CH 03

Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
3-1
The Accounting CHAPTER 3
Information System
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe the basic accounting 4. Prepare financial statements
information system. from the adjusted trial
balance and prepare closing
2. Record and summarize basic
entries.
transactions.
5. Prepare financial statements
3. Identify and prepare adjusting
for a merchandising
entries.
company.
3-2
PREVIEW OF CHAPTER 3
Intermediate Accounting
IFRS 3rd Edition
Kieso ● Weygandt ● Warfield
3-3
Accounting LEARNING OBJECTIVE 1
Describe the basic accounting
Information System information system.
Accounting Information System

 Collects and processes transaction data.
 Disseminates financial information to interested parties.
 Varies widely from business to business.
► Nature of business
► Type of transactions
► Size of business
► Volume of data to be handled
► Informational demands
3-4 LO 1
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?
3-5 LO 1
Basic Terminology
 Event  Journal
 Transaction  Posting
 Account  Trial Balance
 Real Account  Adjusting Entries
 Nominal Account  Financial Statements
 Ledger  Closing Entries
3-6 LO 1
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.
3-7 LO 1
Debits and Credits
 An arrangement that shows the

Account
effect of transactions on an
account.
 Debit = “Left”
 Credit = “Right”
An Account can Account Name

be illustrated in a Debit / Dr. Credit / Cr.
T-Account form.
3-8 LO 1
Debits and Credits
If the sum of Debit entries are greater than the sum of

Credit entries, the account will have a debit balance.
Account Name
Debit / Dr. Credit / Cr.
Transaction #1 $10,000 $3,000 Transaction #2

Transaction #3 8,000
Balance $15,000
3-9 LO 1
Debits and Credits
If the sum of Debit entries are less than the sum of

Credit entries, the account will have a credit balance.
Account Name
Debit / Dr. Credit / Cr.
Transaction #1 $10,000 $3,000 Transaction #2

8,000 Transaction #3
Balance $1,000
3-10 LO 1
Debits and Credits Summary
Normal Normal
Balance Balance
Debit Credit
3-11 LO 1
Debits and Credits Summary
Statement of Financial
Position Income Statement
Asset = Liability + Equity Revenue - Expense
Debit
Credit
3-12 LO 1
The Accounting Equation
Relationship among the assets, liabilities and equity of a

business: ILLUSTRATION 3.3
Expanded Equation and
Debit/Credit Rules and Effects
The equation must be in balance after every transaction. For

every Debit there must be a Credit.
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Double-Entry System
1. Owners invest $40,000 in exchange for ordinary

shares.
Assets = Liabilities + Equity
+ 40,000 + 40,000
3-14 LO 1
Double-Entry System
2. Disburse $600 cash for secretarial wages.
- 600 - 600
(expense)
3-15 LO 1
Double-Entry System
3. Purchase office equipment priced at $5,200, giving a

6 percent promissory note in exchange.
+ 5,200 + 5,200
3-16 LO 1
Double-Entry System
4. Received $4,000 cash for services performed.
+ 4,000 + 4,000
(revenue)
3-17 LO 1
Double-Entry System
5. Pay off a short-term liability of $7,000.
- 7,000 - 7,000
3-18 LO 1
Double-Entry System
6. Declared a cash dividend of $5,000.
+ 5,000 - 5,000
3-19 LO 1
Double-Entry System
7. Convert a non-current liability of $80,000 into ordinary

shares.
- 80,000 + 80,000
3-20 LO 1
Double-Entry System
8. Pay cash of $16,000 for a delivery van.
- 16,000
+ 16,000
Note that the accounting equation equality is

maintained after recording each transaction.
3-21 LO 1
Financial Statements and Ownership Structure
Ownership structure dictates the types of accounts that are

part of the equity section.
Proprietorship or
Corporation
Partnership
 Owner’s Capital  Share capital

