Chapter 3

The Accounting Information System

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1. Accounting EquationA = L + SEExpanded: A = L + SE + R + G -

E - LDefinitions of elements

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2. Financial StatementsBalance SheetIncome StatementStatement of Stockholders’

Equity (or Retained Earnings Statement)

Cash Flow StatementArticulation

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3. AccountsDefinitionNumber neededT accountGeneral ledger

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4. Debits and CreditsDefinitionsIncreases and decreasesNormal balanceBalance of an account

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5. Journal EntriesJournalizingFormatPostingSpecial journalsAnalyzing transactionsE 3-1

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6. Trial BalanceDefinitionPurposeWhen prepared?Order of accounts

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7. Adjusting EntriesPurposeTypes

◦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

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8. Deferred Expense Adjustments

On January 1 you paid $1,800 for three months’ rent in advance.

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9. Deferred Revenue Adjustments

On May 1 your tenant pays you $3,600 for four months’ rent in advance.

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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

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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

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12. Reversing EntriesPurposeIf you choose to use reversing

entries, what adjustments should be reversed?◦All accruals◦Deferrals initially recorded as a

revenue or expense

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13. Other Adjusting EntriesBad Debts AdjustmentDepreciation ExpenseInventory and cost of good sold

adjustments◦Perpetual inventory system◦Periodic inventory system

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14. Closing EntriesPurposeEntries

◦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

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15. Cash Basis of AccountingDefinitionGAAP requirementsConversion to accrual basis

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