Post on 12-Jan-2016
CHAPTER THREE
THE ACCOUNTING INFORMATION SYSTEM
An individual accounting record of increases and decreases to any specific
• Asset
• Liability
• Stockholders’ Equity
• Revenue
• Expense
The Account...
The Ledger Card
Account: Cash Account # 101PostRef
9/1 /09 20,000 20,0009/2 /09 1,000 19,0009/3 /09 10,000 9,0009/4 /09 1,200 7,800
9/20 /09 700 7,1009/30 /09 5,000 12,100
BalanceDebit CreditDate Item Debit Credit
Using AccountsUsing AccountsAccounts provide an efficient method to
categorize transactions.It is the location where we record activity
and maintain a running balance for any particular item.
Each account is maintained on its own ledger card.
All of the ledger cards combined become the General Ledger.
Where all activity and the resulting balances are kept for everything we want to
keep track of.
AccountsAccounts
General Ledger
Put all of the ledger cards together.
Account: Cash Account # 101PostRef
9/1 /09 20,000 20,0009/2 /09 1,000 19,0009/3 /09 10,000 9,0009/4 /09 1,200 7,800
9/20 /09 700 7,1009/30 /09 5,000 12,100
BalanceDebit CreditDate Item Debit Credit
Accounts Receivable
Office Supplies
Equipment
Accounts Payable
Wages Payable
Chart of Accounts...
is a list of a company’s accounts.
Jim’s LemonadeChart of Accounts
101 - Cash105 - Accts Receivable110 - Office Supplies150 - Equipment201 - Accounts Payable210 - Wages Payable305 - Common Stock320 - Retained Earnings401 - Sales - Lemonade 410 - Sales – Catering501 - Lemon Expense505 - Insurance Expense510 - Office Expense
Basic Steps in the Recording Process.
1.1. AnalyzeAnalyze
2.2. JournalizeJournalize
3.3. PostPost
When a transaction occurs:
Recording Process Step 1
Analyze Analyze each each
transactiotransaction and n and
effect on effect on accountsaccounts
If you don’t understand what happenedIf you don’t understand what happened
(the transaction)(the transaction)
you you cannot account for it!cannot account for it!
So. . . This is a pretty good place to start
!!!
Accounting Transactions...
are economic events that must be recorded in the financial statements because they affect assets liabilities and/or stockholders’ equity
Transaction Analysis
The process of identifying the The process of identifying the specific effects of economic events specific effects of economic events on the accounting equation.on the accounting equation.
Each transaction has a dual Each transaction has a dual (double-sided) effect on the (double-sided) effect on the accounting equation.accounting equation.
Recording Process Step 2
Enter transaction information in a Enter transaction information in a journal, a process called journal, a process called
journalizingjournalizing
The Journal...
is an accounting record where the transactions are recorded in
chronological order.
Recording Process Step 3Recording Process Step 3
Copy (post) the journal information Copy (post) the journal information to the appropriate accounts in the to the appropriate accounts in the
ledgerledger
“T” Accounts
Debit Credit
SHAPEDLIKE a “T”
“T” Accounts
Debit Credit
Debit means Left
Credit meansRight
“T” Accounts
Dr. Cr.
Abbreviation for Debit
Abbreviation for Credit
“T” Accounts
Dr. Cr.
CASHACCOUNT NAME
The Ledger Card
Account: Cash Account # 101___
PostRef
9/1 /06 20,000 20,0009/2 /06 1,000 19,0009/3 /06 10,000 9,0009/4 /06 1,200 7,800
9/20 /06 700 7,1009/30 /06 5,000 12,100
BalanceDebit CreditDate Item Debit Credit
The T Account
Cash
Every Account has:
An Increase Side, and
A Decrease Side But, Some Accounts
Increase on the Debit Side
And, Some Accounts Increase on the Credit Side
7 RULES OF
DEBITS AND CREDITS
RULE #1
ASSET ACCOUNTS
Dr. Cr.
+
Increase on Debit Side
Decrease on Credit Side
EXAMPLE:
PURCHASED OFFICE SUPPLIES FOR $800 CASH
STEP #1
Name the accounts affected:
CASH OFFICE SUPPLIES
STEP #2
Determine Classification of Accounts
CASH
ASSETOFFICE
SUPPLIES
ASSET
STEP #3
Now that we know the classification, we can identify increase and decrease sides.
