Intermediate Accounting

IFRS Edition
Kieso, Weygandt, Warfield
Fourth Edition

Chapter 3
The Accounting Information System
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College

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Copyright © 2020 John Wiley & Sons, Inc.
 Learning Objective 1
Describe the basic accounting
information system.

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Accounting Information System (1 of 3)

• Collects and processes transaction data.

• Disseminates financial information to interested parties.
• Varies widely from business to business.
o Nature of business
o Type of transactions
o Size of business
o Volume of data to be handled
o Informational demands

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Accounting Information System (2 of 3)
Helps management answer such questions as:
• How much and what kind of debt is outstanding?
• Were our sales higher this period than last?
• What assets do we have?
• What were our cash inflows and outflows?
• Did we make a profit last period?
• Are any of our product lines or divisions operating at a
loss?
• Can we safely increase our dividends to shareholders?
• Is our rate of return on net assets increasing?
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Debits and Credits

• An account shows the effect of transactions on a given

asset, liability, equity, revenue, or expense account.
• Double-entry accounting system (two-sided effect).
• Recording done by debiting at least one account and
crediting another.
• DEBITS must equal CREDITS.

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Double Entry (Debit and Credit) Accounting
System

ILLUSTRATION 3.1

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The Expanded Accounting Equation

ILLUSTRATION 3.3
The equation must be in balance after every transaction. For
every Debit there must be a Credit.

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Income Statement and Equity Relationships

ILLUSTRATION 3.4

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The Accounting Cycle

ILLUSTRATION 3.6

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The Accounting Cycle
Identify and Recording Transactions and Other Events

An item should be recognized in the financial statements

provided that the item meets the definition of one of the
elements of financial statements and if such recognition
provides users of financial statements with
a) relevant information about the asset or the liability
and about any income, expenses, or changes in equity
and
b) a faithful representation of the asset or the liability
and of any income, expenses, or changes in equity.

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 Learning Objective 2
Record and summarize basic
transactions.

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Technique of Journalizing

Recording transactions and events that effect particular asset, liability, equity,
revenue, and expense accounts.
September 1: Shareholders invested ₺15,000 cash in the corporation in
exchange for ordinary shares.
September 1: Purchase computer equipment for ₺7,000 cash.

ILLUSTRATION 3.7

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Posting a Journal Entry

Posting – The process of transferring amounts from the journal to

the ledger accounts.

ILLUSTRATION 3.8

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The Recording Process Illustrated

The next ten slides show the basic steps in the recording process,
using the October transactions of Yazici Advertising A.Ş. Yazici’s
accounting period is a month.
A basic analysis and a debit-credit analysis precede the journalizing
and posting of each transaction.
For simplicity, we use the T-account form in the illustrations instead
of the standard account form.

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The Recording Process Illustrated
Investment of Cash by Shareholders

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The Recording Process Illustrated
Purchase of Office Equipment

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The Recording Process Illustrated
Receipt of Cash for Future Service

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The Recording Process Illustrated
Payment of Monthly Rent

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The Recording Process Illustrated
Payment for Insurance

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The Recording Process Illustrated
Purchase of Supplies on Credit

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The Recording Process Illustrated
Signing a Contract

ILLUSTRATION 3.16
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The Recording Process Illustrated
Declaration and Payment of Dividend

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The Recording Process Illustrated
Payment of Salaries

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The Recording Process Illustrated
Receipt of Cash for Services Provided

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Trial Balance

A Trial Balance
• List of each account and its balance at a given time in the
order in which they appear in the ledger.
• Debit balances listed in the left column and credit balance
in the right column.
• Used to prove the mathematical equality of debit and
credit balances.
• Uncovers errors in journalizing and posting.

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Trial Balance (Unadjusted)

ILLUSTRATION 3.20
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 Learning Objective 3
Identify and prepare adjusting entries.

