finanacial accounting ch4

8/3/2019 Finanacial Accounting Ch4

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Copyright2001 by HoughtonMifflin Company. All rights reserved.

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Financial AccountingFinancial Accounting

Belverd E. Needles, Jr.Belverd E. Needles, Jr.

Marian PowersMarian Powers

- - - - - - - - - - -

Multimedia Slides by:

Dr. Howard A. Kanter, CPA

DePaul University

Milton M. Pressley

University of New Orleans


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LEARNING OBJECTIVESLEARNING OBJECTIVES

1. Identify the principles of accounting systems

design.

2. State all the steps in the accounting cycle.

3. Describe how general ledger software and

spreadsheet software are used in accounting.


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4. Identify the basic elements of computer

systems, and describe microcomputer

accounting systems.

5. Explain how accountants use the Internet.

6. Explain the purposes of closing entries and

prepare required closing entries.


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7. Prepare the post-closing trialbalance.


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Principles ofPrinciples of

Accounting Systems DesignAccounting Systems Design

OBJECTIVE 1OBJECTIVE 1

Identify the principles of accounting

systems design.


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Design PrinciplesDesign Principles

Accounting systems summarize financial data

about a business and organize them in useful

forms.

Most businesses use computerized accounting

systems to provide timely information to decision

makers.

Accountants must have an understanding ofcomputer systems.


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Design PrinciplesDesign Principles

Four general principles of systems design:

Cost-benefit principle.

Control principle. Compatibility principle.

Flexibility principle.


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CostCost--Benefit PrincipleBenefit Principle

The cost-benefit principle holds that the benefits derived

from an accounting system and the information it

generates must be equal to or greater than the systems

cost. Costs may either be tangible or intangible.

Tangible costs include personnel, forms, and

equipment.

Intangible costs include the costs of wrong decisions.


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Control PrincipleControl Principle

The control principle requires that an

accounting system provide internal controlfeatures in order to protect a firms assets and

ensure that data are reliable.


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CompatibilityPrincipleCompatibilityPrinciple

The compatibility principle states that the design

of an accounting system must be in harmonywith the organizational and human factors of

the business.


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FlexibilityPrincipleFlexibilityPrinciple

Theflexibility principle holds that an accounting

system must be flexible enough to allow thevolume of transactions to grow and

organizational changes to be made.


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Overview of theOverview of the

Accounting CycleAccounting Cycle

OBJECTIVE 2OBJECTIVE 2State all the steps in the

accounting cycle.


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Copyright2001 by HoughtonMifflin Company. All rights reserved. 13

Steps in the AccountingSteps in the Accounting

CycleCycle

1. Analyze business transactions from source

documents.

2. Record the entries in the journal.

3. Post the entries to the ledger and prepare a

trial balance.


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Steps in the AccountingSteps in the Accounting

CycleCycle

4. Adjust the accounts and prepare an

adjusted trial balance.

5. Close the accounts and prepare a post-

closing trial balance.

6. Prepare financial statements.


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ComputerSoftware forComputerSoftware for

AccountingAccounting


Describe how general ledger software and

spreadsheet software are used in

accounting.


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General LedgerSoftwareGeneral LedgerSoftware

General ledger software is a group of integrated

programs that an accountant uses to perform

major functions such as sales and accounts

receivable, purchases and accounts payable, and

payroll.

Most software is Windows based and operates

with a graphical user interface (GUI).


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Accounting SoftwareAccounting Software

Widely used general ledger software programsinclude:

Peachtree Complete AccountingTM.

General Ledger Software.

QuickBooks.

Spreadsheet software is often used in addition to

general ledger software. These include such

programs as:

Windows Excel.

Lotus 1-2-3.


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OBJECTIVE4

OBJECTIVE4

Identify the basic elements of computer

systems, and describe microcomputer

accounting systems.

Computerized

Accounting Systems


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Elements of a ComputerElements of a Computer

SystemSystem

Hardware is the equipment needed to operate a

computer system.

Central processing unit (CPU).

Input devices (e.g., keyboards).

Storage devices (e.g., disks).

Output devices (e.g., printers).


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SystemSystem

Software is the set of instructions and steps that

bring about the desired results in a computer

system. Computer systems may be linked together by

means oflocal area networks (LANs) or wide

area networks (WANs).


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SystemSystem

Computer personnel consist of systems

programmers, analysts, and operators.

Accountants work closely with computer

personnel to design and operate an efficient

computer accounting system.


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MicrocomputerAccountingMicrocomputerAccounting

SystemsSystems

Most businesses purchase commercial

accounting software.

Most software consists of modules.

Sales/accounts receivable.

Purchases/accounts payable.

Cash receipts.

Cash disbursements. Payroll.

General journal.


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SystemsSystems

After transactions are processed, a procedure is

followed to post them to and update the ledgers

and to prepare a trial balance.

The final step is the preparation of financial

statements and other accounting reports.


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Copyright2001 by Houghton

Mifflin Company. All rights reserved.

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SystemsSystems

Computerization typically results in:

Reduced processing time. Improved arithmetic accuracy.

Increased data dependability.


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Explain how accountants use

the Internet.

Accountants and the Internet


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InternetInternet

Worlds largest computer network.

