Chapter 3: The Accounting Information System

ADM1340: Introduction to Financial Accounting

Qiu Chen Ph.D., MSc.
Accounting Cycle

 A period of time (month, quarter, or year) for which a

company prepares financial statements.

2007 2008 2009 2010 2011 2012 2013

a fiscal a fiscal a fiscal a fiscal a fiscal
year year year year year

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The Accounting Cycle
Start of new period
• Beginning account balance of this period
= Ending balance of the last period

During the Period

• Analyze transactions
• Record journal entries in the general journal
• Post amounts to the general ledger

At the End of the Period

• Prepare an unadjusted trial balance to determine if debits equal
credits
• Adjust revenues and expenses and related statement of financial
position accounts (record in journal and post to ledger)
• Prepare an adjusted trial balance to determine if debits equal
credits
• Prepare a complete set of financial statements and disseminate it
to users
• Close revenues, gains, expenses, and losses to Retained
Earnings (record in journal and post to ledger)
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Account

 Account: a standardized record used by

companies to accumulate the dollar effects of
transactions

 Each company creates a list of accounts to

record its transactions – called a Chart of
Accounts

Notes
Inventory Payable
Cash Equipment

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Understand Business Model

 Merchandising Companies

COGS
Sales

Salary Rent Exp.

Exp.

 Service Companies Utility Tax exp.

exp.

Depreciation Insurance
Exp. exp.

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The Accounting Cycle
Start of new period
• Beginning account balance of this period
= Ending balance of the last period

During the Period

• Analyze transactions
• Record journal entries in the general journal
• Post amounts to the general ledger

At the End of the Period

• Prepare an unadjusted trial balance to determine if debits equal
credits
• Adjust revenues and expenses and related statement of financial
position accounts (record in journal and post to ledger)
• Prepare an adjusted trial balance to determine if debits equal
credits
• Prepare a complete set of financial statements and disseminate it
to users
• Close revenues, gains, expenses, and losses to Retained
Earnings (record in journal and post to ledger)
6
Identifying Transactions

 What do we record in accounting books?

• Not all events are recorded
• Only transactions are recorded
• Transactions are events that are measurable and realized
 Examples: to be recorded or not?
• The company received $10,000 of cash from shareholders and
issued 1,000 shares. (Yes)
• The weather forecast predicts a severe storm next week, which
may damage the company’s $100,000 worth of roof. (No)
• The company is negotiating with a potential client, which may
bring at least $100,000 of revenue. (No)
• The company prepaid $6,000 of the rent for the next 2 months.
(Yes)

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T-Account

 The T Account: Records increases and decreases in

a specific Asset, Liability, Shareholders’ Equity,
Revenue, or Expense item.

Account Title
   
debit (Left) credit (Right)
   

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Transaction Effects on T-Account

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Transaction Effects on T-Account

 Transaction Effects on T-Account

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1. The company bought $2,000 of short-term
investments
2. The company sold $1,000 of short-term investment
3. The company borrowed $3,000 from a bank
4. The company paid down the bank loan $1,500
5. The company issued $50,000 of common shares
6. The company sold a TV set to a customer for cash
$2,000; The company determined that the TV set
cost $1,000 to purchase from its supplier.
7. The company paid $8,000 to employees.

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General Ledger

 General Ledger: A formal account that records increases

and decreases in a specific Asset, Liability, or Shareholders’
Equity, Revenue or Expense item and shows their balances.

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Journal Entry

 Journal entry: expresses the effects of a transaction

on the accounts by using debits and credits.
Reference:
No. / Date.

(a ) Account Title 1 XXXX

Account Title 2 XXXX

Account Titles: Amounts:

Accounts affected by the Increase / decrease in
transaction account amount caused by
the transaction
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1. The company bought $2,000 of short-term
investments
2. The company sold $1,000 of short-term investment
3. The company borrowed $3,000 from a bank
4. The company paid down the bank loan $1,500
5. The company issued $50,000 of common shares
6. The company sold a TV set to a customer for cash
$2,000; The company determined that the TV set
cost $1,000 to purchase from its supplier.
7. The company paid $8,000 to employees.

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Rules of Debit and Credit

 The accounting equation should be always kept in

balance:

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Rules of Debit and Credit (Continue)

 In every transaction: Total Debit = Total Credit

 Double-entry accounting: in every transaction, at

least one account is debited and at least one
account is credited.

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General Journal

 General Journal: contains a chronological listing of a

company's transactions and events (a.k.a. the book of original
entry)

Account Titles: Amounts:

Reference:
Accounts affected by the Increase / decrease in
Date.
transaction account amount caused by
the transaction 17
How does the accounting system track each
transaction?

