1. 2 chapter 3 the accounting information system
TRANSCRIPT
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Chapter 3
THE ACCOUNTING THE ACCOUNTING INFORMATION INFORMATION
SYSTEMSYSTEM
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Chapter 3The Accounting Information System
Analyze the effect of business transactions on the basic accounting equation.
Explain what an account is and how it helps in the recording process.
Define debits and credits and explain how they are used to record business transactions.
Identify the basic steps in the recording process.
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Chapter 3The Accounting Information System
Explain what a journal is and how it helps in the recording process.
Explain what a ledger is and how it helps in the recording process.
Explain what posting is and how it helps in the recording process.
Explain the purposes of a trial balance.
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Transaction Analysis Transaction Analysis:Transaction Analysis: the process of the process of
identifying the specific effects of economic identifying the specific effects of economic events on the accounting equation.events on the accounting equation.
Each transaction has a dual (double-sided) Each transaction has a dual (double-sided) effect on the accounting equation.effect on the accounting equation.
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The Accounting Information System
The system of:
•collecting and processing transaction data and
•communicating financial information to decision makers.
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Accounting Transactions... are economic events
that must be recorded in the financial statements because they affect assets, liabilities and/or stockholders’
equity.
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Accounting Transactions...
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Accounting Analysis...
Analyze the effect of business transactions on the basic accounting equation:
Assets = Liabilities + Stockholders’ Equity
Must always balance.
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Transaction AnalysisTransaction Analysis If an individual asset is increased, If an individual asset is increased,
there must be a corresponding:there must be a corresponding: Decrease in another asset, Decrease in another asset, oror Increase in a specific liability, Increase in a specific liability, oror Increase in stockholders’ equityIncrease in stockholders’ equity
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Transaction AnalysisTransaction Analysis
Two or more items can be affectedTwo or more items can be affected Example: purchase computer for Example: purchase computer for
$10,000 by paying $6,000 in cash $10,000 by paying $6,000 in cash and signing a note for $4,000and signing a note for $4,000
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Let’s Practice!Let’s Practice!
Let’s practice transaction Let’s practice transaction analysis with Sierra analysis with Sierra
Corporation. . .Corporation. . .
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Event 1 – Investment of Event 1 – Investment of Cash Cash by Stockholdersby Stockholders
Oct. 1 - Owner invested $10,000 Oct. 1 - Owner invested $10,000 Cash in business in exchange for Cash in business in exchange for $10,000 of Sierra Corporation $10,000 of Sierra Corporation Common StockCommon Stock
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Event 2 – Note Issued in Event 2 – Note Issued in Exchange for CashExchange for Cash
Oct. 1 – Sierra issued a 3-month, Oct. 1 – Sierra issued a 3-month, 12%, $5,000 Note Payable to Castle 12%, $5,000 Note Payable to Castle Bank in exchange for cash.Bank in exchange for cash.
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Event 3 – Purchase of Event 3 – Purchase of Office Equipment for CashOffice Equipment for Cash
Oct. 2 – Sierra acquired office Oct. 2 – Sierra acquired office equipment by paying $5,000 cash to equipment by paying $5,000 cash to Superior Sales CoSuperior Sales Co..
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Event 4 – Receipt of Cash Event 4 – Receipt of Cash in Advance from Customerin Advance from Customer
Oct. 2 – Sierra received a $1,200 Oct. 2 – Sierra received a $1,200 cash advance from R. Knox, a cash advance from R. Knox, a client.client.
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Event 5 – Services Event 5 – Services Rendered for CashRendered for Cash
Oct. 3 – Sierra received $10,000 in Oct. 3 – Sierra received $10,000 in cash from Copa Co. for advertising cash from Copa Co. for advertising services performedservices performed
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Event 5 –Event 5 – Services Rendered, Services Rendered, WHAT IFWHAT IF these were performed these were performed “on account”?“on account”?
Later, when $10,000 is collected from Later, when $10,000 is collected from customer…customer…
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Event 6 – Payment of RentEvent 6 – Payment of Rent
Oct. 3 – Sierra paid its office rent Oct. 3 – Sierra paid its office rent for the month of October in cash, for the month of October in cash, $900.$900.
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Event 7 – Purchase of Event 7 – Purchase of Insurance Policy with CashInsurance Policy with Cash
Oct. 4 – Sierra paid $600 for a one-Oct. 4 – Sierra paid $600 for a one-year insurance policy that will expire year insurance policy that will expire next year on Sept. 30.next year on Sept. 30.
