Kế toán, kiểm toán - Chương 03: The accounting information system

C H A P T E R 3THE ACCOUNTING INFORMATION SYSTEMIntermediate Accounting13th EditionKieso, Weygandt, and Warfield Understand basic accounting terminology.Explain double-entry rules.Identify steps in the accounting cycle.Record transactions in journals, post to ledger accounts, and prepare a trial balance.Explain the reasons for preparing adjusting entries.Prepare financial statement from the adjusted trial balance.Prepare closing entries.Learning ObjectivesIdentifying and recordingJournalizingPostingTrial balanceAdjusting entriesAdjusted trial balancePreparing financial statementsClosingPost-closing trial balanceReversing entriesAccounting Information SystemThe Accounting CycleFinancial Statements for MerchandisersBasic terminologyDebits and creditsAccounting equationFinancial statements and ownership structureIncome statementStatement of retained earningsBalance sheetClosing entriesThe Accounting Information SystemCollects and processes transaction data.Disseminates the information to interested parties.Accounting Information SystemAccounting Information System (AIS)How much and what kind of debt is outstanding?Were 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 stockholders?Is our rate of return on net assets increasing?Accounting Information SystemHelps management answer such questions as:Basic TerminologyLO 1 Understand basic accounting terminology.EventTransactionAccountReal AccountNominal AccountLedgerJournalPostingTrial BalanceAdjusting EntriesFinancial StatementsClosing EntriesDebits and CreditsLO 2 Explain double-entry rules.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.Debits and CreditsAn arrangement that shows the effect of transactions on an account.Debit = “Left”Credit = “Right”AccountLO 2 Explain double-entry rules.An Account can be illustrated in a T-Account form.Account NameDebit / Dr. Credit / Cr. Debits and CreditsIf Debit entries are greater than Credit entries, the account will have a debit balance.LO 2 Explain double-entry rules.$10,000Transaction #2$3,000 $15,0008,000Transaction #3BalanceTransaction #1Debits and CreditsIf Credit entries are greater than Debit entries, the account will have a credit balance.LO 2 Explain double-entry rules.$10,000Transaction #2$3,000 $1,0008,000Transaction #3BalanceTransaction #1Normal Balance CreditNormal Balance DebitDebits and Credits SummaryLO 2 Explain double-entry rules. Balance Sheet Income Statement=+=-AssetLiabilityEquityRevenueExpenseDebitCreditDebits and Credits SummaryLO 2 Explain double-entry rules.The Accounting EquationLO 2 Explain double-entry rules.Relationship among the assets, liabilities and stockholders’ equity of a business: The equation must be in balance after every transaction. For every Debit there must be a Credit.Illustration 3-3Double-Entry System IllustrationAssetsLiabilitiesStockholders’ Equity=+Owners invest $40,000 in exchange for common stock.+ 40,000+ 40,000LO 2 Explain double-entry rules.AssetsLiabilitiesStockholders’ Equity=+2. Disburse $600 cash for secretarial wages.- 600- 600 (expense)LO 2 Explain double-entry rules.Double-Entry System IllustrationDouble-Entry System IllustrationAssetsLiabilitiesStockholders’ Equity=+3. Purchase office equipment priced at $5,200, giving a 10 percent promissory note in exchange.+ 5,200+ 5,200LO 2 Explain double-entry rules.Double-Entry System IllustrationAssetsLiabilitiesStockholders’ Equity=+4. Received $4,000 cash for services rendered.+ 4,000+ 4,000 (revenue)LO 2 Explain double-entry rules.Double-Entry System IllustrationAssetsLiabilitiesStockholders’ Equity=+5. Pay off a short-term liability of $7,000.- 7,000- 7,000LO 2 Explain double-entry rules.AssetsLiabilitiesStockholders’ Equity=+6. Declared a cash dividend of $5,000.+ 5,000- 5,000LO 2 Explain double-entry rules.Double-Entry System IllustrationDouble-Entry System IllustrationAssetsLiabilitiesStockholders’ Equity=+7. Convert a long-term liability of $80,000 into common stock.- 80,000+ 80,000LO 2 Explain double-entry rules.Double-Entry System IllustrationAssetsLiabilitiesStockholders’ Equity=+8. Pay cash of $16,000 for a delivery van.LO 2 Explain double-entry rules.