 Owner’s Drawing  Share premium
 Dividends
 Retained Earnings
3-22 LO 1
ILLUSTRATION 3.4
Income Statement and
Equity Relationships
Financial
Statements
and Ownership
Structure
Investments by shareholders
Net income retained in the
business
3-23 LO 1
Financial Statements and Ownership Structure
ILLUSTRATION 3.5
Effects of Transactions on Equity Accounts
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THE ACCOUNTING CYCLE
ILLUSTRATION 3.6
Transactions
Reversing entries Journalization
Post-closing trail balance Posting
Closing Trial balance
Work
Statement preparation Sheet
Adjustments
Adjusted trial balance
3-25 LO 1
THE ACCOUNTING CYCLE
Identifying and Recording Transactions and

Other Events
An item should be recognized in the financial statements 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.
3-26 LO 1
Record and Summarize LEARNING OBJECTIVE 2
Record and summarize basic
Basic Transactions transactions.
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.
ILLUSTRATION 3.7
3-27 Technique of Journalizing LO 2
Posting
Posting – The process of transferring amounts from the
journal to the ledger accounts.
ILLUSTRATION 3.7
ILLUSTRATION 3.8
3-28 Posting a Journal Entry LO 2
ILLUSTRATION 3.8
Posting a Journal
Entry
3-29 LO 2
Chart of Accounts
Chart of accounts lists the accounts and the account

numbers that identify their location in the ledger.
The numbering system that identifies the accounts

usually starts with the statement of financial position
accounts and follows with the income statement accounts.
3-30 LO 2
Chart of Accounts ILLUSTRATION 3.9
Chart of Accounts for
Yazici Advertising A.Ş.
Chart of accounts lists the accounts and the account

numbers that identify their location in the ledger.
The numbering system that identifies the accounts

usually starts with the statement of financial position
accounts and follows with the income statement accounts.
3-31 LO 2
The Recording Process Illustrated
ILLUSTRATIONS 3.10 through 3.19 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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ILLUSTRATION 3.10
3-33 LO 2
ILLUSTRATION 3.11
3-34 LO 2
ILLUSTRATION 3.12
3-35 LO 2
ILLUSTRATION 3.13
3-36 LO 2
ILLUSTRATION 3.14
3-37 LO 2
ILLUSTRATION 3.15
3-38 LO 2
ILLUSTRATION 3.17
3-39 LO 2
ILLUSTRATION 3.18
3-40 LO 2
ILLUSTRATION 3.19
3-41 LO 2
Trial Balance
A Trial Balance
 List of each account and its balance 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.
3-42 LO 2
ILLUSTRATION 3.20
Trial Balance (Unadjusted)
3-43 LO 2
Identify and Prepare LEARNING OBJECTIVE 3
Identify and prepare adjusting
Adjusting Entries 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.
3-44 LO 3
Identify and Prepare Adjusting Entries
Types of Adjusting Entries
Deferrals Accruals
1. Prepaid Expenses. 3. Accrued Revenues.

Expenses paid in cash Revenues for services
before they are used or performed but not yet
consumed. received in cash or recorded.
2. Unearned Revenues. 4. Accrued Expenses.

Cash received before Expenses incurred but not
services are performed. yet paid in cash or recorded.
ILLUSTRATION 3.21
Categories of Adjusting Entries
3-45 LO 3
Adjusting Entries for 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.
3-46 LO 3
ILLUSTRATION 3.22 Adjusting Entries for Deferrals
3-47 LO 3
Prepaid Expenses. Assets paid for and recorded before a

company uses them.
Cash Payment BEFORE Expense Recorded
Prepayments often occur in regard to:

 Insurance  Rent
 Supplies  Buildings and equipment
 Advertising
3-48 LO 3
Supplies. Yazici Advertising purchased advertising supplies

costing ₺25,000 on October 5. Prepare the journal entry to
record the purchase of the supplies.
Oct. 5 Supplies 25,000

Cash 25,000
Supplies Cash
Debit Credit Debit Credit
25,000 25,000
3-49 LO 3
Supplies. An inventory count at the close of business on

October 31 reveals that ₺10,000 of supplies are still on hand.
Oct. 31 Supplies Expense 15,000

