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Understanding the Accounting Information System: Key Concepts and Principles

This chapter delves into the fundamentals of the Accounting Information System (AIS), focusing on essential concepts such as the accounting equation (A = L + SE), financial statements including the balance sheet and income statement, and the roles of accounts and journal entries. It covers debits and credits, trial balances, and the purpose of adjusting entries for accruals and deferrals. Additionally, it explains the significance of reversing entries, bad debt adjustments, and the closing process of accounts, providing a comprehensive introduction to accounting practices and principles.

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Understanding the Accounting Information System: Key Concepts and Principles

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  1. Chapter 3 The Accounting Information System

  2. 1. Accounting Equation • A = L + SE • Expanded: A = L + SE + R + G - E - L • Definitions of elements

  3. 2. Financial Statements • Balance Sheet • Income Statement • Statement of Stockholders’ Equity (or Retained Earnings Statement) • Cash Flow Statement • Articulation

  4. 3. Accounts • Definition • Number needed • T account • General ledger

  5. 4. Debits and Credits • Definitions • Increases and decreases • Normal balance • Balance of an account

  6. 5. Journal Entries • Journalizing • Format • Posting • Special journals • Analyzing transactions • E 3-1

  7. 6. Trial Balance • Definition • Purpose • When prepared? • Order of accounts

  8. 7. Adjusting Entries • Purpose • Types • Deferrals – cash flow occurs before revenue/expense recognition • Expense, Revenue • Accruals – cash flow occurs after revenue/expense recognition • Expense, Revenue • Other • Bad debts, Depreciation, Cost of goods sold

  9. 8. Deferred Expense Adjustments • On January 1 you paid $1,800 for three months’ rent in advance.

  10. 9. Deferred Revenue Adjustments • On May 1 your tenant pays you $3,600 for four months’ rent in advance.

  11. 10. Accrued Expense Adjustments • On December 31 your employees have earned wages of $10,000 but they will not be paid until January 5. • Without reversing • With reversing

  12. 11. Accrued Revenue Adjustments • As of December 31 another of your apartment building tenants has not paid his December rent of $700. • Without reversing • With reversing

  13. 12. Reversing Entries • Purpose • If you choose to use reversing entries, what adjustments should be reversed? • All accruals • Deferrals initially recorded as a revenue or expense

  14. 13. Other Adjusting Entries • Bad Debts Adjustment • Depreciation Expense • Inventory and cost of good sold adjustments • Perpetual inventory system • Periodic inventory system

  15. 14. Closing Entries • Purpose • Entries • Using income summary account • Close temporary accounts with Cr balances to income summary • Close temporary accounts with Dr balances to income summary • Close income summary to retained earnings • Close dividends account to retained earnings • Making one entry

  16. 15. Cash Basis of Accounting • Definition • GAAP requirements • Conversion to accrual basis

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