- 16,000+ 16,000Note that the accounting equation equality is maintained after recording each transaction.Ownership structure dictates the types of accounts that are part of the equity section.Proprietorship or PartnershipCorporationCapital AccountDrawing AccountCommon StockAdditional Paid-in CapitalDividends DeclaredRetained EarningsFinancial Statements and Ownership StructureLO 2 Explain double-entry rules.Financial Statements and Ownership StructureLO 2 Explain double-entry rules.Stockholders’ EquityBalance SheetStatement of Retained EarningsNet income or Net loss (Revenues less expenses)Income StatementDividendsRetained Earnings (Net income retained in business)Common Stock (Investment by stockholders)Illustration 3-4The Accounting CycleLO 3 Identify steps in the accounting cycle.Transactions1. Journalization6. Financial Statements7. Closing entries8. Post-closing trail balance9. Reversing entries3. Trial balance2. Posting5. Adjusted trial balance4. AdjustmentsWork SheetIllustration 3-6Identify and Recording TransactionsWhat to Record? FASB states, “transactions and other events and circumstances that affect a business enterprise.”LO 3 Identify steps in the accounting cycle.Types of Events:External – between a business and its environment. Internal – event occurring entirely within a business.A supplier of a company‘s raw material is paid an amount owed on account.ExternalNot Recorded2. A customer pays its open account.External3. A new chief executive officer is hired.Not Recorded4. The biweekly payroll is paid.5. Raw materials are entered into production.InternalExternal6. A new advertising agency is hired.Not Recorded7. The accountant determines the federal income taxes owed based on the income earned.InternalReview “Transactions and Events”LO 3 Identify steps in the accounting cycle.ExternalInternalGeneral Journal – a chronological record of transactions. Journal Entries are recorded in the journal. 1. JournalizingLO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.September 1: Stockholders invested $15,000 cash in the corporation in exchange for shares of stock.Illustration 3-7Posting – the process of transferring amounts from the journal to the ledger accounts. 2. PostingLO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.Illustration 3-7Illustration 3-8Posting – Transferring amounts from journal to ledger. 2. PostingLO 4 Illustration 3-8Expanded ExampleLO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.2. PostingThe purpose of transaction analysis is to identify the type of account involved, and to determine whether a debit or a credit is required.Keep in mind that every journal entry affects one or more of the following items: assets, liabilities, stockholders’ equity, revenues, or expense.1. October 1: Stockholders invest $100,000 cash in an advertising venture to be known as Pioneer Advertising Agency Inc.Common stock100,000Cash100,000Oct. 1DebitCreditCash100,000100,000DebitCreditCommon Stock2. PostingLO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.2. October 1: Pioneer Advertising purchases office equipment costing $50,000 by signing a 3-month, 12%, $50,000 note payable.Notes payable50,000Office equipment50,000Oct. 1DebitCreditOffice Equipment50,00050,000DebitCreditNotes Payable2. PostingLO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.3. October 2: Pioneer Advertising receives a $12,000 cash advance from KC, a client, for advertising services that are expected to be completed by December 31.Unearned service revenue12,000Cash12,000Oct. 2DebitCreditCash100,00012,000DebitCreditUnearned Service Revenue2. Posting12,000LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.4. October 3: Pioneer Advertising pays $9,000 office rent, in cash, for October.Cash9,000Rent expense9,000Oct. 3DebitCreditCash100,0009,000DebitCreditRent Expense2. Posting12,0009,000LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.5. October 4: Pioneer Advertising pays $6,000 for a one-year insurance policy that will expire next year on September 30.Cash6,000Prepaid insurance6,000Oct. 4DebitCreditCash100,0006,000DebitCreditPrepaid Insurance2. Posting12,0009,0006,000LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.6. October 5: Pioneer Advertising purchases, for $25,000 on account, an estimated 3-month supply of advertising materials from Aero Supply.Accounts payable25,000Advertising supplies25,000Oct. 5DebitCreditAdvertising Supplies25,00025,000DebitCreditAccounts Payable2. PostingLO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.7. October 