Supplies 15,000
Supplies Supplies Expense

25,000 15,000 15,000
10,000
3-50 LO 3
ILLUSTRATION 3.23
Adjustment for Supplies
3-51 LO 3
Adjusting Entries
for Deferrals
Statement
Presentation:
Supplies identifies that
portion of the asset’s
cost that will provide
future economic benefit.
ILLUSTRATION 3.37
3-52
Statement
Presentation:
Supplies expense
shows a balance of
₺15,000, which
equals the cost of
supplies used in
October.
ILLUSTRATION 3.36
3-53 LO 3
Insurance. On Oct. 4th, Yazici Advertising paid ₺6,000 for a

one-year fire insurance policy, beginning October 1. Show the
entry to record the purchase of the insurance.
Oct. 4 Prepaid Insurance 6,000

Cash 6,000
Prepaid Insurance Cash

6,000 6,000
3-54 LO 3
Insurance. An analysis of the policy reveals that ₺500 (₺6,000

÷ 12) of insurance expires each month. Thus, Yazici makes the
following adjusting entry.
Oct. 31 Insurance Expense 500

Prepaid Insurance 500
Prepaid Insurance Insurance Expense

6,000 500 500
5,500
3-55 LO 3
ILLUSTRATION 3.24
Adjustment for Insurance
3-56 LO 3
Adjusting Entries
for Deferrals
Statement
Presentation:
Prepaid Insurance
represents the
unexpired cost for the
remaining 11 months
of coverage.
ILLUSTRATION 3.37
3-57
Statement
Presentation:
Insurance
expense identifies
that portion of the
asset’s cost that
expired in
October.
ILLUSTRATION 3.36
3-58 LO 3
Depreciation. Yazici Advertising estimates depreciation on its

office equipment to be ₺400 per month. Yazici recognizes
depreciation for October by the following adjusting entry.
Oct. 31 Depreciation Expense 400

Accumulated Depreciation 400
Depreciation Expense Accumulated Depreciation

400 400
3-59 LO 3
ILLUSTRATION 3.25 Adjustment for Depreciation
3-60 LO 3
Adjusting Entries
for Deferrals
Statement
Presentation:
Accumulated
Depreciation—is a
contra asset account.
ILLUSTRATION 3.37
3-61
Statement
Presentation:
Depreciation
expense identifies
that portion of the
asset’s cost that
expired in October.
ILLUSTRATION 3.35
3-62 LO 3
Receipt of cash before the services are performed is recorded

as a liability called unearned revenues.
Cash Receipt BEFORE Revenue Recorded
Unearned revenues often occur in regard to:
 Rent  Magazine subscriptions

 Airline tickets  Customer deposits
 Tuition
3-63 LO 3
Unearned Revenue. Yazici Advertising received ₺12,000 on

October 2 from KC for advertising services expected to be
completed by December 31. Show the journal entry to record
the receipt on Oct. 2nd.
Oct. 2 Cash 12,000

Unearned Service Revenue 12,000
Cash Unearned Service Revenue

12,000 12,000
3-64 LO 3
Unearned Revenues. An evaluation of the service Yazici

performed for KC during October, the company determines that
it should recognize ₺4,000 of revenue in October.
Oct. 31 Unearned Service Revenue 4,000

Service Revenue 4,000
Service Revenue Unearned Service Revenue

100,000 4,000 12,000
4,000
104,000 8,000
3-65 LO 3
ILLUSTRATION 3.27
Adjustment for Unearned Service Revenue
3-66 LO 3
Adjusting Entries
for Deferrals
Statement
Presentation:
Unearned service
revenue represents the
remaining advertising
services expected to be
performed in the future.
ILLUSTRATION 3.37
3-67
Statement
Presentation:
Service revenue
shows total revenue
recognized in
October.
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.
3-69 LO 3
3-70 ILLUSTRATION 3.28 Adjusting Entries for Accruals LO 3
Revenues recorded for services performed for which cash has

yet to be received at statement date are accrued revenues.
Adjusting entry results in:
Revenue Recorded BEFORE Cash Receipt
Accrued revenues often occur in regard to:

 Rent
 Interest
 Services performed
3-71 LO 3
Accrued Revenues. In October Yazici Advertising performed

services worth ₺2,000 that were not billed to clients on or
before October 31. Yazici makes the following adjusting entry.
Oct. 31 Accounts Receivable 2,000
Accounts Receivable Service Revenue

