

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.

Chapter 3-64 LO LO

5 5

Illustration 3-34




nIllustration 3-

35


entries.entries.



Accrued Salaries. 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.

Chapter 3-66

Salaries payable 6,000

Salaries expense 6,000Oct. 31


Debit Credit

Salaries Expense

40,00040,000 6,0006,000

Debit Credit

Salaries Payable



Accrued Salaries. 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.

6,0006,000

46,00046,000

Chapter 3-67 LO LO

5 5

Illustration 3-34




nIllustration 3-

35

Chapter 3-68

Salaries expense 34,000

Salaries payable 6,000Nov. 23


Debit Credit

Salaries Expense

34,00034,000 6,0006,000

Debit Credit

Salaries Payable



Accrued Salaries. 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

6,0006,000


entries.entries.



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

Chapter 3-70

Shows the balance of all accounts, after adjusting entries, at the end of the accounting period.

5. Adjusted Trial Balance5. Adjusted Trial Balance5. Adjusted Trial Balance5. Adjusted Trial Balance

LO 5 LO 5

Illustration 3-33

Chapter 3-71

6. Preparing Financial Statements6. Preparing Financial Statements6. Preparing Financial Statements6. Preparing Financial Statements

LO 6 Prepare financial statement from the adjusted trial LO 6 Prepare financial statement from the adjusted trial balance.balance.

Financial Statements are prepared directly from the Adjusted Trial Balance.

Financial Statements are prepared directly from the Adjusted Trial Balance.

Balance Sheet

Income Statemen

t

Statement of

Retained Earnings

Chapter 3-72


LO LO 66

Illustration 3-34

Chapter 3-73


LO LO 66

Illustration 3-35

Chapter 3-74

7. Closing Entries7. Closing Entries7. Closing Entries7. Closing Entries

LO 7 Prepare closing LO 7 Prepare closing entries.entries.

To reduce the balance of the income To reduce the balance of the income statement (statement (revenuerevenue and and expenseexpense) accounts ) accounts to zero. to zero.

To transfer net income or net loss to owner’s To transfer net income or net loss to owner’s equity.equity.

Balance sheet (Balance sheet (assetasset, , liabilityliability, and , and equityequity) ) accounts are not closed.accounts are not closed.

Dividends are closed directly to the Retained Dividends are closed directly to the Retained Earnings account.Earnings account.

Chapter 3-75

7. Closing Entries7. Closing Entries7. Closing Entries7. Closing Entries


Retained earnings 5,000 Dividends

5,000


Salaries expense46,000

Advertising expense15,000

Rent expense9,000

Insurance expense500

Interest expense500

Depreciation expense400

Bad debt expense1,600

Retained earnings33,000

Illustration 3-33

Closing Journal Entries:

Chapter 3-76 LO 7 Prepare closing LO 7 Prepare closing

entries.entries.

7. Closing 7. Closing EntriesEntries

7. Closing 7. Closing EntriesEntries

Illustration 3-37

Chapter 3-77

8. Post-Closing Trial Balance8. Post-Closing Trial Balance8. Post-Closing Trial Balance8. Post-Closing Trial Balance


Illustration 3-38

Chapter 3-78

9. Reversing Entries9. Reversing Entries9. Reversing Entries9. Reversing Entries


After preparing the financial After preparing the financial statements and closing the books, a statements and closing the books, a company may reverse some of the company may reverse some of the adjusting entries before recording the adjusting entries before recording the regular transactions of the next period. regular transactions of the next period.

Chapter 3-79

Accounting Cycle SummarizedAccounting Cycle SummarizedAccounting Cycle SummarizedAccounting 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).

Chapter 3-80

Financial Statements of a Merchandising Financial Statements of a Merchandising CompanyCompany


LO 7LO 7

Illustration 3-39

Chapter 3-81



LO 7LO 7

Illustration 3-40

Chapter 3-82



LO 7LO 7

Illustration 3-41

Chapter 3-83

Internal controls are a system of checks and balances designed to prevent and detect fraud and errors. Both of these actions are required under SOX.

Companies find that internal control review is a costly process. One study 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 public companies listed on U.S. exchanges. There is continuing debate over whether foreign issuers should have to comply.

Chapter 3-84 LO 9 Identifying adjusting entries that may be reversed.LO 9 Identifying adjusting entries that may be reversed.

Illustration of Reversing Entries—AccrualsIllustration of Reversing Entries—AccrualsIllustration 3B-1


Illustration of Reversing Entries—DeferralsIllustration of Reversing Entries—DeferralsIllustration 3B-2


Summary of Reversing EntriesSummary 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.

chapter 3-1 c h a p t e r 3 the accounting information system intermediate accounting 13th edition...

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