9: Pioneer Advertising signs a contract with a local newspaper for advertising inserts (flyers) to be distributed starting the last Sunday in November. Pioneer will start work on the content of the flyers in November. Payment of $7,000 is due following delivery of the Sunday papers containing the flyers.2. PostingLO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.8. October 20: Pioneer Advertising’s board of directors declares and pays a $5,000 cash dividend to stockholders.Cash5,000Dividends5,000Oct. 20DebitCreditCash100,0005,000DebitCreditDividends2. Posting12,0009,0006,0005,000LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.9. October 26: Employees are paid every four weeks. The total payroll is $2,000 per day. The pay period ended on Friday, October 26, with salaries of $40,000 being paid.Cash40,000Salaries expense40,000Oct. 26DebitCreditCash100,00040,000DebitCreditSalaries Expense2. Posting12,0009,0006,0005,00040,000LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.10. October 31: Pioneer Advertising receives $28,000 in cash and bills Copa Company $72,000 for advertising services of $100,000 provided in October. Accounts receivable72,000Cash28,000Oct. 31DebitCreditCash100,00072,000DebitCreditAccounts Receivable2. Posting12,0009,0006,0005,00040,000Service revenue100,000100,000DebitCreditService Revenue28,00080,000Trial Balance – A list of each account and its balance; used to prove equality of debit and credit balances.3. Trial BalanceLO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.Illustration 3-194. Adjusting EntriesRevenues - recorded in the period in which they are earned.Expenses - recognized in the period in which they are incurred.Adjusting entries - needed to ensure that the revenue recognition and matching principles are followed.LO 5 Explain the reasons for preparing adjusting entries.Types of Adjusting Entries1. Prepaid Expenses. Expenses paid in cash and recorded as assets before they are used or consumed.Prepayments3. Accrued Revenues. Revenues earned but not yet received in cash or recorded. 4. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded.2. Unearned Revenues. Revenues received in cash and recorded as liabilities before they are earned.AccrualsLO 5 Explain the reasons for preparing adjusting entries.Illustration 3-20Deferrals are either prepaid expenses orunearned revenues.Adjusting Entries for DeferralsLO 5 Explain the reasons for preparing adjusting entries.Illustration 3-21Payment of cash that is recorded as an asset because service or benefit will be received in the future.Adjusting Entries for “Prepaid Expenses”insurancesuppliesadvertisingCash PaymentExpense RecordedBEFORELO 5 Explain the reasons for preparing adjusting entries.rentmaintenance on equipmentfixed assetsPrepayments often occur in regard to:Supplies. Pioneer purchased advertising supplies costing$25,000 on October 5. Prepare the journal entry to record the purchase of the supplies.Cash25,000Advertising supplies25,000Oct. 5LO 5 Explain the reasons for preparing adjusting entries.DebitCreditAdvertising Supplies25,00025,000DebitCreditCashAdjusting Entries for “Prepaid Expenses”Supplies. An inventory count at the close of business on October 31 reveals that $10,000 of the advertising supplies are still on hand.Advertising supplies15,000Advertising supplies expense15,000Oct. 31LO 5 Explain the reasons for preparing adjusting entries.DebitCreditAdvertising Supplies25,00015,000DebitCreditAdvertising Supplies Expense15,000Adjusting Entries for “Prepaid Expenses” 10,000Statement Presentation:Advertising supplies identifies that portion of the asset’s cost that will provide future economic benefit.LO 5 Explain the reasons for preparing adjusting entries.Adjusting Entries for “Prepaid Expenses”Illustration 3-35Statement Presentation:Advertising expense identifies that portion of the asset’s cost thatexpired in October.LO 5 Explain the reasons for preparing adjusting entries.Adjusting Entries for “Prepaid Expenses”Illustration 3-34Insurance. On Oct. 4th, Pioneer paid $6,000 for a one-year fire insurance policy, beginning October 1. Show the entry to record the purchase of the insurance. Cash6,000Prepaid insurance6,000Oct. 4LO 5 Explain the reasons for preparing adjusting entries.DebitCreditPrepaid Insurance6,0006,000DebitCreditCashAdjusting Entries for “Prepaid