Step 1: Analyze the transaction

Step 2: Record journal entries in the general journal

(a ) Account Title 1 XXXX
Account Title 2 XXXX

Step 3: Post amounts to the general ledger

Account Title 1 Account title 2

Beg. Bal. XXX Beg. Bal. xxx
(a) xxx xxx (a)

Bal. xxx xxx Bal.

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 Exercises

Laundry Shop opened on January 1, 2019. The following

transactions occurred in the first month. Journalize each
transaction, and post the journal entries to T accounts.
1. An owner invested $50,000 of cash to start a new company,
Laundry Shop, on January 1.
2. On January 5, Laundry Shop used $10,000 of cash to purchase
supplies.
3. On January 9, Laundry Shop took out $100,000 of a loan from
its bank. The loan will be due in six months.
4. On January 14, Laundry Shop purchased $5,000 worth of
supplies on account.
5. On January 27, Laundry Shop used $75,000 of cash to
purchase equipment.
6. On January 30, Laundry Shop performed service for a hotel,
$6,000.
7. On January 31, Laundry Shop paid employee salaries of $2,000
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1. An owner invested $50,000 of cash to start a new
company, Laundry Shop, on January 1.

Jan1 Cash 50,000

Capital stock 50,000

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2. On January 5, Laundry Shop used $10,000 of cash to
purchase supplies.

Jan 5 Supplies 10,000

Cash 10,000

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3. On January 9, Laundry Shop took out $100,000 of a
loan from its bank. The loan will be due in six months.

Jan 9 Cash 100,000

Short-term bank loan 100,000

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4. On January 14, Laundry Shop purchased $5,000
worth of supplies on account.

Jan 14 Supplies 5,000

Account Payable 5,000

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5. On January 27, Laundry Shop used $75,000 of cash
to purchase equipment.

Jan 27 Equipment 75,000

Cash 75,000

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6. On January 30, Laundry Shop performed service for
a hotel, $6,000.

Jan 30 Cash 6,000

Sales 6,000

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7. On January 31, Laundry Shop paid employee
salaries of $2,000

Jan 31 Salary Expense 2,000

Cash 2,000

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The Accounting Cycle
Start of new period
• Beginning account balance of this period
= Ending balance of the last period

During the Period

• Analyze transactions
• Record journal entries in the general journal
• Post amounts to the general ledger

At the End of the Period

• Prepare an unadjusted trial balance to determine if debits equal
credits
• Adjust revenues and expenses and related statement of financial
position accounts (record in journal and post to ledger)
• Prepare an adjusted trial balance to determine if debits equal
credits
• Prepare a complete set of financial statements and disseminate it
to users
• Close revenues, gains, expenses, and losses to Retained
Earnings (record in journal and post to ledger)
27
The Trial Balance

 How can the trial balance check errors?

• Recall the effects of transaction on T-Account

• Rule #1: In every transaction: Debit = Credit
• Rule #2: All accounts: All Debits = All Credits

Total debit account balances should equal total credit account balances

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The Trial Balance

 List of each account and its balance at a certain point in time.

 Structure: Ending debit or credit balances are listed in two
separate columns.
Company Name
Unadjusted Trial Balance
At December 31, 20XX
Description Debit Credit
Cash $ XXXX Ending
Inventory XXXX Balance
Equipment XXXX from T-
Notes payable $ XXXX Accounts
Common shares XXXX
Retained earnings, 12/31/2010 XXXX
Sales revenue XXXX
Cost of goods sold XXXX
Operating expenses XXXX
Totals $ XXXX $ XXXX

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The Trial Balance

If total debits do not equal total credits on the trial

balance, errors have occurred . . .
in
inpreparing
preparingbalanced
balanced
journal
journalentries,
entries,
in
inposting
postingthe
thecorrect
correct dollar
dollar
effects
effects of
of aa transaction,
transaction,
in
incomputing
computingending
ending
balances
balancesininaccounts,
accounts,
or
or in
incopying
copyingending
endingbalances
balances
from
from the
theledger
ledger to
tothe
the
trial
trialbalance.
balance.
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In-Class Exercise

 Q3-1

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The Accounting Cycle
Start of new period
• Beginning balance of this period
= Ending balance of the last period

During the Period

• Analyze transactions
• Record journal entries in the general journal
• Post amounts to the general ledger

At the End of the Period

• Prepare an unadjusted trial balance to determine if debits equal
credits
• Adjust revenues and expenses and related statement of financial
Covered position accounts (record in journal and post to ledger)
in Ch 4 • Prepare an adjusted trial balance to determine if debits equal
credits
• Prepare a complete set of financial statements and disseminate it
to users
• Close revenues, gains, expenses, and losses to Retained
Earnings (record in journal and post to ledger)
32
Homework

 All assigned textbook questions from Chapter 3 in

the course outline
– BE3-1, BE3-2, BE3-3, BE3-5, BE3-6
– BE3-8, BE3-10
– E3-2, E3-9, E3-10
– P3-3A, P3-6A

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