Financial Accounting

Belverd E. Needles, Jr. Marian Powers

----------Multimedia Slides by: Dr. Howard A. Kanter, CPA
DePaul University

Milton M. Pressley
University of New Orleans
Copyright2001 by Houghton Mifflin Company. All rights reserved. 1

LEARNING 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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LEARNING OBJECTIVES
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.

Copyright2001 by Houghton Mifflin Company. All rights reserved.

LEARNING OBJECTIVES

7. Prepare the post-closing trial balance.

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Principles of Accounting Systems Design

OBJECTIVE 1
Identify the principles of accounting systems design.

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Design Principles
 Accounting systems

summarize financial data about a business and organize them in useful forms. businesses use computerized accounting systems to provide timely information to decision makers. have an understanding of computer systems.

 Most

 Accountants must

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Design Principles
 Four

general principles of systems design:

Cost-benefit principle. Control principle. Compatibility principle. Flexibility principle.

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CostCost-Benefit 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 Principle

 The

control principle requires that an accounting system provide internal control features in order to protect a firms assets and ensure that data are reliable.

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Compatibility Principle

 The

compatibility principle states that the design of an accounting system must be in harmony with the organizational and human factors of the business.

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Flexibility Principle

 The

flexibility principle holds that an accounting system must be flexible enough to allow the volume of transactions to grow and organizational changes to be made.

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Overview of the Accounting Cycle

OBJECTIVE 2
State all the steps in the accounting cycle.

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Steps in the Accounting Cycle

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 Accounting Cycle

4. Adjust the accounts and prepare an adjusted trial balance. 5. Close the accounts and prepare a postclosing trial balance. 6. Prepare financial statements.

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Computer Software for Accounting

OBJECTIVE 3
Describe how general ledger software and spreadsheet software are used in accounting.

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General Ledger Software

 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. software is Windows based and operates with a graphical user interface (GUI).

 Most

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Accounting Software
 Widely

used general ledger software programs include:

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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Computerized Accounting Systems

OBJECTIVE 4
Identify the basic elements of computer systems, and describe microcomputer accounting systems.

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Elements of a Computer System

 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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Elements of a Computer System

 Software is

the set of instructions and steps that bring about the desired results in a computer system. systems may be linked together by means of local area networks (LANs) or wide area networks (WANs).

 Computer

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Elements of a Computer System

 Computer

personnel consist of systems programmers, analysts, and operators. computer personnel to design and operate an efficient computer accounting system.

 Accountants work closely with

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Microcomputer Accounting Systems

 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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Microcomputer Accounting Systems

 Modules

should work together to form an integrated accounting program. enters the system should be supported by a source document. verify the validity of a transaction and provide necessary details.

 Each transaction that

 Source documents

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Microcomputer Accounting Systems

 After

transactions are processed, a procedure is followed to post them to and update the ledgers and to prepare a trial balance. final step is the preparation of financial statements and other accounting reports.

 The

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Microcomputer Accounting Systems

 Computerization typically results

in:

Reduced processing time. Improved arithmetic accuracy. Increased data dependability.

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Accountants and the Internet

OBJECTIVE 5
Explain how accountants use the Internet.

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Internet

 Worlds largest computer  Access to

network.

the Internet requires a communication device (modem) with a connection to an Internet service provider (ISP).

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Closing Entries

OBJECTIVE 6
Explain the purposes of closing entries and prepare required closing entries.

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Types of Accounts and Closing Entries

 Balance sheet

accounts are known as permanent or real accounts. expense accounts are temporary or nominal accounts. are journal entries made at the end of an accounting period.

 Revenue and

 Closing entries

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Purposes of Closing 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 of Closing 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 Four Steps to Close 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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The Four Steps to Close the Accounts

2. Close the debit balances from income statement accounts to the Income Summary account. Reduces the expense account balances to zero. Transfers the total expenses to the debit side of the Income Summary account.

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The Four Steps to Close the Accounts

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 Retained Earnings account.

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The Four Steps to Close the Accounts

4. Close the Dividends account balance to the Retained Earnings account. Closes the Dividends account. Transfers the balance to the Retained Earnings account.

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The Accounts After Closing

 Accounts are

ready for next period.

 Revenue, expense,

and dividends (temporary accounts) have zero balances.

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The Accounts After Closing

 The

Retained Earnings account has been increased to reflect the companys net income and decreased for dividends. balance sheet accounts (permanent accounts) show the correct balances, which are carried forward to the next period.

 The

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The Post-Closing Trial PostBalance

OBJECTIVE 7
Prepare the post-closing trial balance.

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The Post-Closing PostTrial Balance

A

post-closing trial balance is prepared to determine that: 1.All temporary accounts have a zero balance. 2.Debits equal credits.

 Only

balance sheet accounts should show a balance.

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Reversing Entries: The Optional First Step in the Next Accounting Period
SUPPLEMENTAL OBJECTIVE 8
Prepare reversing entries as appropriate.

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Reversing Entries

 Reversing entries

simplify the bookkeeping for accrued revenues and accrued expenses. be reversed.

 Deferrals cannot

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The Work Sheet: An Accountants Tool

SUPPLEMENTAL OBJECTIVE 9
Prepare a work sheet.

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Working Papers
 In

order to prepare financial reports, accountants must collect data in various forms to determine what should be included. data collected make up the accountants working papers.

 The

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Working 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 Work Sheet

 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. work sheet helps check the arithmetical accuracy of the accounts.

A

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The Work Sheet

A

work sheet facilitates the preparation of financial statements. work sheet is not a published financial statement. work sheet is often prepared using a computer.

A

A

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Preparing the Work Sheet

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 Work Sheet

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 column totals.
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Using the Work Sheet sing

SUPPLEMENTAL OBJECTIVE 10
Use a work sheet for three different purposes.

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Tasks of the Work Sheet

 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 Work Sheet

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 Statement columns of the work sheet. 3. Preparing the Financial Statements. Account balances have been sorted into Income Statement and Balance Sheet columns.

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