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The Accounting
Information Processing
System
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BASIC ACCOUNTING EQUATION

[Corporation]

Assets = Liabilities + Stockholders’ Equity

Contributed Retained
(Paid-in)
Earnings
Capital
Par Excess
Value Over
Par
Net Income (+)
Net loss (-) Dividends (-)
Declared

Revenues & Gains (+) Expenses & Losses (-)

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Accounts and Transaction Recording

Financial Accounting Information

Accounts

Permanent Accounts Temporary Accounts

Assets Revenues Dividends
Liabilities Expenses
Owners’ Equity Gains & Losses
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PERMANENT ACCOUNTS
Application of Debits and Credits

A = L + OE
Account Name Account Name Account Name
Debit Credit Debit Credit Debit Credit

The balances in PERMANENT accounts

are carried over to future accounting periods.

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PERMANENT ACCOUNTS

Application of Debits and Credits

A = L + OE
ASSETS LIABILITIES EQUITIES

Debit Credit for Debit Credit for Debit Credit for

for Decrease for Increase for Increase
Increase Decrease Decrease

The balances in PERMANENT accounts

are carried over to future accounting periods
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TEMPORARY ACCOUNTS
(Subdivisions of Retained Earnings)
Application of debits and credits

EXPENSES, LOSSES
REVENUES & GAINS
& DIVIDENDS
DECLARED
Debit Credit for
for Increase Debit Credit for
Decrease for Decrease
Increase
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The Accounting Cycle

The Accounting Cycle is a series of sequential
steps leading to the financial statements.

 During Accounting Period

 Identify transactions or events to be
recorded.

ANALYSIS OF TRANSACTION IS THE KEY

 Journalize transactions and events.

 Posting from journals to ledger.

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The Accounting Cycle

At the end of the accounting period:

 Prepare unadjusted trial balance.

 Journalize and post adjusting journal entries.
 Prepare adjusted trial balance.
 Prepare financial statements.
 Journalize and post closing journal entries.
 Prepare post-closing trial balance.
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Source Transaction Record in Post to

documents Analysis Journal Ledger

Financial Adjusted Record & Post Unadjusted

Statements Trial Balance Adjusting Trial Balance
Entries
The
Accounting
Processing
Close Temporary Post-Closing Cycle
Accounts Trial Balance
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UNADJUSTED TRIAL BALANCE

 Consists of a listing of each general ledger

account and its balance at the end of period.

– Debit balances in one column and credit

balances in another

 Serves as a convenient means for checking

that the sum of debit account balances equals
the sum of credit account balances.
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Trial Balance - Example

Sample Company
Unadjusted Trial Balance
December 31, 1998
Debits Credits
Cash $ 450
Accounts Receivable 1,200
Equipment 3,800
Accounts Payable $ 700
Notes Payable 1,450
Capital Stock 3,000
Retained Earnings - 1/1/X8 0 The General
Ledger is in
Dividends declared 50 balance!
Revenues 11,000 DR = CR
Salary Expense 5,250
Utility Expense 3,000
Rent Expense 2,400
Total $ 16,150 $ 16,150
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ADJUSTING JOURNAL ENTRIES

 Accruals
 Prepayments
(Deferrals)
 Corrections
of errors
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ADJUSTING JOURNAL ENTRIES

Accruals

 Cash flows that occur AFTER

expense and revenue
recognition

 Recorded when cash is to be

paid or received in a future
accounting period
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AJEs Accrual Example

Your company pays its workers every Friday.
Year-end ,12/31/X5, falls on Wednesday.
It is estimated that employees have earned
salaries of $47,250 through Wednesday of
the week ended 1/2/X6.

GENERAL JOURNAL Page: 1

Date Description PR Debit Credit

31-Dec Salary Expense 47,250
Salary Payable 47,250
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ADJUSTING JOURNAL ENTRIES

Prepayments/Deferrals

 Cash flows that occur BEFORE

expense and revenue recognition
 Portion that applies to future
periods is deferred as a prepaid
expense or unearned revenue
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PREPAYMENTS

Standard
Recording Method

Records an asset upon payment of cash

and liability upon receipt of cash
before goods or services are provided

– Cash paid recorded as an asset (Prepaids)

– Cash received recorded as liability

(Unearned revenue)
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Prepayment Example
Standard Method
On 12/1/X5, your company paid $1,200 for
a six-month insurance policy. The $1,200
was recorded as Prepaid Insurance (an
asset).

