3-1 THE ACCOUNTING INFORMATION SYSTEM Financial Accounting, Sixth Edition 3.

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THE ACCOUNTING INFORMATION SYSTEM

Financial Accounting, Sixth Edition

3

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1. Analyze the effect of business transactions on the basic accounting

equation.

2. Explain what an account is and how it helps in the recording process.

3. Define debits and credits and explain how they are used to record

business transactions.

4. Identify the basic steps in the recording process.

5. Explain what a journal is and how it helps in the recording process.

6. Explain what a ledger is and how it helps in the recording process.

7. Explain what posting is and how it helps in the recording process.

8. Explain the purposes of a trial balance.

9. Classify cash activities as operating, investing, or financing.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

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The Accounting Information SystemThe Accounting Information SystemThe Accounting Information SystemThe Accounting Information System

Accounting Information System

System of

► collecting and

► processing transaction data and

► communicating financial information to decision

makers.

Most businesses use computerized accounting (EDP)

systems.

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Transactions are economic events that require

recording in the financial statements.

Not all activities represent transactions.

Assets, liabilities, or stockholders’ equity items

change as a result of some economic event.

Dual effect on the accounting equation.

Accounting TransactionsAccounting TransactionsAccounting TransactionsAccounting Transactions

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Question:Question: Are the following events recorded in the accounting records?

EventPurchase computer.

Criterion Is the financial position (assets, liabilities, or stockholders’ equity) of the company changed?

Pay rent.

Record/ Don’t Record


Discuss guided trip

options with potential

customer.

Illustration 3-1

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AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesStockholders’ Stockholders’

EquityEquityStockholders’ Stockholders’

EquityEquity= +

Analyzing Transactions

SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation.

Basic Accounting Equation


The process of identifying the specific effects of economic events on the accounting equation.

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Analyzing Transactions



Illustration 3-2 Expanded accounting equation

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Illustration:Illustration: 1. On October 1, cash of $10,000 is invested in Sierra Corporation by investors in exchange for $10,000 of common stock.


1. +10,000 +10,000


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2. On October 1, Sierra borrowed $5,000 from Castle Bank by signing a 3-month, 12%, $5,000 note payable.


1. +10,000 +10,000

2. +5,000 +5,000


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3. On October 2, Sierra purchased equipment by paying $5,000 cash to Superior Equipment Sales Co.


3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000


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4. On October 2, Sierra received a $1,200 cash advance from R. Knox, a client.


4. +1,200 +1,200

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000


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5. On October 3, Sierra received $10,000 in cash from Copa Company for guide services performed.


4. +1,200 +1,200

5. +10,000 +10,000

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000


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6. On October 3, Sierra Corporation paid its office rent for the month of October in cash, $900.


4. +1,200 +1,200

5. +10,000 +10,000

6. -900 -900

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000


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7. On October 4, Sierra paid $600 for a one-year insurance policy that will expire next year on September 30.


4. +1,200 +1,200

5. +10,000 +10,000

6. -900 -900

7. -600 +600

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000


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8. On October 5, Sierra purchased supplies on account from Aero Supply for $2,500.


4. +1,200 +1,200

5. +10,000 +10,000

6. -900 -900

7. -600 +600

8. +2,500 +2,500

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000


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10. On October 20, Sierra paid a $500 dividend.


4. +1,200 +1,200

5. +10,000 +10,000

6. -900 -900

7. -600 +600

8. +2,500 +2,500

10. -500 -500

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000


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11. Employees have worked two weeks, earning $4,000 in salaries, which were paid on October 26.


4. +1,200 +1,200

5. +10,000 +10,000

6. -900 -900

7. -600 +600

8. +2,500 +2,500

10. -500 -500

11. -4,000 -4,000

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000

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Account Name

Debit / Dr. Credit / Cr.

Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item.

Debit = “Left”

Credit = “Right”

AccountAccount

An Account can An Account can be illustrated in a be illustrated in a T-Account form.T-Account form.

SO 2 Explain what an account is and how it helps in the recording process.SO 2 Explain what an account is and how it helps in the recording process.