Expenses”Insurance. An analysis of the policy reveals that $500 ($6,000 / 12) of insurance expires each month. Thus, Pioneer makes the following adjusting entry.Prepaid insurance500Insurance expense500Oct. 31LO 5 Explain the reasons for preparing adjusting entries.DebitCreditPrepaid Insurance6,000500DebitCreditInsurance ExpenseAdjusting Entries for “Prepaid Expenses”500 5,500Statement Presentation:Prepaid insurance identifies that portion of the asset’s cost that will provide future economic benefit.LO 5 Explain the reasons for preparing adjusting entries.Adjusting Entries for “Prepaid Expenses”Illustration 3-35Statement Presentation:Insurance expense identifies that portion of the asset’s cost thatexpired in October.LO 5 Explain the reasons for preparing adjusting entries.Adjusting Entries for “Prepaid Expenses”Illustration 3-34Depreciation. Pioneer Advertising estimates depreciation on its office equipment to be $400 per month. Accordingly, Pioneer recognizes depreciation for October by the following adjusting entry.Accumulated depreciation400Depreciation expense400Oct. 31LO 5 Explain the reasons for preparing adjusting entries.DebitCreditDepreciation Expense400400DebitCreditAccumulated DepreciationAdjusting Entries for “Prepaid Expenses”Statement Presentation:Accumulated Depreciation—is a contra asset account.LO 5 Explain the reasons for preparing adjusting entries.Adjusting Entries for “Prepaid Expenses”Illustration 3-35Statement Presentation:Depreciation expense identifies that portion of the asset’s cost thatexpired in October.LO 5 Explain the reasons for preparing adjusting entries.Adjusting Entries for “Prepaid Expenses”Illustration 3-34Receipt of cash that is recorded as a liability because the revenue has not been earned.Adjusting Entries for “Unearned Revenues”rentairline ticketsschool tuitionCash ReceiptRevenue RecordedBEFORELO 5 Explain the reasons for preparing adjusting entries.magazine subscriptionscustomer depositsUnearned revenues often occur in regard to:Unearned Revenue. Pioneer 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. Unearned advertising revenue12,000Cash12,000Oct. 2LO 5 Explain the reasons for preparing adjusting entries.DebitCreditCash12,00012,000DebitCreditUnearned Rent RevenueAdjusting Entries for “Unearned Revenues”LO 5 Explain the reasons for preparing adjusting entries.DebitCreditService Revenue100,00012,000DebitCreditUnearned Service Revenue4,000 8,000Adjusting Entries for “Unearned Revenues”Unearned Revenues. Analysis reveals that Pioneer earned $4,000 of the advertising services in October. Thus, Pioneer makes the following adjusting entry.Service revenue4,000Unearned service revenue4,000Oct. 314,000LO 5 Adjusting Entries for “Unearned Revenues”Illustration 3-35Statement PresentationUnearned service revenue identifies that portion of the liability that has not been earned.Accruals are either accrued revenues oraccrued expenses.Adjusting Entries for AccrualsLO 5 Explain the reasons for preparing adjusting entries.Illustration 3-27Revenues earned but not yet received in cash or recorded.Adjusting Entries for “Accrued Revenues”rentinterestservices performedBEFORELO 5 Explain the reasons for preparing adjusting entries.Accrued revenues often occur in regard to:Cash ReceiptRevenue RecordedAdjusting entry results in:Accrued Revenues. In October Pioneer earned $2,000 for advertising services that it did not bill to clientsbefore October 31. Thus, Pioneer makes the following adjusting entry.Service revenue2,000Accounts receivable2,000Oct. 31DebitCreditAccounts Receivable72,000Adjusting Entries for “Accrued Revenues”DebitCreditService Revenue100,0004,0002,000106,0002,00074,000LO 5 Illustration 3-34Adjusting Entries for “Unearned Revenues”Statement PresentationIllustration 3-35Expenses incurred but not yet paid in cash or recorded.Adjusting Entries for “Accrued Expenses”rentinteresttaxesBEFORELO 5 Explain the reasons for preparing adjusting entries.Accrued expenses often occur in regard to:Cash Payment, if any*Expense Recordedsalariesbad debts*Adjusting entry results in:LO 5 Explain the reasons for preparing adjusting entries.Adjusting Entries for “Accrued Expenses”Accrued Interest. Pioneer signed a three-month, 12%, 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: 123Illustration 3-29Interest payable500Interest expense500Oct. 31LO 5 Explain the