Access to the Internet requires acommunication device (modem) with a

connection to an Internet service provider

(ISP).


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Closing EntriesClosing Entries


Explain the purposes of closing

entries and prepare required

closing entries.


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Types of AccountsTypes of Accounts

and Closing Entriesand Closing Entries

Balance sheet accounts are known as

permanent or real accounts.

Revenue and expense accounts are temporaryor nominal accounts.

Closing entries are journal entries made at the

end of an accounting period.


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Purposes ofClosing EntriesPurposes ofClosing Entries

1. To clear the revenue, expense, and dividends

accounts of their balances and prepare the

accounts for the next accounting period.


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Purposes ofClosing EntriesPurposes ofClosing Entries

2. To summarize a periods revenues and

expenses.

The balance of the Income Summary

account equals the net income or loss for

the period.

The net income or loss is transferred to the

Retained Earnings account.


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The FourSteps toThe FourSteps to

Close the AccountsClose the Accounts

1. Close the credit balances from income

statement accounts to the Income Summary

account.

Sets the balances of the revenue accounts to

zero.

Transfers the total revenues to the credit side

of the Income Summary account.


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2. Close the debit balances from income statement

accounts to the Income Summary account.

Reduces the expense account balances tozero.

Transfers the total expenses to the debit side

of the Income Summary account.


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3. Close the Income Summary account balance to

the Retained Earnings account. Closes the Income Summary account.

Transfers the balance, income or loss, to the





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4. Close the Dividends account balance to the


Closes the Dividends account.

Transfers the balance to the Retained

Earnings account.




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The Accounts AfterClosingThe Accounts AfterClosing

Accounts are ready for next period.

Revenue, expense, and dividends

(temporary accounts) have zero balances.


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The Accounts AfterThe Accounts AfterClosingClosing

The Retained Earnings account has been

increased to reflect the companys net income

and decreased for dividends. The balance sheet accounts (permanent

accounts) show the correct balances, which are

carried forward to the next period.


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The PostThe Post--Closing TrialClosing Trial

BalanceBalance


Prepare the post-closing trial

balance.


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The PostThe Post--ClosingClosing

Trial BalanceTrial Balance

A post-closing trial balance is prepared to

determine that:

1

.All temporary accounts have azero balance.

2.Debits equal credits.

Only balance sheet accounts should show a

balance.


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Reversing Entries:Reversing Entries:

The Optional First Step in theThe Optional First Step in the

Next Accounting PeriodNext Accounting Period

SUPPLEMENTAL OBJECTIVE 8SUPPLEMENTAL OBJECTIVE 8Prepare reversing entries as appropriate.


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Reversing EntriesReversing Entries

Reversing entries simplify the bookkeeping for

accrued revenues and accrued expenses.

Deferrals cannot be reversed.


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The WorkSheet:The WorkSheet:

An Accountants ToolAn Accountants Tool

SUPPLEMENTAL OBJECTIVE 9SUPPLEMENTAL OBJECTIVE 9Prepare a work sheet.


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Working PapersWorking Papers

In order to prepare financial reports,

accountants must collect data in various forms

to determine what should be included.

The data collected make up the accountants

working papers.


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Working PapersWorking Papers

Working papers are important for two reasons.

1. They help accountants organize their work

and avoid omitting important data or steps.

2. They provide evidence of past work so that

accountants or auditors can retrace their

steps and support the information in the

financial statements.


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The WorkSheetThe WorkSheet

The work sheet, a special kind of working paper,

is often used as a preliminary step in the

preparation of financial statements.

A work sheet lessens the possibility of leaving out

an adjustment.

A work sheet helps check the arithmetical

accuracy of the accounts.


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The WorkSheetThe WorkSheet

A work sheet facilitates the preparation of

financial statements.

A work sheet is not a published financialstatement.

A work sheet is often prepared using a

computer.


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Preparing the WorkSheetPreparing the WorkSheet

1. Enter and total the account balances in

the Trial Balance columns.

2. Enter and total the adjustments in the

Adjustments columns.

3. Enter and total the adjusted account

balances in the Adjusted Trial Balance

columns.


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Preparing the WorkSheetPreparing the WorkSheet

4. Extend the account balances from the

Adjusted Trial Balance columns to the Income

Statement columns or the Balance Sheet

columns.5. Total the Income Statement columns and the

Balance Sheet columns. Enter the net income

or net loss in both pairs of columns as a

balancing figure, and recompute the columntotals.


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sing the WorkSheetUsing the WorkSheet

SUPPLEMENTAL OBJECTIVE 10SUPPLEMENTAL OBJECTIVE 10

Use a work sheet for three different purposes.


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Tasks of the WorkSheetTasks of the WorkSheet

The completed work sheet aids the accountant

in three principal tasks:

1. Recording the Adjusting Entries. Adjusting entries

are copied to the general journal and then posted to the

general ledger.


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Tasks of the WorkSheetTasks of the WorkSheet

2. Recording the Closing Entries.

Closing entries are entered in the journal and posted to

the ledger. All accounts that need closing, except for

Dividends, may be found in the Income Statementcolumns of the work sheet.

3. Preparing the Financial Statements.

Account balances have been sorted into Income

Statement and Balance Sheet columns.

finanacial accounting ch4

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