Accounting Information System & Cycle
The Accounting Information System (AIS) is the structured process by which business activities are converted into financial statements. The accounting cycle is the routine that runs the AIS, period after period. ACC 926 Module 2.
ADMN 201’s Accounting.md introduces the AIS as “the organized procedure for identifying, measuring, recording, and retaining financial information.” ACC 926 supplies the explicit ten-step cycle.
Double-Entry Foundation
Every transaction has at least two equal effects: a debit and a credit. The accounting equation A = L + E must remain in balance after every entry.
| Increase | Decrease | |
|---|---|---|
| Asset | Debit | Credit |
| Liability | Credit | Debit |
| Equity | Credit | Debit |
| Revenue | Credit | Debit |
| Expense | Debit | Credit |
The Ten Steps
flowchart TD S1[1. Identify and analyze<br/>transactions] S2[2. Journalize<br/>chronological record] S3[3. Post to ledger<br/>group by account] S4[4. Unadjusted trial balance<br/>verify debits = credits] S5[5. Adjusting entries<br/>accruals, deferrals, estimates] S6[6. Adjusted trial balance] S7[7. Prepare financial statements] S8[8. Closing entries<br/>zero out temporary accounts] S9[9. Post-closing trial balance] S10[10. Reversing entries<br/>optional, next period] S1 --> S2 --> S3 --> S4 --> S5 --> S6 --> S7 --> S8 --> S9 --> S10
(diagram saved)
Adjusting Entries — Four Categories
Adjustments are needed because cash transactions and economic events don’t always align in time.
| Category | Example | Effect at period end |
|---|---|---|
| Prepaid Expenses | Rent paid in advance | Reduce asset, recognize expense for portion used |
| Unearned Revenues | Magazine subscription received in advance | Reduce liability, recognize revenue for portion delivered |
| Accrued Expenses | Wages earned but not yet paid | Recognize liability + expense |
| Accrued Revenues | Interest earned but not received | Recognize asset (receivable) + revenue |
Plus estimated adjustments: depreciation, bad debt expense, inventory write-downs.
Closing Entries
Temporary accounts (revenues, expenses, dividends, gains/losses) are zeroed out at period end so the next period starts fresh. Their balances roll to Retained Earnings.
1. Close revenues to Income Summary
2. Close expenses to Income Summary
3. Close Income Summary balance (= net income or loss) to Retained Earnings
4. Close Dividends Declared to Retained Earnings
Permanent accounts (assets, liabilities, equity) carry forward; temporary accounts do not.
Reversing Entries (Optional)
At the start of the new period, reverse certain adjusting entries (typically accrued expenses/revenues) so that ordinary cash transactions can be recorded the usual way without double counting. Bookkeeping convenience, not a requirement.
Ownership Structure → Equity Section
| Form | Equity accounts |
|---|---|
| Sole Proprietorship | Owner’s Capital · Owner’s Drawings |
| Partnership | Each partner’s Capital · Each partner’s Drawings |
| Corporation | Common Shares · Preferred Shares · Contributed Surplus · Retained Earnings · AOCI (IFRS) |
Cross-Course Connections
- Accounting — ADMN 201’s overview of the AIS
- AccountingEquation-FinancialStatements — the equation that double-entry preserves
- RevenueRecognition5Step — when “revenue earned” is determined for accrual entries
Key Points
- Double-entry: every transaction has equal debits and credits; A=L+E stays balanced
- 10 steps: identify · journalize · post · trial balance · adjust · adjusted TB · statements · close · post-closing TB · (reverse)
- Four adjustment categories: prepaid expenses · unearned revenues · accrued expenses · accrued revenues
- Closing zeroes temporary accounts (revenues, expenses, dividends) into Retained Earnings
- Permanent accounts (A, L, E) carry forward; temporary do not