reasons for preparing adjusting entries.DebitCreditInterest Expense500500DebitCreditInterest PayableAdjusting Entries for “Accrued Expenses”Accrued Interest. Pioneer 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.LO 5 Illustration 3-34Adjusting Entries for “Accrued Expenses”Statement PresentationIllustration 3-35LO 5 Explain the reasons for preparing adjusting entries.Adjusting Entries for “Accrued Expenses”Accrued Salaries. At October 31, the salaries for these days represent an accrued expense and a related liability to Pioneer. The employees receive total salaries of $10,000 for a five-day work week, or $2,000 per day.Salaries payable6,000Salaries expense6,000Oct. 31LO 5 Explain the reasons for preparing adjusting entries.DebitCreditSalaries Expense40,0006,000DebitCreditSalaries PayableAdjusting Entries for “Accrued Expenses”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.6,00046,000LO 5 Illustration 3-34Adjusting Entries for “Accrued Expenses”Statement PresentationIllustration 3-35Salaries expense34,000Salaries payable6,000Nov. 23LO 5 Explain the reasons for preparing adjusting entries.DebitCreditSalaries Expense34,0006,000DebitCreditSalaries PayableAdjusting Entries for “Accrued Expenses”Accrued Salaries. On November 23, Pioneer will again pay total salaries of $40,000. Prepare the entry to record the payment of salaries on November 23.Cash40,0006,000LO 5 Explain the reasons for preparing adjusting entries.Adjusting Entries for “Accrued Expenses”Bad Debts. Assume Pioneer reasonably estimates a bad debt expense for the month of $1,600. It makes the adjusting entry for bad debts as follows.Illustration 3-32Shows the balance of all accounts, after adjusting entries, at the end of the accounting period. 5. Adjusted Trial BalanceLO 5 Illustration 3-336. Preparing Financial StatementsLO 6 Prepare financial statement from the adjusted trial balance.Financial Statements are prepared directly from the Adjusted Trial Balance. Balance SheetIncome StatementStatement of Retained Earnings6. Preparing Financial StatementsLO 6Illustration 3-346. Preparing Financial StatementsLO 6Illustration 3-357. Closing EntriesLO 7 Prepare closing entries.To reduce the balance of the income statement (revenue and expense) accounts to zero. To transfer net income or net loss to owner’s equity.Balance sheet (asset, liability, and equity) accounts are not closed.Dividends are closed directly to the Retained Earnings account.7. Closing EntriesLO 7 Prepare closing entries.Retained earnings 5,000 Dividends 5,000Service revenue 106,000 Salaries expense 46,000 Advertising expense 15,000 Rent expense 9,000 Insurance expense 500 Interest expense 500 Depreciation expense 400 Bad debt expense 1,600 Retained earnings 33,000Illustration 3-33Closing Journal Entries:LO 7 Prepare closing entries.7. Closing EntriesIllustration 3-378. Post-Closing Trial BalanceLO 7 Prepare closing entries.Illustration 3-389. Reversing EntriesLO 7 Prepare closing entries.After preparing the financial statements and closing the books, a company may reverse some of the adjusting entries before recording the regular transactions of the next period. Accounting Cycle SummarizedLO 7 Prepare closing entries.Enter the transactions of the period in appropriate journals.Post from the journals to the ledger (or ledgers).Take an unadjusted trial balance (trial balance).Prepare adjusting journal entries and post to the ledger(s).Take a trial balance after adjusting (adjusted trial balance).Prepare the financial statements from the second trial balance.Prepare closing journal entries and post to the ledger(s).Take a trial balance after closing (post-closing trial balance).Prepare reversing entries (optional) and post to the ledger(s).Financial Statements of a Merchandising CompanyLO 7Illustration 3-39Financial Statements of a Merchandising CompanyLO 7Illustration 3-40Financial Statements of a Merchandising CompanyLO 7Illustration 3-41Internal controls are a system of checks and balances designed to prevent and detect fraud and errors. Both of these actions are required under SOX.Companies find that internal control review is a costly process. One study estimates the cost for U.S. companies at over $35 billion, with audit fees doubling in the first year of compliance. The enhanced internal control standards apply only to large public companies listed