72,000 100,000
2,000 4,000
2,000
74,000 106,000
3-72 LO 3
ILLUSTRATION 3.29
Accrual Adjustment for Receivable and Revenue Accounts LO 3
3-73
Adjusting Entries
for Accruals
ILLUSTRATION 3.36
ILLUSTRATION 3.37
3-74 LO 3
Expenses incurred but not yet paid in cash or recorded.
Adjusting entry results in:
Expense Recorded BEFORE Cash Payment
Accrued expenses often occur in regard to:
 Rent  Taxes
 Interest  Salaries
3-75 LO 3
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:
1 2 3
ILLUSTRATION 3.30
Formula for Computing Interest for One Month
3-76 LO 3
Accrued Interest. Yazici Advertising signed a three-month,

12%, note payable in the amount of ₺50,000 on October 1.
Prepare the adjusting entry on Oct. 31 to record the accrual of
interest.
Oct. 31 Interest Expense 500
Interest Payable 500
Interest Expense Interest Payable

500 500
3-77 LO 3
ILLUSTRATION 3.31
Adjustment for Interest
3-78 LO 3
Adjusting Entries
for Accruals
ILLUSTRATION 3.36
ILLUSTRATION 3.37
3-79 LO 3
Accrued Salaries. At October 31, the salaries and wages for

these days represent an accrued expense and a related liability to
Yazici. The employees receive total salaries of ₺10,000 for a five-
day work week, or ₺2,000 per day.
ILLUSTRATION 3.32
Accrued Salaries and Wages
3-80 LO 3
Accrued Salaries. Employees receive total salaries of ₺10,000

for a five-day work week, or ₺2,000 per day. Prepare the
adjusting entry on Oct. 31 to record accrual for salaries.
Oct. 31 Salaries and Wages Expense 6,000

Salaries and Wages Payable 6,000
Salaries and Wages Expense Salaries and Wages Payable

40,000 6,000
6,000
46,000
3-81 LO 3
ILLUSTRATION 3.33
Adjustment for Salaries and Wages Expense
3-82 LO 3
Adjusting Entries
for Accruals
ILLUSTRATION 3.36
ILLUSTRATION 3.37
3-83 LO 3
Accrued Salaries. On November 23, Yazici Advertising will again

pay total salaries of ₺40,000. Prepare the entry to record the
payment of salaries on November 23.
Nov. 23 Salaries and Wages Payable 6,000

Salaries and Wages Expense 34,000
Cash 40,000
Salaries and Wages Expense Salaries and Wages Payable

34,000 6,000 6,000
3-84 LO 3
Bad Debts. Assume Yazici Advertising reasonably estimates a

bad debt expense for the month of ₺1,600. It makes the
adjusting entry for bad debts as follows.
Oct. 31 Bad Debt Expense 1,600

Allowance for Doubtful Accounts 1,600
ILLUSTRATION 3.34
Adjustment for Bad Debt
Expense
3-85 LO 3
Adjusting Entries
for Accruals
ILLUSTRATION 3.36
ILLUSTRATION 3.37
3-86 LO 3
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
3-87
Preparing Financial LEARNING OBJECTIVE 4
Prepare financial statements
Statements from the adjusted trial balance
and prepare closing entries.
Financial Statements are prepared directly from the

Adjusted Trial Balance.
Retained Statement
Income
Earnings of Financial
Statement
Statement Position
3-88 LO 4
ILLUSTRATION 3.36 Preparation of the Income
Statement and Retained Earnings Statement from
the Adjusted Trial Balance
3-89
ILLUSTRATION 3.37
Preparation of the Statement of Financial Position from the Adjusted Trial Balance
3-90 LO 4
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 Retained

Earnings.
 Statement of financial position (asset, liability, and equity)

accounts are not closed.
 Dividends are closed directly to Retained Earnings.
3-91 LO 4
Closing Journal Entries
Closing Entries
Income Summary 106,000

Salaries & Wages Expense 46,000
Supplies Expense 15,000
Rent Expense 9,000
Insurance Expense 500
Interest Expense 500
Depreciation Expense 400
Bad Debt Expense 1,600

