4-1 Accounting Information Systems Chapter 4 Electronic Presentation by Douglas Cloud Pepperdine...

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Accounting Information Systems

Chapter 4

Electronic Presentation by Douglas Cloud

Pepperdine University

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1. Describe the nature of business information systems.

2. Describe the nature of accounting information systems.

3. Describe and illustrate the basic elements of transaction processing systems.

4. Describe and illustrate the basic elements of a financial reporting system.

Learning GoalsLearning Goals

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

ContinuedContinued

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5. Describe and illustrate the computation and use of earnings before interest, taxes, depreciation, and amortization (EBITDA).

Learning GoalsLearning Goals

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1Learning GoalLearning Goal

Describe the nature of business information systems.

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A business information system

collects and processes data and distributes

information to users.

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Business Information SystemBusiness Information System

Data Sources Data Collection

Data Processing

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Business Information SystemBusiness Information System

Information Users

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Describe the nature of accounting information systems.2

Learning GoalLearning Goal

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An accounting information system processes financial

and operating data into reports useful to internal and

external stakeholders.

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Accounting Information SystemAccounting Information System

Financial and Operational Data

ACCOUNTING INFORMATION SYSTEMS

Management Reporting SystemTransaction Processing System

Financial Reporting System

Stakeholders StakeholdersStakeholders

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Accounting Information SystemAccounting Information System

The management reporting system provides internal

information to assist managers in making

decisions.

The transaction processing system

records and summarizes the effects

of financial transactions on a

business.

The financial reporting system

produces financial statements and other reports for external

stakeholders.

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Describe and illustrate the basic elements of transaction processing systems.3

Learning GoalLearning Goal

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The AccountThe Account

The account has a title.The account has a title.

Cash

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The AccountThe Account

The left side of the account is the The left side of the account is the debit debit side.side.

CashLeft side

debit

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The AccountThe Account

The right side of the account is the The right side of the account is the credit credit side.side.

CashLeft side

debitRight side

credit

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The AccountThe Account

Cash3,7504,3002,900

8501,400

7002,9001,000

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The AccountThe Account

Cash3,7504,3002,900

8501,400

7002,9001,000

10,950

First, foot the debit side.

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The AccountThe Account

Cash3,7504,3002,900

8501,400

7002,9001,000

10,950

Next, foot thecredit side.

6,850

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The AccountThe Account

Cash3,7504,3002,900

8501,400

7002,9001,000

10,950

6,850

Subtract total credits from total debits to obtain the account

balance.

4,100

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Rules of Debits and Credits

Luca PacioliDeveloper ofDouble-EntryAccounting

Scale or Balance

ReceiveDEBIT

GiveCREDIT

T account

Left SideReceiveDEBIT

Right SideGive

CREDIT

Assets

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T account

Left Side

DEBIT

Right Side

CREDIT

Stockholders’ EquityCapital Stock/Retained

Earnings

Rules of Debits and Credits

T account

Left Side

DEBIT

Right Side

CREDIT

Liabilities

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T account

Left Side

DEBIT

Right Side

CREDIT

Revenues

Rules of Debits and Credits

T account

Left Side

DEBIT

Right Side

CREDIT

Dividends

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Rules of Debits and Credits

T account

Left Side

DEBIT

Right Side

CREDIT

Expenses

The normal balance is on the increase side of

an account.

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The Journal

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Post. Ref.

JOURNAL

Date Description Debit Credit

Page 1

Nov. 12004

Cash 25 000 00

Capital Stock 25 000 00

On November 1, 2004, Shannon Hughes On November 1, 2004, Shannon Hughes deposits $25,000 in a bank account in deposits $25,000 in a bank account in

the name of Online Solutions.the name of Online Solutions.

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On November 5, Online Solutions On November 5, Online Solutions bought land for $20,000, paying cash.bought land for $20,000, paying cash.

5 Land 20 000 00

Cash 20 000 00

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On November 10, Online Solutions On November 10, Online Solutions purchased supplies on account for $1,350.purchased supplies on account for $1,350.

10 Supplies 1 350 00

Accounts Payable 1 350 00

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On November 18, Online Solutions On November 18, Online Solutions received fees of $7,500 from received fees of $7,500 from

customers for services provided.customers for services provided.