CASH
DR. CR.+
OFFICE SUPPLIES
DR. CR.+
Did Office Supplies Increase or Decreasein this transaction?
PURCHASED OFFICE SUPPLIES FOR $800 CASH
INCREASED
OFFICE SUPPLIESDR. CR.
$800+
What about Cash? Increase or Decreasein this transaction?
PURCHASED OFFICE SUPPLIES FOR $800 CASH
DECREASED
CASH
DR. CR.
$800+
RULE #2
IN EVERY TRANSACTION DEBITS MUST EQUAL
CREDITS
DEBITS = CREDITS
DR.
CASH
+$800
CR.
OFFICE SUPPLIES
DR. CR.
$800+
RULE #3
LIABILITY ACCOUNTS
Dr. Cr.
+
Decrease onDebit Side
Increase on Credit Side
EXAMPLE:
PURCHASED EQUIPMENT ON ACCOUNT FOR $3,000.
STEP #1
Name the accounts affected:
EQUIPMENT
ACCOUNTS PAYABLE
STEP #2
Determine Classification of Accounts:
EQUIPMENT
ACCOUNTS PAYABLE
ASSET
LIABILITY
STEP #3
Now that we know the classification, we can identify increase and decrease sides.
EQUIPMENT
DR. CR.
+
ACCOUNTS PAYABLE
DR. CR.
+
Did Equipment Increase or Decrease in this transaction?
PURCHASED EQUIPMENT ON ACCOUNT FOR $3,000.
INCREASED
EQUIPMENTDR. CR.
$3000+
Accounts Payable? Increase or Decreasein this transaction?
PURCHASED EQUIPMENT ON ACCOUNT FOR $3,000.
INCREASED
ACCOUNTS PAYBLE
DR. CR.
$3000+
DEBITS = CREDITS
DR.
ACCOUNTS PAYABLE
+$3000
CR.
EQUIPMENT
DR. CR.
$3000+
RULE #4
CAPITAL ACCOUNT
Dr. Cr.
+
Decrease onDebit Side
Increase onCredit Side
JUST LIKE LIABILITY ACCOUNTS
EXAMPLE:
MARY ADAMS, THE OWNER, INVESTED $25,000 IN THE BUSINESS
STEPS #1 & 2
Name and classify the accounts affected:
M. ADAMS, CAPITAL CASH
DR. CR. DR. CR.
OWNER’S EQUITY ASSET
STEP #3
Now that we know the classification, we can identify increase and decrease sides.
CASH
DR. CR.+
M. ADAMS, CAPITAL
DR. CR.+
INCREASED OR DECREASED?
CASH
DR. CR.+
M. ADAMS, CAPITAL
DR. CR.+
INCREASED INCREASED
$25,000 $25,000
DEBITS = CREDITS
DR.
M. ADAMS, CAPITAL
+$25,000
CR.
CASH
DR. CR.+
$25,000
RULE #5
DIVIDEND / DRAWING ACCOUNT
Dr. Cr.+
Increase on theDebit Side
Decrease on theCredit Side
JUST LIKEASSET ACCOUNTS
EXAMPLE:
MARY WITHDREW $1,500 FOR PERSONAL EXPENSES
STEPS #1 & #2
Name and classify the accounts affected:
M. ADAMS, DRAWING CASH
DR. CR. DR. CR.
OWNER’S EQUITY ASSET
INCREASED OR DECREASED?
CASH
DR. CR.
+
M. ADAMS, DRAWING
DR. CR.
INCREASED DECREASED
$1,500 $1,500+
DEBITS = CREDITS
DR.
M. ADAMS, DRAWING
$1,500
CR.
CASH
DR. CR.
$1,500+ +
RULE #6
REVENUE ACCOUNTS
Dr. Cr.Decrease onDebit Side
Increase onCredit Side
JUST LIKE LIABILITY & CAPITAL
ACCOUNTS
+
EXAMPLE:
MARY PERFORMED SERVICES AND RECEIVED $4,500 IN CASH
STEPS #1 & #2
Name and classify the accounts affected:
CONSULTING FEES CASH
DR. CR. DR. CR.