on U.S. exchanges. There is continuing debate over whether foreign issuers should have to comply.Most companies use accrual-basis accountingrecognize revenue when it is earned and expenses in the period incurred, without regard to the time of receipt or payment of cash.Under the strict cash basis, companiesrecord revenue only when they receive cash, and record expenses only when they disperse cash.Cash basis financial statements are not in conformity with GAAP.LO 8 Differentiate the cash basis of accounting from the accrual basis of accounting.Illustration: Quality Contractor signs an agreement to construct a garage for $22,000. In January, Quality begins construction, incurs costs of $18,000 on credit, and by the end of January delivers a finished garage to the buyer. In February, Quality collects $22,000 cash from the customer. In March, Quality pays the $18,000 due the creditors. Illustration 3A-1Solution on notes pageLO 8 Differentiate the cash basis of accounting from the accrual basis of accounting.Illustration: Quality Contractor signs an agreement to construct a garage for $22,000. In January, Quality begins construction, incurs costs of $18,000 on credit, and by the end of January delivers a finished garage to the buyer. In February, Quality collects $22,000 cash from the customer. In March, Quality pays the $18,000 due the creditors.Illustration 3A-2Solution on notes pageLO 8 Differentiate the cash basis of accounting from the accrual basis of accounting.Conversion From Cash Basis To Accrual BasisIllustration: Dr. Diane Windsor, like many small business owners, keeps her accounting records on a cash basis. In the year 2010, Dr. Windsor 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, 2010, she has accounts receivable, unearned service revenue, accrued liabilities, and prepaid expenses as shown in Illustration 3A-5.Illustration 3A-5LO 8 Differentiate the cash basis of accounting from the accrual basis of accounting.Conversion From Cash Basis To Accrual BasisIllustration: Calculate service revenue on an accrual basis.Illustration 3A-5Illustration 3A-8Solution on notes pageLO 8 Differentiate the cash basis of accounting from the accrual basis of accounting.Conversion From Cash Basis To Accrual BasisIllustration: Calculate operating expenses on an accrual basis.Illustration 3A-5Illustration 3A-11Solution on notes pageLO 8 Differentiate the cash basis of accounting from the accrual basis of accounting.LO 8 Differentiate the cash basis of accounting from the accrual basis of accounting.Conversion From Cash Basis To Accrual BasisIllustration 3A-12LO 8 Differentiate the cash basis of accounting from the accrual basis of accounting.Theoretical Weaknesses of the Cash BasisToday’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 an enterprise’s future cash flows. LO 9 Identifying adjusting entries that may be reversed.Illustration of Reversing Entries—AccrualsIllustration 3B-1LO 9 Identifying adjusting entries that may be reversed.Illustration of Reversing Entries—DeferralsIllustration 3B-2LO 9 Identifying adjusting entries that may be reversed.Summary of Reversing EntriesAll accruals should be reversed.All deferrals for which a company debited or credited the original cash transaction to an expense or revenue account should be reversed.Adjusting entries for depreciation and bad debts are not reversed.Recognize that reversing entries do not have to be used. Therefore, some accountants avoid them entirely.LO 10 Prepare a 10-column worksheet.A company prepares a worksheet either on columnar paper or within an electronic spreadsheet. A company uses the worksheet to adjust account balances and to prepare financial statements.LO 10 Prepare a 10-column worksheet.A company prepares a worksheet either on columnar paper or within an electronic spreadsheet. Worksheet ColumnsLO 10 Prepare a 10-column worksheet.Adjusted Trial BalanceIllustration 3C-1The Worksheet: provides information needed for preparation of the financial statements.Sorts data into appropriate columns, which facilitates the preparation of the statements.LO 10 Prepare a 10-column worksheet.Preparing Financial Statements from a WorksheetLO 7Illustration 3-39LO 7Illustration 3-40LO 7Illustration 3-41Copyright © 2009 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. 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