18 Cash 7 500 00

Fees Earned 7 500 00

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Throughout the month, Online Solutions Throughout the month, Online Solutions incurred the following expenses that were incurred the following expenses that were paid in cash: wages, $2,125; rent, $800; paid in cash: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. utilities, $450; and miscellaneous, $275.

30 Wages Expense 2 125 00

Rent Expense 800 00

Utilities Expense 450 00

Miscellaneous Expense 275 00

Cash 3 650 00

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On December 30, Online On December 30, Online Solutions paid creditors on Solutions paid creditors on

account, $950. account, $950.

30 Accounts Payable 950 00

Cash 950 00

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Online Solutions paid Online Solutions paid stockholder (Shannon Hughes) stockholder (Shannon Hughes)

a dividend of $2,000.a dividend of $2,000.

30 Dividends 2 000 00

Cash 2 000 00

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You should have noted that in every entry the sum of the

debits always equaled the sum of the credits.

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Posting to a LedgerPosting to a Ledger

Post. Ref.

JOURNAL

Date Description Debit Credit

Page 1

Nov. 12004

Cash 25 000 00

Capital Stock 25 000 00

CASH CAPITAL STOCK25,000Nov. 1 25,000Nov. 1

11 31

1131

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Ledger for Online SolutionsLedger for Online Solutions——NovemberNovemberCash

Nov. 1 25,000 Nov. 5 25,000

Rent ExpenseNov. 30 800

18 7,500

SuppliesNov. 10 1,350

Utilities ExpenseNov. 30 450

Miscellaneous ExpenseNov. 30 275

30 3,65030 96030 2,000

30 Bal. 5,900

LandNov. 5 20,000

Accounts PayableNov. 30 950 Nov. 10 1,350

30 Bal. 400Capital Stock

Nov. 1 25,000

DividendsNov. 30 2,000

Wages ExpenseNov. 30 2,125

Fees EarnedNov. 18 7,500

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Online SolutionsTrial BalanceNovember 30, 2004

Cash 5,900Supplies 1,350Land 20,000Accounts Payable 400Capital Stock 25,000Dividends 2,000Fees Earned 7,500Wages Expense 2,125Rent Expense 800Utilities Expense 450Miscellaneous Expense 275

32,900 32,900

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Describe and illustrate the basic elements of a financial reporting system.

4Learning GoalLearning Goal

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On December 1, paid a premium of $2,400 On December 1, paid a premium of $2,400 for a comprehensive insurance policy for a comprehensive insurance policy covering liability, theft, and fire. The covering liability, theft, and fire. The

policy covers a two year period.policy covers a two year period.

Dec. 1 Prepaid Insurance 2,400Cash 2,400

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On December 1, paid rent for December, On December 1, paid rent for December, $800. The company from which Online $800. The company from which Online Solutions is renting its store space now Solutions is renting its store space now

requires the payment of rent on the first of requires the payment of rent on the first of each month rather than the end of the month.each month rather than the end of the month.

Dec. 1 Rent Expense 800Cash 800

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On December 1, received an offer from a local retailer On December 1, received an offer from a local retailer to rent the land purchased on November 5. The retailer to rent the land purchased on November 5. The retailer plans to use the land as a parking lot for its employees plans to use the land as a parking lot for its employees

and customers. Online Solutions agreed to rent the and customers. Online Solutions agreed to rent the land to the retailer for three months, with rent payable land to the retailer for three months, with rent payable in advance. Online Solutions received $360 for three in advance. Online Solutions received $360 for three

months’ rent beginning December 1.months’ rent beginning December 1.

Dec. 1 Cash 360Unearned Rent 360

This account is a liability!

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On December 4, purchased office On December 4, purchased office equipment on account from Executive equipment on account from Executive

Supply Co. for $1,800.Supply Co. for $1,800.

Dec. 4 Office Equipment 1,800Accounts Payable 1,800

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On December 6, paid $180 for a On December 6, paid $180 for a newspaper advertisement.newspaper advertisement.

Dec. 6 Miscellaneous Expense 180Cash 180

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On December 11, paid On December 11, paid creditors, $400.creditors, $400.

Dec. 11 Accounts Payable 400Cash 400

On December 13, paid a receptionist and a part-On December 13, paid a receptionist and a part-time assistant $950 for two week’s wages.time assistant $950 for two week’s wages.

Dec. 13 Wages Expense 950Cash 950

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On December 16, received $3,100 from fees On December 16, received $3,100 from fees earned for the first half of December.earned for the first half of December.

