ACTG 3110

Chapter 3 – The Accounting Information System

Accounting Information Systems

• Proper system accurately records all transactions

• Accurately reports information to users

• Reports relevant and reliable information in a timely manner

• System should be tailored to meet each company’s needs

Objectives

• Collect data

• Classify and process data

• Summarize data for reports

Basic Model

• Identify economic events that need to be recorded• External events

– Exchange between the company and a separate economic entity

– Recorded with journal entries

• Internal events– Affect the financial position of the company but do not

involve an exchange with another company

– Recorded with adjusting entries

Double-entry System

• Double Entry System– $Debits = $Credits– Every transaction affects two or more accounts– Rules of debits and credits

• Basic Accounting equation:

Assets = liabilities + owner’s equity• Accounting equation must ALWAYS be in

balance

Accounting Cycle

• 1- Identifying and recording transactions and other events

• 2- Journalizing– Chronological record of transactions– Includes debits and credits for each transaction

in a journal entry– General journal– Special journals

Accounting Cycle

• 3- Posting– Ledger is a book of accounts listed in the order

of the chart of accounts– Ledger account details information about one

particular account; shows balances– General ledger– Subsidiary ledgers

Accounting Cycle

• 4- Trial balance.– List of each account and their balance– Ensures equality of $debits and $credits– If it does not balance, you have an error.– If it does balance, this does not necessarily

mean you do not have an error• You could have omitted transactions.

• You could have incorrect postings.

Accounting Cycle

• 5- Adjusting Journal Entries – Made every time financial statements are prepared

– Recorded due to matching principle• Revenues are earned (but not yet recorded)

• Expenses are incurred (but not yet recorded)

– Generally there is no source document; internal transactions

– Generally affects one permanent and one temporary account

– Cash is generally not involved!!!!

Accounting Cycle

- Adjusting Entries – continued

-Prepayments – cash has been prepaid or received • Prepaid expenses (assets) – insurance, rent, supplies,

depreciation – set up when cash is paid– Adjusting entry is to adjust the prepaid asset to the correct

balance

• Debit expense

• Credit prepaid asset

Accounting Cycle

• Adjusting Entries – continued– Prepayments

• Unearned revenues (liability) – subscription revenue, airline ticket receipts, season ticket sales – set up when cash is received

– Adjusting entry is to adjust the liability to the correct balance

• Debit liability (unearned revenue)

• Credit revenue (earned portion)

Accounting Cycle

• Adjusting Entries – continued– Accruals -- cash not paid or received yet

• Accrued revenues – rent revenue, interest revenue – Revenues earned but no cash received

• Debit receivable• Credit revenue

• Accrued expenses – interest, wages, bad debts, taxes expenses

– Expenses incurred but no cash paid• Debit expense• Credit payable

Accounting Cycle

• 6- Adjusted trial balance– List of accounts and debit/credit balance– Prepared after adjusting entries posted

• 7- Preparing financial statements

• 8- Prepare closing entries for all temporary accounts – Transfer ending balance to retained earnings

• 9- Post-closing trial balance– Only balance sheet (permanent) accounts left

Accounting Cycle

• 10- Prepare and post reversing entries (if desired)– Reversal of certain adjusting entries– Preparing these entries helps ease bookkeeping

burden– Only prepare a reversing entry if the entry

increases the balance in an asset or liability account.