CHAPTER 3
The Accounting Information System
LEARNING OBJECTIVES
1. Understand basic accounting terminology.
2. Explain double-entry rules.
3. Identify steps in the accounting cycle.
4. Record transactions in journals, post to ledger accounts, and prepare a trial balance.
CHAPTER REVIEW
*Note: All asterisked (*) items relate to material contained in the Appendices to the chapter.
1. Chapter 3 presents a concise yet thorough review of the accounting process. The basic
Accounting Information System
2. (L.O. 1) The accounting information system collects and processes transaction data
and disseminates the financial information to interested parties. Factors that shape these
systems include: the nature of the business, the transactions in which it engages, the size
of the firm, the volume of data to be handled, and the informational demands of
3. (L.O. 2) Double-entry accounting refers to the process used in recording transactions.
The terms debit and credit are used in the accounting process to indicate the effect
4. In a double-entry system, for every debit there must be a credit and vice-versa. This leads
us to the accounting equation: Assets = Liabilities + Equity.
5. The equity section of the statement of financial position reports the owners’ interest in the
The Accounting Cycle
7. (L.O. 3) The first step in the accounting cycle is analysis of transactions and selected
8. Events can be classified as external or internal. External events are those between an
9. (L.O. 4) Transactions are initially recorded in a journal, sometimes referred to as the
book of original entry. A general journal is merely a chronological listing of transactions
10. The next step in the accounting cycle involves transferring amounts entered in the journal
to the general ledger. The ledger is a book that usually contains a separate page for
11. The next step in the accounting cycle is the preparation of a trial balance. A trial balance is
a list of all open accounts in the general ledger and their balances. An entity may prepare
12. (L.O. 5) Preparation of adjusting journal entries is the next step in the accounting
cycle. Adjusting entries are entries made at the end of accounting period to bring all
accounts up to date on an accrual accounting basis so that correct financial statements
13. Prepaid expenses and unearned revenues refer to situations where cash has been paid
or received but the corresponding expense or revenue will not be recognized until a future
14. After adjusting entries are recorded and posted, an adjusted trial balance is prepared.
16. (L.O. 7) After financial statements have been prepared, nominal (revenues and expenses)
accounts should be reduced to zero in preparation for recording the transactions of the
next period. This closing process requires recording and posting of closing entries. All
17. A third trial balance may be prepared after the closing entries are recorded and posted.
This post-closing trial balance shows that the company has properly journalized and
posted the closing entries.
19. In summary, the steps in the accounting cycle performed every fiscal period are as follows:
a. Enter the transactions of the period in appropriate journals.
b. Post from the journals to the ledger (or ledgers).
Financial Statements for a Merchandising Company
20. (L.O. 8) The income statement for a merchandising company differs from that of a
service company because a product is being sold rather than a service. This difference
21. The retained earnings statement is still formatted the same way: net income is added to
the beginning retained earnings balance, and then dividends are deducted to arrive at
ending retained earnings.
Cash-Basis Accounting Versus Accrual-Basis Accounting
*24. (L.O. 9) Cash-Basis Accounting Versus Accrual-Basis Accounting, is presented in
Appendix A of Chapter 3 for the purpose of demonstrating the difference between cash
Using Reversing Entries
*25. (L.O. 10) Appendix B covers preparation and posting of reversing entries, the final
optional step in the accounting cycle. A reversing entry is made at the beginning of the
Using a Worksheet: The Accounting Cycle Revisited
*26. (L.O. 11) Appendix C covers the use of a ten-columnworksheet, which serves as an aid to
the accountant in adjusting the account balances and preparing the financial statements.
LECTURE OUTLINE
Chapter 3 provides a review of accounting procedures throughout the accounting cycle.
Depending on time constraints and students’ accounting course background, Chapter 3 can be
approached in several different ways: (1) Spend 2-3 class sessions reviewing the chapter and
Appendices 3-A through 3-C. (2) Spend 1-2 class sessions reviewing selected portions of the
chapter and Appendix 3-A. (3) Omit the chapter entirely.
The following lecture outline can be expanded upon or reduced to suit the needs of your class.
A. (L.O. 1) Basic Terminology. Review the 11 terms defined on text page 3-4.
B. (L.O. 2) Double-Entry Accounting. Review the mechanics of debits and credits and the
accounting equation.
C. (L.O. 3) The Accounting Cycle.
1. Identifying and Recording Transactions and Other Events
5. (L.O. 5) Adjusting Entries. The ability to classify adjusting entries into one of these four
categories is necessary to an understanding of reversing entries.
a. Prepaid expenses.
8. (L.O. 7) Prepare closing entries.
a. Temporary accounts vs. permanent accounts.
D. (L.O. 8) Financial statements for a merchandising company.
1. Income statement
a. Net sales
b. Cost of goods sold
2. Retained earnings statement
a. Beginning Retained Earnings plus Net income
b. Less Dividends is equal to Ending Retained Earnings
3. Statement of financial position
a. Non-current assets
4. Closing entries
a. Sales revenue closed to Income Summary
E. (L.O. 9) APPENDIX 3-A. Cash basis versus accrual-basis accounting.
1. Strict cash basis. Recognize revenue when cash is received and expenses when cash
is paid.
a. Used by small businesses and individual taxpayers.
2. Modified cash basis. Recognize revenue when cash is received. Depreciable assets
3. Accrual basis. Revenues are recognized when earned and expenses when incurred.
F (L.O. 10) APPENDIX 3–B. Using reversing entries.
1. Use of reversing entries is optional.
2. In an accounting system which uses reversing entries, the following types of
b. adjusting entries for all accrued items.
G. (L.O. 11) APPENDIX 3–C. Using a worksheet: The accounting cycle revisited.
1. The worksheet does not replace the financial statements.