Unit IV: The Accounting Information System and Cycle

The Accounting Information System (AIS) functions as a structured workflow that captures raw financial source documents, processes them through double-entry rules, and converts them into standardized financial outputs.

Accountants follow a continuous sequence of steps during each accounting period:

[Phase 1: Recording]

1. Analyze transactions via source documents (invoices, receipts, payroll).
2. Journalize transactions chronologically into the General Journal.
3. Post journal entries to individual ledger accounts in the General Ledger.

[Phase 2: Summarizing & Reporting]

1. Prepare an unadjusted Trial Balance to verify debit/credit equality.
2. Assemble data needed for period-end adjustments.
3. Formulate a multi-column Worksheet.
4. Generate core Financial Statements.
5. Journalize and post period-end Adjusting Entries.
6. Journalize and post formal Closing Entries to clear temporary accounts.
7. Construct a Post-Closing Trial Balance.
8. Journalize and post Reversing Entries at the start of the new period.

To facilitate recording, similar transactional line items are grouped into individual designated structures called accounts and cataloged within a systematic Chart of Accounts.

1. Assets (Economic Resources Controlled by the Entity)

Current Assets (Liquid assets convertible to cash within one year):

• Cash: Currency, coins, and checking account balances.
• Notes Receivable: Formal written claims for unconditional future cash collection.
• Accounts Receivable: Outstanding credit claims from customers for services performed.
• Supplies: Unconsumed physical assets utilized in daily work operations.
• Prepaid Expenses: Upfront payments for benefits spanning future periods (e.g., Rent, Insurance).

Non-Current Assets (Long-term operational hard assets):

• Property, Plant, and Equipment (Tangible): Hard physical assets like Land, Buildings, Equipment, Machineries, and Furniture & Fixtures.
• Intangible Assets: Legal rights and non-physical values lacking physical form (e.g., Patents, Copyrights, Trademarks, Goodwill).
• Contra-Asset Accounts: Reductions linked directly to long-term assets (e.g., Accumulated Depreciation).

2. Liabilities (Present Legal Obligations Incurred via Past Events)

Current Liabilities (Debts due and payable within twelve months):

• Accounts Payable: Credit balances owed to suppliers for goods purchased.
• Notes Payable: Short-term formal written promises to pay specific financial sums.
• Accrued Expenses: Unpaid liabilities for obligations consumed during the period (e.g., Salaries Payable, Interest Payable, Taxes Payable).
• Unearned Revenues: Pre-collected cash values received before services are performed.

Non-Current Liabilities (Obligations maturing beyond one year):

• Long-Term Notes Payable: Formal extended loan liabilities.
• Mortgage Payable: Long-term bank debts secured by property real estate assets.

3. Capital / Owner's Equity (Residual Interest in Company Assets)

• Capital Account: Tracks the primary equity balance, owner contributions, and net income allocations.
• Drawing Account: Temporary debit-nature account tracking asset extractions for personal use.
• Income Summary: A temporary clearing account used solely during the year-end closing sequence.