Retained Earnings 33,000
Retained Earnings 5,000

Dividends 5,000
ILLUSTRATION 3.35
3-92 LO 4
ILLUSTRATION 3.39
Posting of Closing Entries
3-93 LO 4
ILLUSTRATION 3.40
3-94 LO 4
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).
3-95 LO 4
Financial Statements for a LEARNING OBJECTIVE 5
Prepare financial
Merchandising Company statements for a
merchandising company.
The income statement for Ciner 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.
3-96 LO 5
ILLUSTRATION 3.41
Merchandising
Company
3-97 LO 5
Retained Earnings Statement
ILLUSTRATION 3.42
3-98 LO 5
Statement
of Financial
Position
ILLUSTRATION 3.43
3-99
Cash-Basis Accounting Versus Accrual-Basis
APPENDIX 3A
Accounting
LEARNING OBJECTIVE 6
Differentiate the cash basis of accounting from the accrual basis of 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.
Cash basis
Under the strict cash-basis, companies financial
statements are
 record revenue only when they receive cash, and
not in conformity
 record expenses only when they disperse cash. with IFRS.
3-100 LO 6
APPENDIX 3A
Accounting
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
3-101 LO 6
APPENDIX 3A
Accounting
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
3-102 LO 6
APPENDIX 3A
Accounting
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 2019, 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, 2019,
she has accounts receivable, unearned service revenue, accrued
liabilities, and prepaid expenses as shown below.
ILLUSTRATION 3A.5
3-103 LO 6
APPENDIX 3A 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.8
ILLUSTRATION 3A.5
3-104 LO 6
APPENDIX 3A 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.11
ILLUSTRATION 3A.5
3-105 LO 6
ILLUSTRATION 3A.12
3-106 LO 6
APPENDIX 3A
Accounting
Theoretical Weaknesses 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.
3-107 LO 6
APPENDIX 3B Using Reversing Entries
Identify adjusting entries that may be reversed.
A company most often uses reversing entries to reverse two

types of adjusting entries:
1. accrued revenues and
2. accrued expenses.
3-108 LO 7
Illustration of Reversing Entries—Accruals

ILLUSTRATION 3B.1
3-109 LO 7
Illustration of Reversing Entries—Deferrals

ILLUSTRATION 3B.2
3-110 LO 7
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.
3-111 LO 7
Using A Worksheet: The Accounting
APPENDIX 3C
Cycle Revisited
Prepare a 10-column worksheet.
A company prepares a worksheet either on

 columnar paper or
 within a computer spreadsheet.
A company uses the worksheet to adjust

 account balances and
 to prepare financial statements.
3-112 LO 8
APPENDIX 3C
Cycle Revisited
Worksheet Columns
 Trial Balance Columns
 Adjustment Columns
 Adjustments Entered on the Worksheet
3-113 LO 8
APPENDIX 3C
Cycle Revisited
ILLUSTRATION 3C.1 (Partial)

Use of a Worksheet
3-114 LO 8
APPENDIX 3C
Using A
Worksheet: The
Accounting
Cycle Revisited
ILLUSTRATION 3C.1
Use of a Worksheet
3-115
APPENDIX 3C
Cycle Revisited
Preparing Financial Statements from a Worksheet

The Worksheet:
 provides information needed for preparation of the
financial statements.
 Sorts data into appropriate columns, which facilitates the

preparation of the statements.
3-116 LO 8
GLOBAL ACCOUNTING INSIGHTS
Compare the accounting information systems under IFRS and U.S. GAAP.
As indicated in this chapter, companies must have an effective accounting