Dec. 16 Cash 3,100Fees Earned 3,100

On December 16, earned fees on account On December 16, earned fees on account totaling $1,750 for the first half of December.totaling $1,750 for the first half of December.

Dec. 16 Accounts Receivable 1,750Fees Earned 1,750

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On December 20, paid $1,800 to Executive On December 20, paid $1,800 to Executive Supply Co. on the debt owed from the Supply Co. on the debt owed from the

December 4 transaction.December 4 transaction.

Dec. 20 Accounts Payable 1,800Cash 1,800

On December 21, received $650 from On December 21, received $650 from customers in payment of their accounts.customers in payment of their accounts.

Dec. 21 Cash 650Accounts Receivable 650

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On December 23, purchased $1,450 of On December 23, purchased $1,450 of supplies by paying $550 cash and charging supplies by paying $550 cash and charging

the remainder of account.the remainder of account.

Dec. 23 Supplies 1,450Cash 550Accounts Payable 900

On December 27, paid the receptionist and the On December 27, paid the receptionist and the part-time assistant $1,200 for two weeks’ wagespart-time assistant $1,200 for two weeks’ wages

Dec. 27 Wages Expense 1,200Cash 1,200

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On December 31, paid $310 On December 31, paid $310 telephone bill for the month.telephone bill for the month.

Dec. 31 Utilities Expense 310Cash 310

On December 31, paid $225 On December 31, paid $225 electric bill for the month.electric bill for the month.

Dec. 31 Utilities Expense 225Cash 225

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On December 31, received $2,870 from fees On December 31, received $2,870 from fees earned for the second half of December.earned for the second half of December.

Dec. 31 Cash 2,870Fees Earned 2,870

On December 31, earned fees on account totaling On December 31, earned fees on account totaling $1,120 for the second half of December.$1,120 for the second half of December.

Dec. 31 Accounts Receivable 1,120Fees Earned 1,120

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On December 31, paid dividend of $2,000 On December 31, paid dividend of $2,000 to stockholder (Shannon Hughes).to stockholder (Shannon Hughes).

Dec. 31 Dividends 2,000Cash 2,000

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Trial BalanceDecember 31, 2004

Cash 2,065Accounts Receivable 2,220Supplies 2,800Prepaid Insurance 2,400Office Equipment 1,800Land 20,000Accounts Payable 900Unearned Rent 360Capital Stock 25,000Dividends 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600Utilities Expense 985Miscellaneous Expense 455

42,600 42,600

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Trial BalanceDecember 31, 2004

Cash 2,065Accounts Receivable 2,220Supplies 2,800Prepaid Insurance 2,400Office Equipment 1,800Land 20,000Accounts Payable 900Unearned Rent 360Capital Stock 25,000Dividends 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600Utilities Expense 985Miscellaneous Expense 455

42,600 42,600

Some of these supplies have been used. On December 31, a count reveals that $760 of

supplies are on hand.

The Supplies account has a balance of $2,800 on the

December 31 trial balance.

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Supplies on hand at December 31, $760.Supplies on hand at December 31, $760.

Dec. 31 Supplies Expense 2,040Supplies 2,040

Adjusting Entries

$2,800$2,800– – 780780$2,040$2,040

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Trial BalanceDecember 31, 2004

Cash 2,065Accounts Receivable 2,220Supplies 2,800Prepaid Insurance 2,400Office Equipment 1,800Land 20,000Accounts Payable 900Unearned Rent 360Capital Stock 25,000Dividends 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600Utilities Expense 985Miscellaneous Expense 455

42,600 42,600

Of this prepayment, $100 of it expired during December.

Prepaid Insurance has a balance of $2,400 on the

December 31 trial balance.

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Insurance premiums expired Insurance premiums expired during December, $100.during December, $100.

Dec. 31 Insurance Expense 100Prepaid Insurance 100

Adjusting Entries

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Trial BalanceDecember 31, 2004

Cash 2,065Accounts Receivable 2,220Supplies 2,800Prepaid Insurance 2,400Office Equipment 1,800Land 20,000Accounts Payable 900Unearned Rent 360Capital Stock 25,000Dividends 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600Utilities Expense 985Miscellaneous Expense 455

42,600 42,600

Unearned Rent has a balance of $360 on the December 31

trial balance.

Of this amount, $120 was earned during December for the

use of the land owned by Online Solutions.

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Unearned rent earned during Unearned rent earned during December, $120.December, $120.