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Identify and Prepare Adjusting Entries

Makes it possible to:

• Report on the statement of financial position the
appropriate assets, liabilities, and equity at the statement
date.
• Report on the income statement the proper revenues and
expenses for the period.
• Adjusting entries are required every time a company,
prepares financial statements.
• Companies date the entries as of the statement of
financial position date.
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Categories of Adjusting Entries

ILLUSTRATION 3.21

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Deferrals

Deferrals are expenses or revenues that are recognized at a date

later than the point when cash was originally exchanged.
Two types of deferrals
• Prepaid expenses
• Unearned revenues
If a company does not make an adjustment for these deferrals,
• the asset and liability are overstated, and
• the related expense and revenue are understated.

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Adjusting Entries for Deferrals

ILLUSTRATION 3.22

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Adjusting Entries for Deferrals
Adjustment for Supplies
Inventory count at the close of business on Oct 31 reveals that
Transaction
10,000 of supplies are on hand. .

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Adjusting Entries for Deferrals
Supplies

Statement Presentation:
Supplies identifies that
portion of the asset’s
cost that will provide
future economic benefit.

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Adjusting Entries for Deferrals
Supplies Expense
Statement Presentation:
Supplies expense shows
a balance of ₺15,000,
which equals the cost of
supplies used in October.

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Adjusting Entries for Deferrals
Adjustment for Insurance
Insurance account still shows 6,000 in Oct 31 trial balance.
Insurance expires each month.

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Adjusting Entries for Deferrals
Prepaid Insurance
Statement
Presentation:
Prepaid Insurance
represents the
unexpired cost for the
remaining 11 months
of coverage.

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Adjusting Entries for Deferrals
Insurance Expense
Statement Presentation:
Insurance expense
identifies that portion of
the asset’s cost that
expired in October.

ILLUSTRATION 3.36

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Adjusting Entries for Deferrals
Adjustment for Depreciation
Yazici Advertising estimates depreciation on its office equipment
to be 4,800 a year.

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Adjusting Entries for Deferrals
Accumulated Depreciation
Statement Presentation:
Accumulated Depreciation is a
contra asset account.

ILLUSTRATION 3.37

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Adjusting Entries for Deferrals
Depreciation Expense
Statement Presentation:
Depreciation expense identifies
that portion of the asset’s cost
that expired in October.

ILLUSTRATION 3.36

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Adjusting Entries for Deferrals
Adjustment for Unearned Service Revenue
Based on an evaluation of the service Yazici performed for Knox
during October, the company should recognize 4,000 of revenue
in October

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Adjusting Entries for Deferrals
Unearned Service Revenue
Statement Presentation:
Unearned service
revenue represents the
remaining advertising
services expected to be
performed in the future.

ILLUSTRATION 3.37

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Adjusting Entries for Deferrals
Service Revenue
Statement Presentation:
Service revenue shows total
revenue recognized in October.
*The Service revenue balance is
after posting an adjusting entry
for accrued revenue shown in
Slide 62.

ILLUSTRATION 3.36

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Adjusting Entries for Accruals

Accruals are made to record

• revenues for services performed and
• expenses incurred in the current accounting period.
Without an accrual adjustment, the
• revenue account (and the related asset account) or the
• expense account (and the related liability account) are
understated.

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Adjusting Entries for Accruals

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Adjusting Entries for Accruals
Adjustment for Receivable and Revenue Accounts
In October Yazici Advertising performed services worth 2,000 that
were not billed to clients on or before October 31

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Adjusting Entries for Accruals
Accounts Receivable
Statement Presentation:
Accounts Receivable shows total
amount owed by customers on
October 31, 2022.

ILLUSTRATION 3.37

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Adjusting Entries for Accruals
Service Revenue
Statement Presentation:
Service revenue shows total
revenue recognized in October.

ILLUSTRATION 3.36

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Adjusting Entries for Accruals
Formula for Computing Interest
Accrued Interest. Yazici Advertising signed a three-month note payable in
the amount of ₺50,000 on October 1. The note requires interest at an
annual rate of 12 percent. Three factors determine the amount of the
interest accumulation:

ILLUSTRATION 3.30

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Adjusting Entries for Accruals
Adjustment for Interest

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Adjusting Entries for Accruals
Interest Payable
Statement Presentation:
Interest Payable shows the
interest owed by Yazici
Advertising on October 31,
2022.

ILLUSTRATION 3.37

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Adjusting Entries for Accruals
Interest Expense
Statement Presentation:
Interest Expense shows total
interest recognized in October.