system. In the wake of accounting scandals at U.S. companies like Sunbeam,
Rite-Aid, Xerox, and WorldCom, U.S. lawmakers demanded higher
assurance on the quality of accounting reports. Since the passage of the
Sarbanes-Oxley Act (SOX), companies that trade on U.S. exchanges are
required to place renewed focus on their accounting systems to ensure
accurate reporting.
3-117 LO 9
Relevant Facts
Following are the key similarities and differences between U.S. GAAP and
IFRS related to accounting information systems.
Similarities
• International companies use the same set of procedures and records to
keep track of transaction data. Thus, the material in Chapter 3 dealing with
the account, general rules of debit and credit, and steps in the recording
process—the journal, ledger, and chart of accounts—is the same under
both U.S. GAAP and IFRS.
• Transaction analysis is the same under U.S. GAAP and IFRS but, as you
will see in later chapters, different standards sometimes impact how
transactions are recorded.
3-118 LO 9
Relevant Facts
Similarities
• Both the FASB and IASB go beyond the basic definitions provided in this
textbook for the key elements of financial statements, that is, assets,
liabilities, equity, revenues, and expenses.
• A trial balance under U.S. GAAP follows the same format as shown in the
textbook. As shown in the textbook, currency signs are typically used only in
the trial balance and the financial statements. The same practice is followed
under U.S. GAAP.
3-119 LO 9
Relevant Facts
Differences
• Rules for accounting for specific events sometimes differ across countries.
For example, European companies rely less on historical cost and more on
fair value than U.S. companies. Despite the differences, the double- entry
accounting system is the basis of accounting systems worldwide.
• Internal controls are a system of checks and balances designed to prevent
and detect fraud and errors. While most public U.S. companies have these
systems in place, many non-U.S. companies have never completely
documented them nor had an independent auditor attest to their
effectiveness. Both of these actions are required under SOX. Enhanced
internal control standards apply only to large public companies listed on
U.S. exchanges.
3-120 LO 9
On the Horizon
High-quality international accounting requires both high-quality accounting
standards and high-quality auditing. Similar to the convergence of U.S. GAAP
and IFRS, there is a movement to improve international auditing standards.
The International Auditing and Assurance Standards Board (IAASB) functions
as an independent standard-setting body. It works to establish high-quality
auditing and assurance and quality-control standards throughout the world.
Whether the IAASB adopts internal control provisions similar to those in SOX
remains to be seen. You can follow developments in the international audit
arena at http:// www.ifac.org/iaasb/.
3-121 LO 9
COPYRIGHT
Copyright © 2018 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
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Accounting Information System

Helps management answer such questions as:

 Account  Trial Balance

 Real Account  Adjusting Entries

 Nominal Account  Financial Statements

 Ledger  Closing Entries

Debits and Credits

 Double-entry accounting system (two-sided effect).

 Recording done by debiting at least one account and

 DEBITS must equal CREDITS.

 An arrangement that shows the

An Account can Account Name

If the sum of Debit entries are greater than the sum of

Transaction #1 $10,000 $3,000 Transaction #2

If the sum of Debit entries are less than the sum of

Transaction #1 $10,000 $3,000 Transaction #2

Asset = Liability + Equity Revenue - Expense

Relationship among the assets, liabilities and equity of a

The equation must be in balance after every transaction. For

1. Owners invest $40,000 in exchange for ordinary

Assets = Liabilities + Equity

2. Disburse $600 cash for secretarial wages.

Assets = Liabilities + Equity

3. Purchase office equipment priced at $5,200, giving a

Assets = Liabilities + Equity

4. Received $4,000 cash for services performed.

Assets = Liabilities + Equity

5. Pay off a short-term liability of $7,000.

Assets = Liabilities + Equity

6. Declared a cash dividend of $5,000.

Assets = Liabilities + Equity

7. Convert a non-current liability of $80,000 into ordinary

Assets = Liabilities + Equity

8. Pay cash of $16,000 for a delivery van.

Assets = Liabilities + Equity

Note that the accounting equation equality is

Ownership structure dictates the types of accounts that are

 Owner’s Capital  Share capital

Reversing entries Journalization

Post-closing trail balance Posting

Closing Trial balance

Adjusted trial balance

Identifying and Recording Transactions and

(a) relevant information about the asset or the liability

(b) a faithful representation of the asset or the liability

September 1: Shareholders invested ₺15,000 cash in the

Chart of accounts lists the accounts and the account

The numbering system that identiﬁes the accounts

Chart of accounts lists the accounts and the account

The numbering system that identiﬁes the accounts

ILLUSTRATIONS 3.10 through 3.19 show the basic steps

A basic analysis and a debit-credit analysis precede the

For simplicity, we use the T-account form in the illustrations

 Debit balances listed in the left column and credit

 Used to prove the mathematical equality of debit and

 Uncovers errors in journalizing and posting.

Makes it possible to:

Types of Adjusting Entries