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Prepared by:
Patricia Zima, CA
Mohawk College of Applied Arts and Technology
The Accounting Information
System
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Basic Terminology
Journalizing and Posting
A Journal is a book of original entry for all
transactions
The General Journal is a chronological listing of
transactions expressed as debits and credits to
particular accounts (known as a journal entry)
Special Journals are used to summarize
transactions with common characteristics
(e.g. cash receipts, sales, purchases)
Posting: when the transaction information entered
in the journal is transferred to the general ledger
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Basic Terminology
Ledger
Book (electronic database) containing all
accounts
Each account has a separate page
General ledger contains all asset, liability,
and all equity related accounts (capital,
revenue, and expenses)
Subsidiary ledger contains details related to
a specific general ledger account (example:
accounts receivable subsidiary ledger)
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Basic Terminology
Trial balance
Listing of all accounts and their balances
from the general ledger at a given point in
time
Objective: prove the mathematical equality
of debits and credits after posting (i.e. to
ensure general ledger is in balance)
Prepared after end of period adjustments
(called Adjusted Trial Balance) and possibly
after closing entries (called Post-closing
Trial Balance)
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Basic Terminology
Adjusting entries
Entries made at the end of an accounting period
Brings all accounts up to date on an accrual
accounting basis
Ensures that revenue recognition principle are
followed and that proper matching occurs
Four classifications of adjusting entries:
Prepayment Accruals
1. Prepaid expenses 2. Accrued revenues
3. Unearned revenues 4. Accrued expenses
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Basic Terminology
Financial statements
Final summaries of the accounting data for a
specific time period
Four statements:
Balance Sheet-shows financial condition at
a specific date
Income Statement-measures the results of
operations during a period of time
Statement of Cash Flows-shows sources
and uses of cash
Statement of Retained Earnings
Optional: Statement of Comprehensive Income
(or as part of Income Statement) 9
Debits and Credits
Debit (Dr.) Credit (Cr.)
To record or enter an To record or enter an
amount on the left side amount on the right side
of a general ledger of a general ledger
account account
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The Rules of Debit and
Credit
To increase the balance of any account,
record the amount in the normal balance
column
To decrease the balance of any account,
record the amount in the column opposite to
its normal balance
When any transaction is correctly recorded,
the accounting equation will remain in
balance
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The Rules of Debit and
Credit
Account Debit Credit
Assets Increase Decrease
13
Ownership Structure
Owners Dividends (for
investments corporation) or
(common shares for withdrawals (for
corporation) or proprietor or
capital (for partnership)
proprietor
or partnership)
Net Income Net Loss
+ -
+ $3,000 + $3,000
Account Debit
Cash Credit
Cash 80,000
80,00 Accounts Receivable 72,000
0 Advertising Supplies 25,000
Notes Prepaid Insurance 6,000
Payable Office Equipment 50,000
50,00 Notes Payable 50,000
0 Accounts Payable
Dividen 25,000
ds Unearned Service Revenue
5,000
12,000
Revenu Common Shares
100,000
e
100,00 Dividends 5,000
0 Service Revenue
100,000
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Salaries Expense 40,000
Preparation of Trial Balance
From the previous example, we can see that
the trial balance is in balance
However, the trial balance only proves the
mathematical accuracy of the ledger
Errors may still exist such as the following:
1. Transaction not recorded
2. Journal entry not posted
3. Journal entry posted twice
4. Incorrect accounts used in either the
journal or posting
5. Offsetting errors made during recording
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Adjusting Journal Entries
Adjusting entries ensure that revenue
recognition and matching are followed within
the period
Reasons for adjusting entries include:
To record those events that are not
journalized daily
To record those costs, which expire with
time and are therefore not recorded
To record item previously unrecorded
Adjusting entries are required each time
financial statements are prepared 20
Adjusting Entries
Prepayments Accruals
1. Prepayments made in
cash and recorded as 3. Revenues earned but not
assets before item is used yet received in cash and not
(Prepaid Expenses) recorded (Accrued Revenues)
2. Revenue received in 4. Expenses incurred but
cash and recorded as not yet paid in cash and not
liabilities before being recorded (Accrued Expenses)
earned (Unearned Revenue)
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Adjusting Journal Entries
Prepaid expenses expire either with the
passage of time (e.g. rent and insurance) or by
being used and consumed (e.g. supplies)
Example: Company paid $6,000 for one year
insurance when coverage begins October 1
Adjust for Prepaid Insurance on Dec. 31 :
Dr Insurance Expense 1,500
Cr Prepaid Insurance 1,500
($6,000/12 * 3)
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Adjusting Journal Entries
When payment is received from customers for
services (or goods) that will be provided in a future
accounting period, a liability (unearned revenue) is
recognized
e.g. Rent, magazine subscriptions, deposits
Example: Company received $12,000 for four
months advertising services that begins Oct. 1.
$12,000 was credited to unearned revenue
Adjustment required on December 31 :
Dr Unearned Revenue 9,000
Cr Service Revenue 9,000
($12,000/4 * 3)
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Adjusting Journal Entries
Expenses must be accrued when they are
incurred; also revenues must be recorded as
earned
Accruals required: interest expense, salaries
expense, bad debts expense, interest earned
Example: assume on January 5, a company
pays $20,000 for salaries which includes
$10,000 of salaries for December
Adjustment required on December 31:
Dr Salaries Expense 10,000
Cr Salaries Payable 10,000
24
Closing Entries
Closing entries are made to close all nominal
accounts (revenue and expense accounts) for
the year
The balances in these accounts are
transferred to a clearing account (Income
Summary)
The balance in Income Summary represents
net income or net loss for the period
Real (or permanent) accounts are not closed
The Dividends account is closed to retained
earnings
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Closing Entries
The following closing entries are made (assume
net income for the year):
1. Income Summary $$$
Expense Accounts (Individually) $$$
2. Revenue Accounts (Individually) $$$
Income Summary $$$
3. Income Summary $$$
Retained Earnings $$$
4. Retained Earnings $$$
Dividends $$$
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Scheme of Closing Entries
Ret. Earnings
4 3
Expense Revenue
1 2
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Closing Entries: Inventory
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Closing Entry: Periodic
Inventory System
Dr Cr
To record Inventory
ending balance Inventory (ending) $ $
Purchases Returns
Purchases Returns $
$
Trans-In
Cost of Goods Sold $
$ Transportation-in $
Purchases
$ Purchases $ To remove
Inventory (Begin) $ beginning balance
29
Periodic Inventory:
Closing Entry
Collegiate Apparel Shop has the following
balances at year end. The company uses a
periodic inventory system.
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