What AJE is needed on 12/31/X5?

GENERAL JOURNAL Page: 1

Date Description PR Debit Credit

31-Dec Insurance Expense 200
Prepaid Insurance 200
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OTHER PREPAYMENTS
Jax, Inc. purchased equipment on June 30, 19X5,
that cost $25,000 (recorded as “Equipment”).
The equipment has an estimated useful life of 5
years and no salvage value. Jax uses straight-
line depreciation.

GENERAL JOURNAL Page: 1

Date Description Debit Credit

31-Dec Depreciation Expense 2,500
Accumulated Deprec. - Equip 2,500
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Here comes something

that’s A LITTLE BIT
DIFFERENT!
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PREPAYMENTS

Expedient
Recording Method
Records an expense upon payment of cash
before goods or services are consumed

Records revenue upon receipt of cash before

goods or services are provided
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Prepayment Example
Expedient Method
On 12/1/X5, your company paid $1,200 for a
six-month insurance policy. The $1,200 was
recorded as Insurance expense.
What AJE is needed on 12/31/X5?

GENERAL JOURNAL Page: 1

Date Description PR Debit Credit

31-Dec Prepaid Insurance 1,000
Insurance expense 1,000
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Prepare Adjusted Trial Balance

Sample Company
Adjusted Trial Balance
December 31, 1998
 Includes all Debits Credits
account Cash
Accounts Receivable
$ 450
1,200
balances after Interest Receivable 200
Equipment 3,800
adjustments Accumulated Depreciation $ 400

have been
Accounts Payable 700
Interest Payable 65

posted. Notes Payable

Capital Stock
1,450
3,000

 Used to produce
Retained Earnings - 1/1/X8 -
Dividends declared 50

the financial Revenues

Interest Revenue
11,000
200

statements. Salary Expense

Utility Expense
5,250
3,000
Rent Expense 2,400
Interest Expense 65
Depreciation Expense 400
Total $ 16,815 $ 16,815
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Prepare Financial Statements

Sample Company
 The income Income Statement
For the Year Ended 12/31/98
statement is
always prepared Revenues:
Sales $ 11,000
first. Interest 200
Total $ 11,200
 Includes the
temporary Expenses:
Salary 5,250
account balances Utility 3,000
from the Rent
Interest
2,400
65
adjusted trial Depreciation 400
balance. Total 11,115

Net Income $ 85
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Prepare Financial Statements

Retained Earnings Statement
 The retained
For the Year Ended 12/31/98
earnings
statement
Retained Earnings - 1/1/98 $ -
explains the Add: Net Income 85
changes in Less: Dividends declared (50)
retained earnings
during the year. Retained Earnings - 12/31/98 $ 35
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Prepare Financial Statements

ASSETS:
Cash $ 450

 TheBalance Accounts Receivable

Interest Receivable
1,200
200

Sheet includes
Equipment $ 3,800
Less: Accum.Depr. (400)

the permanent
Equipment (net) 3,400
Total Assets $ 5,250

accounts. LIABILITIES:
Accounts Payable $ 700
 Retained Earnings Interest Payable 65

is taken from the

Notes Payable 1,450
Total Liabilities $ 2,215
Retained Earnings EQUITY:

Statement. Common Stock

R/E - 12/31/98
$ 3,000
35
Total Equity $ 3,035
Total Liabilities & Equity $ 5,250
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Closing Entries

 Two purposes of closing journal

entries:
– Reduce to zero the balances of
temporary accounts related to
earnings measurement and
dividends

– Increase (or decrease) retained

earnings by the net impact of
the temporary accounts for the
period
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CLOSING ENTRIES
Flow - Chart
Revenues

11,200 11,200 Dividends Retained

Declared Earnings
50 50 50 85
Expenses
11,115
11,115

Note: Large type

amounts are
closing entries
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Prepare Post-Closing Trial Balance

 Lists the balances of the

permanent accounts after the
closing process is finished.
 Retained Earnings will show the
end of period balance.
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WOW!