Accounting Information System

Chapter 3: Accounting Information System

This is Intermediate Accounting Chapter 3. For more Intermediate Accounting topics, see Intermediate Accounting Study Guide.

This is a review of the accounting system from accounting principles. The basic elements are used to record transactions and prepare financial statements.


Accounting Information System

The accounting information system records transactions and then summarizes the financial information to interested parties. Accounting is the language of business. To understand the accounting process, basic terms need to be learned.

Debits and Credits

Double-entry accounting is the process used to recording transactions. The debit side of any account is the left side; the right side is the credit side.

T Account

Debit and Credit Rules for Accounts

Here are the debit and credit rules for the balance sheet accounts. Assets increase with debits. Liabilities and equity increase with credits.

Balance Sheet T Accounts

Here are the debit and credit rules for the income statement accounts and dividends. Revenues increase with credits. Expenses and dividends increase with debits.

Remember DEALER for Debits and Credits

The accounts can be remembered with the word DEALER. DEA accounts take debits to increase and LER accounts take credits to increase.

For more on debits and credits, see Debits and Credits Explained: A Helpful Illustrated Guide

DEALER debits and credits

In a double-entry system, for every debit there must be a credit and vice-versa. This leads us to the basic accounting equation: Assets = Liabilities + Stockholders’ Equity.

The Accounting Cycle

The accounting cycle has 9 steps:

  1. Record transactions in the journal – Transactions are recorded in a journal, the book of original entry.
  2. Post from the journals to the ledger – Amounts posted from the journal to the general ledger. This updates the account balances.
  3. Prepare an unadjusted trial balance – A trial balance is a list of accounts and their balances at a given time.
  4. Prepare adjusting journal entries and post to the ledger – adjusting entries are entries made at the end of period to update accounts on an accrual accounting basis so that correct financial statements can be prepared
  5. Prepare an adjusted trial balance – an adjusted trial balance is prepared after adjusting entries.
  6. Prepare financial statements from the adjusted trial balance
    1. income statement
    2. balance sheet
    3. cash flow statement
    4. statement of stockholders’ equity
  7. Prepare closing journal entries and post to the ledger – The revenue and expense (nominal) accounts should be closed in preparation for the next period. All nominal accounts are reduced to zero by closing them through the Income Summary account. The net income or net loss for the period is transferred to equity.
  8. Prepare the post-closing trial balance – The post-closing trial balance will only have assets, liabilities, and equity after the revenues and expenses are closed.
  9. Prepare reversing entries and post to the ledger (optional)

Accounting Information System Tutorial


Make Adjusting Entries Tutorial


Preparing Financial Statements Tutorial


Intermediate Accounting Study Guide

This is Intermediate Accounting Chapter 3. For more Intermediate Accounting topics, see Intermediate Accounting Study Guide.

Jeff Mankin

Jeff Mankin teaches financial literacy. His website is FinallyLearn.com.

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