REVENUE ASSET
STEP #3
Now that we know the classification, we can identify increase and decrease sides.
CASH
DR. CR.
CONSULTING FEES
DR. CR.+ +
INCREASED OR DECREASED?
CASH
DR. CR.
CONSULTING FEES
DR. CR.
INCREASED INCREASED
$4,500 $4,500+ +
DEBITS = CREDITS
DR.
CONSULTING FEES
$4,500
CR.
CASH
DR. CR.
$4,500+ +
EXAMPLE:
MARY PERFORMED $6,000 OF SERVICES ON ACCOUNT
DEBITS = CREDITS
DR.
CONSULT. FEES
$6,000
CR.
ACCOUNTS RECEIVABLE
DR. CR.
$6,000
ACCOUNTS RECEIVABLEINSTEAD OF
CASH
+ +
RULE #7
EXPENSE ACCOUNTS
Dr. Cr.Increase on the
Debit SideDecrease on the
Credit Side
JUST LIKEASSET ACCOUNTS
+
EXAMPLE
MARY ADAMS PAID HER ASSISTANT $750 IN WAGES
STEPS #1 & #2
Name and classify the accounts affected:
WAGES EXPENSE CASH
DR. CR. DR. CR.
EXPENSE ASSET
STEP #3
Now that we know the classification, we can identify increase and decrease sides.
CASH
DR. CR.
WAGES EXPENSE
DR. CR.+ +
INCREASED OR DECREASED?
CASH
DR. CR.
WAGES EXPENSE
DR. CR.
INCREASED DECREASED
$750 $750+ +
DEBITS = CREDITS
DR.
CASH
$750
CR.
WAGES EXPENSE
DR. CR.
$750+ +
Whichever side you increase is the
NORMAL balance!
By: Kyle Umbarger & Carl Phelps
Expansion of Basic Equation
Assets Liabilities EquityRetained Earnings
Revenue DividendsExpenses
Dr Cr
+ -
Dr Cr
+ -Dr Cr
+ -
Dr Cr
- +Dr Cr
- +Dr Cr
- +
Dr Cr
- +
Accounting Education Drives = Large Rich EnterprisesAssets Expenses Dividends Liabilities Revenues Equity
ReviewReview
What is the normal balance for the What is the normal balance for the following accounts?following accounts?
CashCash
Service RevenueService Revenue
Accounts ReceivableAccounts Receivable
Accounts PayableAccounts Payable
Common StockCommon Stock
Salaries ExpenseSalaries Expense
DebitDebit
CreditCredit
DebitDebit
CreditCredit
CreditCredit
DebitDebit
ReviewReview
What is the normal balance for the What is the normal balance for the following accounts?following accounts?
DividendsDividends
Unearned RevenusUnearned Revenus
Taxes PayableTaxes Payable
BuildingBuilding
Prepaid InsurancePrepaid Insurance
Rent ExpenseRent Expense
DebitDebit
DebitDebit
CreditCredit
CreditCredit
DebitDebit
DebitDebit
Date Debit Credit
GENERAL JOURNAL
Account Titles and Explanations
Oct. 1 Cash 10,000 Common Stock 10,000 Issued common stock for cash
Cash 5,000 Notes Payable 5,000 Issued 3-month, 12% note payable for cash
Office Equipment 5,000 Cash 5,000 Purchased office equipment for cash
Oct. 1 Cash 10,000 Common Stock 10,000
Issued common stock for cash
GENERAL JOURNAL
BalanceAcct 1010 Account CASH
Date
Acct 3010 Account COMMON STOCKDate Balance
Debit
Debit
Credit
Credit
Debit
Debit
Credit
Credit
ref
ref
Posting Entries
Oct. 1 Cash 10,000 Common Stock 10,000
Issued common stock for cash
GENERAL JOURNAL
Posting Entries
BalanceAcct 1010 Account CASH
Date
Acct 3010 Account COMMON STOCKDate Balance
Debit
Debit
Credit
Credit
Debit
Debit
Credit
Credit
ref
ref
Oct 1
Oct 1
gj 1
gj 1
10,000 10,000
10,00010,000
TRIAL BALANCE
List of all accounts with a balanceIncluding their balancesTotal all debits and all creditsProve debits equal creditsUsed as an aid in preparing financial
statements
Jessica Jane’s Campus DeliveryTrial BalanceJune 30, 20--
Account Title Debit Balance Credit Balance
HEADING should include:Name of the CompanyTitle of Document “Trial Balance”Date of the Trial Balance
