3-1 ©2006 Prentice Hall, Inc.. 3-2 ©2006 Prentice Hall, Inc. THE ACCTG INFO SYSTEM AND THE ACCTG...


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


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


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


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


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


Balance Sheet Accounts Balance Sheet Accounts and Debits & Creditsand Debits & Credits

Double-entry bookkeepingDebit an credit definitionsT-accountsT-accounts and the accounting equ

ation


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


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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©2006 Prentice Hall, Inc.

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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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Paid $2,000 for advertising expenses



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Paid $2,400 for a 1-year insurance policy



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Performed $9,000 or rodeo training on account



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Received the electric bill for March. Bill is due on April 12



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Paid $1,350 for Miscellaneous expenses



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Received $6,500 from customers for services provided on March 14 (t/a 4)



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Purchased a mechanical bull machine for $3,500 by signing a note payable due on December 31



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Posting Transactions to General Ledger

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


3-1 ©2006 Prentice Hall, Inc.. 3-2 ©2006 Prentice Hall, Inc. THE ACCTG INFO SYSTEM AND THE ACCTG...

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