Dec. 31 Unearned Rent 120Rent Revenue 120

Adjusting Entries

The liability The liability is being is being

reduced. reduced. Revenue is Revenue is

being being “recognized.”“recognized.”

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Trial BalanceDecember 31, 2004

Cash 2,065Accounts Receivable 2,220Supplies 2,800Prepaid Insurance 2,400Office Equipment 1,800Land 20,000Accounts Payable 900Unearned Rent 360Capital Stock 25,000Dividends 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600Utilities Expense 985Miscellaneous Expense 455

42,600 42,600

Wages Expense does not reflect that $250 is owed to the

employees at December 31.

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Wages accrued, but not paid at Wages accrued, but not paid at December 31, $250.December 31, $250.

Dec. 31 Wages Expense 250Wages Payable 250

Adjusting Entries

An additional An additional expense is expense is recorded.recorded.

The books now show The books now show that employees are that employees are

owed $250.owed $250.

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Cash 2,065Accounts Receivable 2,220Supplies 2,800Prepaid Insurance 2,400Office Equipment 1,800Land 20,000Accounts Payable 900Unearned Rent 360Capital Stock 25,000Dividends 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600Utilities Expense 985Miscellaneous Expense 455

42,600 42,600

Online SolutionsTrial BalanceDecember 31, 2004

The account Fees Earned does not include $500 for revenue that has

not been billed.

Online SolutionsTrial BalanceDecember 31, 2004

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Fees revenue earned, but not Fees revenue earned, but not yet billed, $500.yet billed, $500.

Dec. 31 Accounts Receivable 500Fees Earned 500

Adjusting Entries

To increase To increase the asset.the asset.To increase the To increase the

revenue account.revenue account.

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Depreciation of office equipment Depreciation of office equipment during December, $50.during December, $50.

Dec. 31 Depreciation Expense 50Accumulated Depreciation—Office Equipment 50

Adjusting Entries

Notice that the Notice that the Office Office Equipment Equipment account account

is notis not credited. credited.

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Fees earned $16,840Rent revenue 120

Total revenue $16,960Operating expenses:

Wages expense $ 4,525Supplies expense 2,040Rent expense 1,600Utilities expense 985Insurance expense 100Depreciation expense 50Miscellaneous expense 455 Total operating expenses 9,755

Net income $ 7,205

Online SolutionsIncome Statement

For the Two Months Ended December 31, 2004

All amounts All amounts came from came from

the adjusted the adjusted trial balancetrial balance

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Make a note to yourself to analyze Exhibit 11 in the

textbook and the other statements in Exhibit 12 to understand the source of the different amounts.

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Closing EntriesClosing Entries

Entry 1: Close the revenue accounts to Retained Earnings.

Dec. 31 Fees Earned 16,840Rent Revenue 120

Retained Earnings 16,960

After this entry is posted, all revenue accounts will have zero balances.

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Closing EntriesClosing Entries

Entry 2: Close the expense accounts to Retained Earnings.

Dec. 31 Retained Earnings 9,755Wages Expense 4,525Rent Expense 1,600Depreciation Expense 50Utilities Expense 985Supplies Expense 2,040Insurance Expense 100Miscellaneous Expense 455

After this entry is posted, all expense accounts will have zero balances.

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Closing EntriesClosing Entries

Entry 3: Close the Dividends account to Retained Earnings.

Dec. 31 Retained Earnings 4,000Dividends 4,000

After this entry is posted, the Dividends account will have a zero balance.

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Describe and illustrate the computation and use of earnings before interest, taxes, depreciation, and amortization.

5Learning GoalLearning Goal

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Let’s do a pro forma computation for Online

Solutions using EBITDA.

Earnings before interest, taxes,

depreciation, and amortization.

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Fees earned $16,840Rent revenue 120

Total revenue $16,960Operating expenses:

Wages expense $ 4,525Supplies expense 2,040Rent expense 1,600Utilities expense 985Insurance expense 100Depreciation expense 50Miscellaneous expense 455 Total operating expenses 9,755

Net income $ 7,205

Online SolutionsIncome Statement

For the Two Months Ended December 31, 2004

$ 7,255 9,705

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Because Online Solutions only had a small depreciation and no interest, taxes, or amortization,

there was little impact.

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EBITDA is a rough estimate of operating cash flows that are available to pay interest

and other fixed charges.

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The End

Chapter 4Chapter 4

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