ILLUSTRATION 3.36

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Adjusting Entries for Accruals
Accrued Salaries and Wages

ILLUSTRATION 3.32

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Adjusting Entries for Accruals
Adjustment for Salaries and Wages Expense

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Adjusting Entries for Accruals
Salaries and Wages Payable
Statement Presentation:
Salaries and Wages Payable
shows the salaries and wages
owed by Yazici Advertising on
October 31, 2022.

ILLUSTRATION 3.37

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Adjusting Entries for Accruals
Salaries and Wages Expense
Statement Presentation:
Salaries and Wages Expense
shows total salaries and wages
recognized in October.

ILLUSTRATION 3.36

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Adjusting Entries for Accruals
Adjustment for Bad Debt
Based on an past experience, Yazici dvertising reasonably
estimates a bad debt expense for the month of 1,600

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Adjusting Entries for Accruals
Allowance for Doubtful Accounts
Statement Presentation:
Allowance for Doubtful
Accounts is a contra asset
account.

ILLUSTRATION 3.37

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Adjusting Entries for Accruals
Bad Debt Expense
Statement Presentation:
Bad Debt Expense is a non-cash
expense.

ILLUSTRATION 3.36

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Adjusted Trial Balance

Shows the balance of all

accounts, after adjusting
entries, at the end of the
accounting period.
Proves the equality of the
total debit and credit
balances

ILLUSTRATION 3.35

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 Learning Objective 4
Prepare financial statements from the
adjusted trial balance and prepare closing
entries.

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Preparing Financial Statements
Income Statement and Retained Earnings
Statement

ILLUSTRATION 3.36

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Preparing Financial Statements
Statement of Financial Position

ILLUSTRATION 3.37

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Closing

Closing Process
• Reduce the balance of nominal (temporary) accounts to zero in
preparation for the next period’s transactions.
• Transfer all revenue and expense account balances (income
statement accounts) to an account called Income Summary.
• Income Summary balance is then transferred to Retained
Earnings.
• Statement of financial position (asset, liability, and equity)
accounts are not closed.
• Dividends are closed directly to Retained Earnings.

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Closing Entries Journalized

ILLUSTRATION 3.38

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Posting of Closing Entries

ILLUSTRATION 3.39

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Post-Closing Trial Balance

ILLUSTRATION 3.40

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The Accounting Cycle Summarized

1. Enter the transactions of the period in appropriate journals.

2. Post from the journals to the ledger (or ledgers).
3. Prepare an unadjusted trial balance (trial balance).
4. Prepare adjusting journal entries and post to the ledger(s).
5. Prepare a trial balance after adjusting (adjusted trial balance).
6. Prepare the financial statements from the adjusted trial
balance.
7. Prepare closing journal entries and post to the ledger(s).
8. Prepare a trial balance after closing (post-closing trial balance).
9. Prepare reversing entries (optional) and post to the ledger(s).

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 Learning Objective 5
Prepare financial statements for a
merchandising company.

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Financial Statements for a
Merchandising Company
The income statement for Ciner Cabinets is shown in
Illustration 3.41.
The income statement classifies amounts into such categories
as gross profit on sales, income from operations, income
before income taxes, and net income.
Earnings per share information is required to be shown on the
face of the income statement for a company, although we
omit this item here.

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Income Statement for a Merchandising
Company

ILLUSTRATION 3.41
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Retained Earnings Statement for a
Merchandising Co.

ILLUSTRATION 3.42

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Statement of Financial Position for a
Merchandising Company

ILLUSTRATION 3.43

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 Learning Objective 6
Differentiate the cash basis of
accounting from the accrual basis of
accounting.

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Cash-Basis Accounting Versus Accrual-
Basis Accounting
Most companies use accrual-basis accounting. They
• recognize revenue when the performance obligation is satisfied and
• expenses in the period incurred, without regard to the time of receipt
or payment of cash.
Under the strict cash-basis, companies Cash basis financial
• record revenue only when they receive cash, and statements are not
in conformity with
• record expenses only when they disperse cash. IFRS.