Jessica Jane’s Campus DeliveryTrial BalanceJune 30, 20--
Account Title Debit Balance Credit BalanceCashAccounts ReceivableSuppliesPrepaid InsuranceDelivery Equipment
370 00650 00
200 003600 00
80 00
All Asset accountslisted first
Jessica Jane’s Campus DeliveryTrial BalanceJune 30, 20--
Account Title Debit Balance Credit BalanceCashAccounts ReceivableSuppliesPrepaid InsuranceDelivery Equipment
Accounts Payable
370 00650 00
200 003600 00
1800 00
80 00
Liabilities areshown next
Jessica Jane’s Campus DeliveryTrial BalanceJune 30, 20--
Account Title Debit Balance Credit BalanceCashAccounts ReceivableSuppliesPrepaid InsuranceDelivery Equipment
Accounts PayableJessica Jane, CapitalJessica Jane, Drawing
370 00650 00
200 003600 00
1800 002000 00
80 00
150 00
Now the Owner’s Equity Accounts
Jessica Jane’s Campus DeliveryTrial BalanceJune 30, 20--
Account Title Debit Balance Credit BalanceCashAccounts ReceivableSuppliesPrepaid InsuranceDelivery Equipment
Accounts PayableJessica Jane, CapitalJessica Jane, DrawingDelivery Fees
370 00650 00
200 003600 00
1800 002000 00
80 00
150 002150 00
Then the Revenue Account
Jessica Jane’s Campus DeliveryTrial BalanceJune 30, 20--
Account Title Debit Balance Credit BalanceCashAccounts ReceivableSuppliesPrepaid InsuranceDelivery Equipment
Accounts PayableJessica Jane, CapitalJessica Jane, DrawingDelivery FeesWages ExpenseRent ExpenseTelephone Expense
370 00650 00
200 003600 00
1800 002000 00
80 00
150 002150 00
650 00200 0050 00
Finally, the Expenses
Jessica Jane’s Campus DeliveryTrial BalanceJune 30, 20--
Account Title Debit Balance Credit BalanceCashAccounts ReceivableSuppliesPrepaid InsuranceDelivery Equipment
Accounts PayableJessica Jane, CapitalJessica Jane, DrawingDelivery FeesWages ExpenseRent ExpenseTelephone Expense
370 00650 00
200 003600 00
1800 002000 00
80 00
150 002150 00
650 00200 0050 00
5950 00 5950 00
It Balances!!!Debits = Credits
Chapter 3 Sample Transactions
(a) On July 1, cash of $95,000 was invested in the business in
exchange for $95,000 worth of common stock.
(b) Peoples, Inc. acquired land by paying $60,000 cash to Nashtown, Inc.
(c) Peoples, Inc. purchased an estimated three-month supply of office supplies on account. The company will pay $600 for these supplies later.
(d) Peoples, Inc. received $800 for accounting services performed.
(e) Peoples, Inc. performed consulting services for $2,000. The company will be paid later in the month.
(f) Peoples, Inc. received confirmation that a major corporation has selected their corporation to perform major consulting work. The work will start January 1st of next year.
Chapter 3 Sample Transactions
(g) Peoples, Inc. purchased office equipment for $6000. The company
signed a 2-year note with ACME Office Equipment Company.
(h) Peoples, Inc. paid $1800 for a 1-year license to operate as a business. The license expires June 30th of next year.
(i) Peoples, Inc. collected $800 of the money owed from (e).
(j) Peoples, Inc. paid $400 of the amount it owed from (c).
(k) An employee has worked and earned $600 which was paid during the month.
(l) Peoples, Inc. received a $5000 retainer to handle a tax audit that the company will start to work on next month.
(m) Peoples, Inc. paid $500 for rent during the month.
(n) Dividends of $700 were paid during the month.