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Event 8 – Purchase of Event 8 – Purchase of Supplies on CreditSupplies on Credit
Oct. 5 – Sierra purchases a three-Oct. 5 – Sierra purchases a three-month supply of advertising materials month supply of advertising materials on account from Aero Supply for on account from Aero Supply for $2,500.$2,500.
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Event 9 – Hiring of New Event 9 – Hiring of New EmployeesEmployees
Oct. 9 – Sierra hired four new Oct. 9 – Sierra hired four new employees to begin work on Oct. employees to begin work on Oct. 1515..
Accounting transaction Accounting transaction has has NOTNOT occurred! occurred!
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Event 10 – Payment of Event 10 – Payment of DividendDividend
Oct. 20 – Sierra paid a $500 Oct. 20 – Sierra paid a $500 dividenddividend..
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Event 11 – Payment of Cash Event 11 – Payment of Cash for Employee Salariesfor Employee Salaries
Oct. 26 – Paid employees working two Oct. 26 – Paid employees working two weeks, who have earned $4,000 in weeks, who have earned $4,000 in salaries.salaries.
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Summary of TransactionsSummary of Transactions
Assets =Assets = Liabilities Liabilities ++ Equity Equity
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An individual accounting record of increases and decreases in a specific Asset, Liability, or Stockholders’ Equity item.
The Account...11 2
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Three parts :
1) the Title of the account
2) a left or Debit side
3) a right or Credit side
The Account
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Debits and Credits
•Debit means leftDebit means left
• thus, entry on thus, entry on left side is debitingleft side is debiting
• Credit means rightCredit means right
• thus, entry on thus, entry on right side is right side is creditingcrediting
•Normal balance is the side the Normal balance is the side the increase happens on.increase happens on.
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Examples
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Total the Entries to Each Side
If the greater sum is on the left, the account has a Debit Balance
Total Debits Total Credits
TITLE
Debit Credit
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Total the Entries to Each Side
If the greater sum is on the right, the account has a Credit Balance
Total Debits Total Credits
TITLE
Debit Credit
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Whichever side you increase is the
normal balance!
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Normal Normal Balances for Assets and Liabilitiesfor Assets and Liabilities
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Normal Balances for Stockholders’ Equity
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Normal Balances for Expenses and Revenues
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Expansion of Basic Equation
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Basic Steps in the Recording Process.
1.1.AnalyzeAnalyze
2.2.JournalizeJournalize
3.3.PostPost
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Recording Process Step 1
Analyze each Analyze each transaction and effect transaction and effect
on accountson accounts
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The Journal...
is an accounting record where the transactions are recorded in chronological order.
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Recording Process Step 2
Enter transaction information in a Enter transaction information in a journal, a process called journal, a process called journalizingjournalizing
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Recording Process Step Recording Process Step 33
Transfer (post) the journal Transfer (post) the journal information to the appropriate information to the appropriate accounts in the ledgeraccounts in the ledger
Date Debit Credit
GENERAL JOURNAL
Account Titles and Explanations
2007 Oct. 1 Cash 10,000 Common Stock 10,000 (Invested cash in business) 1 Cash 5,000
Notes Payable 5,000 (Issued 3-month, 12% note payable for cash) 2 Office Equipment 5,000 Cash 5,000 (Purchased office equipment for cash)
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The General Ledger•the entire group of accounts maintained by a company
•contains all the asset, liability, and stockholders’ equity accounts
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Chart of Accounts...
is a list of a company’s accounts.
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The General Ledger
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The General Ledger
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Posting
Transferring information from the journals to the general ledger accounts
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GENERAL JOURNALAccount Titles and Explanations
2007 Oct. 1 Cash 10,000 Common Stock 10,000
BalanceAcct 1010 Account CASH
Date
Acct 3010 Account COMMON STOCKDate Balance
debit
debit
credit
credit
debit
debit
credit
credit
ref
ref
Posting Entries
GENERAL JOURNAL
Account Titles and Explanations
2007 Oct. 1 Cash 10,000 Common Stock 10,000
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
Posting Entries
Posting Entries
GENERAL JOURNAL
Account Titles and Explanations
2007 Oct. 1 Cash 10,000 Common Stock 10,000
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
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Trial Balance
A list of all the accounts and their balances at a given time.
It serves to prove the mathematical equality of debits and credits after posting.
It aids in the preparation of financial statements.
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Sierra CorporationTrial Balance
October 31, 2007
Debit Credit Cash $15,200Advertising Supplies 2,500Prepaid Insurance 600Office Equipment 5,000Notes Payable $ 5,000Accounts Payable 2,500Unearned Service Revenue 1,200Common Stock 10,000Dividends 500Service Revenue 10,000Salaries Expense 4,000Rent Expense 900 $28,700 $28,700
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