The AccountThe AccountThe AccountThe Account

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Double-entry Double-entry system

► Each transaction must affect two or more accounts to

keep the basic accounting equation in balance.

► Recording done by debiting at least one account and

crediting another.

► DEBITS must equalmust equal CREDITS.

SO 3 Define debits and credits and explain their use in recording business transactions.SO 3 Define debits and credits and explain their use in recording business transactions.

Debit and Credit Procedures

The AccountThe AccountThe AccountThe Account

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Account Name


If Debits are greater thangreater than Credits, the account will

have a debit balance.

$10,000 Transaction #2$3,000

$15,000$15,000

8,000Transaction #3

Balance

Transaction #1


Debit and Credit ProceduresDebit and Credit ProceduresDebit and Credit ProceduresDebit and Credit Procedures

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Account Name


$10,000 Transaction #2$3,000

Balance

Transaction #1

$1,000$1,000

8,000 Transaction #3


Debit and Credit ProceduresDebit and Credit ProceduresDebit and Credit ProceduresDebit and Credit Procedures

If Credits are greater than Debits, the account will

have a credit balance.

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Assets - Debits should exceed credits.

Liabilities – Credits should exceed debits.

The normal balance is on the increase side.

Dr./Cr. Procedures for Assets and LiabilitiesDr./Cr. Procedures for Assets and LiabilitiesDr./Cr. Procedures for Assets and LiabilitiesDr./Cr. Procedures for Assets and Liabilities

Chapter 3-23

AssetsAssets


Normal BalanceNormal Balance

Chapter 3-24

LiabilitiesLiabilities




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Owner’s investments and revenues increase stockholders’ equity (credit).

Dividends and expenses decrease stockholder’s equity (debit).

Dr./Cr. Procedures for Stockholders’ EquityDr./Cr. Procedures for Stockholders’ EquityDr./Cr. Procedures for Stockholders’ EquityDr./Cr. Procedures for Stockholders’ Equity

Chapter 3-25



Common StockCommon Stock

Chapter 3-23

DividendsDividends



Chapter 3-25



StockholdersStockholders’’ EquityEquity

Chapter 3-25



Retained EarningsRetained Earnings


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The purpose of earning revenues is to benefit the stockholders.

The effect of debits and credits on revenue accounts is the same as their effect on stockholders’ equity.

Expenses have the opposite effect: expenses decrease stockholders’ equity.Chapter

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ExpenseExpense

Chapter 3-26



RevenueRevenue


Dr./Cr. Procedures for Revenue and ExpenseDr./Cr. Procedures for Revenue and ExpenseDr./Cr. Procedures for Revenue and ExpenseDr./Cr. Procedures for Revenue and Expense

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Chapter 3-23

AssetsAssets



Chapter 3-27



ExpenseExpense

Chapter 3-24

LiabilitiesLiabilities



Chapter 3-25



StockholdersStockholders’’ EquityEquity

Chapter 3-26



RevenueRevenue

Normal Balance Credit

Normal Balance Credit

Normal Balance

Debit

Normal Balance

Debit

Summary of Debit/Credit RulesSummary of Debit/Credit RulesSummary of Debit/Credit RulesSummary of Debit/Credit Rules


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Balance Sheet Income Statement

= + =-Asset Liability Equity Revenue Expense

Debit

Credit



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Relationship among the assets, liabilities and stockholders’ equity of a business:

The equation must be in balance after every transaction. For every Debit there must be a Credit.

Illustration 3-16

Assets Liabilities= Stockholders’ EquityBasic Equation

Expanded Basic Equation

+


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Source documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction.

Steps in the Recording ProcessSteps in the Recording ProcessSteps in the Recording ProcessSteps in the Recording Process

SO 4 Identify the basic steps in the recording process.SO 4 Identify the basic steps in the recording process.

Illustration 3-17

Analyze each transaction Enter transaction in a journalTransfer journal information to

ledger accounts

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Book of original entry.

Transactions recorded in chronological order.

Contributions to the recording process:

1. Discloses the complete effects of a transaction.

2. Provides a chronological record of transactions.

3. Helps to prevent or locate errors because the debit

and credit amounts can be easily compared.

