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Chapter 3

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Chapter 3

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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