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Cash-Basis Accounting
Income Statement
Illustration: Eser Contractor signs an agreement to construct a garage for
₺22,000. In January, Eser begins construction, incurs costs of ₺18,000 on
credit, and by the end of January delivers a finished garage to the buyer.
In February, Eser collects ₺22,000 cash from the customer. In March, Eser
pays the ₺18,000 due the creditors.

ILLUSTRATION 3A.1

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Cash-Basis Accounting
Statement of Financial Position
Illustration: Eser Contractor signs an agreement to construct a garage for
₺22,000. In January, Eser begins construction, incurs costs of ₺18,000 on
credit, and by the end of January delivers a finished garage to the buyer.
In February, Eser collects ₺22,000 cash from the customer. In March, Eser
pays the ₺18,000 due the creditors.

ILLUSTRATION 3A.3

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Accrual-Basis Accounting
Income Statement
Illustration: Eser Contractor signs an agreement to construct a garage for
₺22,000. In January, Eser begins construction, incurs costs of ₺18,000 on
credit, and by the end of January delivers a finished garage to the buyer.
In February, Eser collects ₺22,000 cash from the customer. In March, Eser
pays the ₺18,000 due the creditors.

ILLUSTRATION 3A.2

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Accrual-Basis Accounting
Statement of Financial Position
Illustration: Eser Contractor signs an agreement to construct a garage for
₺22,000. In January, Eser begins construction, incurs costs of ₺18,000 on
credit, and by the end of January delivers a finished garage to the buyer.
In February, Eser collects ₺22,000 cash from the customer. In March, Eser
pays the ₺18,000 due the creditors.

ILLUSTRATION 3A.4

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Conversion from Cash to Accrual Basis

Illustration: Dr. L. Liwan, like many small business owners, keeps her accounting
records on a cash basis. In the year 2022, Dr. Liwan received ₺300,000 from her
patients and paid ₺170,000 for operating expenses, resulting in an excess of cash
receipts over disbursements of ₺130,000 (₺300,000 - ₺170,000). At January 1
and December 31, 2022, she has accounts receivable, unearned service revenue,
accrued liabilities, and prepaid expenses as shown below.

ILLUSTRATION 3A.5

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Service Revenue Computation

To convert the amount of cash received from patients to service revenue on an accrual
basis, we must consider changes in accounts receivable and unearned service revenue
during the year.

ILLUSTRATION 3A.6

ILLUSTRATION 3A.7

ILLUSTRATION 3A.8
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Operating Expense Computation

To convert cash paid for operating expenses during the year to operating expenses on an
accrual basis, we must consider changes in prepaid expenses and accrued liabilities.

ILLUSTRATION 3A.9

ILLUSTRATION 3A.10

ILLUSTRATION 3A.11
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Theoretical Weakness of the Cash Basis

• Today’s economy is considerably more lubricated by credit

than by cash.
• The accrual basis, not the cash basis, recognizes all aspects
of the credit phenomenon.
• Investors, creditors, and other decision makers seek timely
information about a company’s future cash flows.

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 Learning Objective 7
Identify adjusting entries that may be
reversed.

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Using Reversing Entries for Accruals

A company most often uses reversing entries to reverse two

types of adjusting entries:
1. accrued revenues and
2. accrued expenses.

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Comparison of Entries for Accruals,
With and Without Reversing Entries

ILLUSTRATION 3B.1

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Using Reversing Entries for Deferrals

Up to this point, we assumed the recording of all deferrals as

prepaid expense or unearned revenue. In some cases, though, a
company records deferrals directly in expense or revenue accounts.
When this occurs, a company may also reverse deferrals.
To illustrate the use of reversing entries for prepaid expenses, we
use the following trans- action and adjustment data.
1. December 10 (initial entry): Purchased 20,000 of supplies with
cash.
2. December 31 (adjusting entry): Determined that 5,000 of
supplies are on hand.

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Comparison of Entries for Deferrals,
With and Without Reversing Entries

ILLUSTRATION 3B.2

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Summary of Reversing Entries

1. All accruals should be reversed.

2. All deferrals for which a company debited or credited the
original cash transaction to an expense or revenue account
should be reversed.
3. Adjusting entries for depreciation and bad debts are not
reversed.
Reversing entries do not have to be used.

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Copyright © 2020 John Wiley & Sons, Inc. 90