SO 5 Explain what a journal is and how it helps in the recording process.SO 5 Explain what a journal is and how it helps in the recording process.


The Journal

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Journalizing - Entering transaction data in the journal.

Illustration: Presented below is information related to Sierra Corporation.

Sierra issued common stock in exchange for $10,000 cash.

Oct. 1

Sierra borrowed $5,000 by signing a note.1

Sierra purchased office equipment for $5,000.2

Instructions - Journalize these transactions.

The JournalThe JournalThe JournalThe Journal


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Account Title Ref. Debit Credit

Oct. 1

Date

JournalizingJournalizingJournalizingJournalizing

General Journal


Sierra issued common stock in exchange for $10,000 cash.

Oct. 1

Cash

Common stock

10,000

10,000

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Oct. 1

Date


General Journal


Sierra borrowed $5,000 by signing a note.Oct. 1

Cash

Notes payable

5,000

5,000

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Oct. 2

Date


General Journal


Sierra purchased equipment for $5,000.Oct. 2

Equipment

Cash

5,000

5,000

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The Ledger contains the entire group of accounts

maintained by a company.

SO 6 Explain what a ledger is and how it helps in the recording process.SO 6 Explain what a ledger is and how it helps in the recording process.

Illustration 3-19


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SO 6 Explain what a ledger is and how it helps in the recording process.SO 6 Explain what a ledger is and how it helps in the recording process.

Chart of Accounts – listing of accounts used by a

company to record transactions.

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Cash Acct. No. 101Date Explanation Ref. Debit Credit Balance

General Ledger

Date Account Title Ref. Debit Credit

Oct. 1 Cash 10,000

Common stock 10,000

General Journal

Oct. 1 Owner investment J1 10,000 10,000

101

J1


SO 7SO 7

Posting – the process of transferring amounts from the

journal to the ledger accounts.

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The Recording Process IllustratedThe Recording Process IllustratedThe Recording Process IllustratedThe Recording Process Illustrated

Follow these steps:

1. Determine what type of account is involved.

2. Determine what items increased or decreased and by how much.

3. Translate the increases and decreases into debits and credits.

Illustration 3-21

SO 7 Explain what posting is and how it helps in the recording process.SO 7 Explain what posting is and how it helps in the recording process.

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Follow these steps:




Illustration 3-22

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Follow these steps:




Illustration 3-23

3-40 SO 7 Explain what posting is and how it helps in the recording process.SO 7 Explain what posting is and how it helps in the recording process.

Additional Transactions

The The Recording Recording Process Process IllustratedIllustrated


Illustration 3-24





Illustration 3-25





Illustration 3-26

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Illustration 3-27





Illustration 3-28



Additional TransactionsIllustration 3-29





Illustration 3-30

3-47 SO 7SO 7




Illustration 3-31

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Summary Illustration of JournalizingSummary Illustration of JournalizingSummary Illustration of JournalizingSummary Illustration of Journalizing


Illustration 3-32

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Summary Illustration of JournalizingSummary Illustration of JournalizingSummary Illustration of JournalizingSummary Illustration of Journalizing


Illustration 3-32

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Summary Summary Illustration Illustration of Postingof Posting

Summary Summary Illustration Illustration of Postingof Posting

Illustration 3-33


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A list of accounts and their balances at a given time.

Purpose is to prove that debits equal credits.

The Trial BalanceThe Trial BalanceThe Trial BalanceThe Trial Balance

Illustration 3-34

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The trial balance may balance even when

1. a transaction is not journalized,

2. a correct journal entry is not posted,

3. a journal entry is posted twice,

4. incorrect accounts are used in journalizing or posting, or

5. offsetting errors are made in recording the amount of a

transaction.

The Trial BalanceThe Trial BalanceThe Trial BalanceThe Trial Balance

SO 8 Explain the purposes of a trial balance.SO 8 Explain the purposes of a trial balance.

Limitations of a Trial Balance

3-1 THE ACCOUNTING INFORMATION SYSTEM Financial Accounting, Sixth Edition 3.

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Transcript of 3-1 THE ACCOUNTING INFORMATION SYSTEM Financial Accounting, Sixth Edition 3.