Chapter 4 Accounting Information Systems 163FINANCIAL REPORTING SYSTEM
In the prior section, we described and illustrated the basic elements of a transaction
processing system. In this section, we continue this illustration to include the basic
elements of a financial reporting system. These elements include adjusting entries,
financial statements, and closing entries.
As a review of transaction processing systems and as a basis for illustrating a
double-entry accounting financial reporting system, we continue our illustration of
Online Solutions. During December, assume that Online Solutions entered into the
following transactions:Dec. 1 Paid a premium of $2,400 for a comprehensive insurance policy covering
liability, theft, and fire. The policy covers a two-year period.
1 Paid rent for December, $800. The company from which Online Solutions is
renting its store space now requires the payment of rent on the first of each
month, rather than at the end of the month.
1 Received an offer from a local retailer to rent the land purchased on
November 5. The retailer plans to use the land as a parking lot for its em-
ployees and customers. Online Solutions agreed to rent the land to the re-
tailer for three months, with the rent payable in advance. Online Solutions
received $360 for three months’ rent beginning December 1.
4 Purchased office equipment on account from Executive Supply Co. for $1,800.
6 Paid $180 for a newspaper advertisement.
11 Paid creditors $400.
13 Paid a receptionist and a part-time assistant $950 for two weeks’ wages.
16 Received $3,100 from fees earned for the first half of December.
16 Earned fees on account totaling $1,750 for the first half of December.
20 Paid $1,800 to Executive Supply Co. on the debt owed from the December 4
transaction.
21 Received $650 from customers in payment of their accounts.
23 Purchased $1,450 of supplies by paying $550 cash and charging the
remainder on account.
27 Paid the receptionist and the part-time assistant $1,200 for two weeks’ wages.
31 Paid $310 telephone bill for the month.
31 Paid $225 electric bill for the month.
31 Received $2,870 from fees earned for the second half of December.
31 Earned fees on account totaling $1,120 for the second half of December.
31 Paid dividends of $2,000 to stockholders.The journal entries for the December transactions are shown in Exhibit 8. The
posting of the journal entries to the ledger accounts is shown in Exhibit 15 (on pages
170–171).Adjusting Entries
In Chapter 3, we described and illustrated various adjustments necessary in preparing
financial statements. In this section, we illustrate this process for Online Solutions, us-
ing the double-entry accounting system. However, before we begin this process, we
prepare the trial balance shown in Exhibit 9 (on page 165) to make sure that no error
has occurred in posting December transactions to the general ledger.
The adjustment data for Online Solutions as of December 31, 2007, are as follows:Supplies on hand at December 31, $760. Used supplies of $2,040 ($2,800 – $760).
Insurance premiums expired during December, $100.
(continued)Describe and illustrate
the basic elements of a
financial reporting system.