chapter 3. 2 chapter 3 the accounting information system after studying chapter 3, you should be...

Chapter 3

2

Chapter 3The Accounting

Information System

After studying Chapter 3, you should be able to:

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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After studying Chapter 3, you should be able to:

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.

Chapter 3The Accounting

Information System

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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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Transaction Analysis

Transaction Analysis determines the impact of the tranaction on the balance sheet.

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Accounting Analysis...

analyze the effect of business transactions on the basic accounting equation:

Assets = Liabilities + Stockholders’ Equity

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The Accounting Equation...

Must always balance.

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

Let’s Practice

Transaction Analysis

Assets = Liabilities Stockholders' Equity Type of Transact ionAccounts Accoiunts Notes Unearned Common Retained

Cash + Receivable + Supplies + License + Equipment + Land = Payable + Payable + Revenue Stock + Earnings(a) 95,000 95,000

a) On July 1, Cash of $95,000 was invested in the business in exchange for $95,000 worth of common stock.

Assets = Liabilities Stockholders' Equity Type of TransactionAccounts Accoiunts Notes Unearned Common Retained

Cash + Receivable + Supplies + License + Equipment + Land = Payable + Payable + Revenue Stock + Earnings(a) 95,000 95,000 (b) (60,000) 60,000

b) Peoples, Inc., acquired land by paying $60,000 cash to Nashtown, Inc.

Assets = Liabilities Stockholders' Equity Type of TransactionAccounts Accoiunts Notes Unearned Common Retained

Cash + Receivable + Supplies + License + Equipment + Land = Payable + Payable + Revenue Stock + Earnings(a) 95,000 95,000 (b) (60,000) 60,000 (c) 600 600

c) Peoples, Inc., purchased an estimated three month supply of office supplies on account. The company will pay $600 for these supplies later.

Assets = Liabilities Stockholders' Equity Type of TransactionAccounts Accoiunts Notes Unearned Common Retained

Cash + Receivable + Supplies + License + Equipment + Land = Payable + Payable + Revenue Stock + Earnings(a) 95,000 95,000 (b) (60,000) 60,000 (c) 600 600 (d) 800 800 Service Revenue

d) Peoples, Inc., received $800 for services performed.

Assets = Liabilities Stockholders' Equity Type of TransactionAccounts Accoiunts Notes Unearned Common Retained

Cash + Receivable + Supplies + License + Equipment + Land = Payable + Payable + Revenue Stock + Earnings(a) 95,000 95,000 (b) (60,000) 60,000 (c) 600 600 (d) 800 800 Service Revenue(e) 2,000 2,000 Service Revenue

e) Peoples, Inc., performed services for $2,000. The company will be paid later in the month.

Assets = Liabilities Stockholders' Equity Type of TransactionAccounts Accoiunts Notes Unearned Common Retained

Cash + Receivable + Supplies + License + Equipment + Land = Payable + Payable + Revenue Stock + Earnings(a) 95,000 95,000 (b) (60,000) 60,000 (c) 600 600 (d) 800 800 Service Revenue(e) 2,000 2,000 Service Revenue(f)

f) Peoples, Inc., received confirmation that a major corporation has selected their corporation to perform major consulting work. The work will start January 1 of next year.

No Transaction

Assets = Liabilities Stockholders' Equity Type of TransactionAccounts Accoiunts Notes Unearned Common Retained

Cash + Receivable + Supplies + License + Equipment + Land = Payable + Payable + Revenue Stock + Earnings(a) 95,000 95,000 (b) (60,000) 60,000 (c) 600 600 (d) 800 800 Service Revenue(e) 2,000 2,000 Service Revenue(f)(g) 6,000 6,000

g) Peoples, Inc., purchased office equipment for $6,000. The Company signed a 2-year note with ACME Office Equipment Company.

Assets = Liabilities Stockholders' Equity Type of TransactionAccounts Accoiunts Notes Unearned Common Retained

Cash + Receivable + Supplies + License + Equipment + Land = Payable + Payable + Revenue Stock + Earnings(a) 95,000 95,000 (b) (60,000) 60,000 (c) 600 600 (d) 800 800 Service Revenue(e) 2,000 2,000 Service Revenue(f)(g) 6,000 6,000 (h) (1,800) 1,800

h) Peoples, Inc., paid $1,800 for a 1-year license to operate as a business. The license expires June 30th of next year.

Assets = Liabilities Stockholders' Equity Type of TransactionAccounts Accoiunts Notes Unearned Common Retained

Cash + Receivable + Supplies + License + Equipment + Land = Payable + Payable + Revenue Stock + Earnings(a) 95,000 95,000 (b) (60,000) 60,000 (c) 600 600 (d) 800 800 Service Revenue(e) 2,000 2,000 Service Revenue(f)(g) 6,000 6,000 (h) (1,800) 1,800 (I) 800 (800)

i) Peoples, Inc., collected $800 of the money owed from (e).

Assets = Liabilities Stockholders' Equity Type of TransactionAccounts Accoiunts Notes Unearned Common Retained

Cash + Receivable + Supplies + License + Equipment + Land = Payable + Payable + Revenue Stock + Earnings(a) 95,000 95,000 (b) (60,000) 60,000 (c) 600 600 (d) 800 800 Service Revenue(e) 2,000 2,000 Service Revenue(f)(g) 6,000 6,000 (h) (1,800) 1,800 (I) 800 (800) (j) (400) (400)

j) Peoples, Inc., paid $400 of the amount it owed from (c).

Assets = Liabilities Stockholders' Equity Type of TransactionAccounts Accoiunts Notes Unearned Common Retained

Cash + Receivable + Supplies + License + Equipment + Land = Payable + Payable + Revenue Stock + Earnings(a) 95,000 95,000 (b) (60,000) 60,000 (c) 600 600 (d) 800 800 Service Revenue(e) 2,000 2,000 Service Revenue(f)(g) 6,000 6,000 (h) (1,800) 1,800 (I) 800 (800) (j) (400) (400) (k) (600) (600) Salaries Expense

k) An employee has worked and earned $600 which was paid during the month.

Assets = Liabilities Stockholders' Equity Type of TransactionAccounts Accoiunts Notes Unearned Common Retained

Cash + Receivable + Supplies + License + Equipment + Land = Payable + Payable + Revenue Stock + Earnings(a) 95,000 95,000 (b) (60,000) 60,000 (c) 600 600 (d) 800 800 Service Revenue(e) 2,000 2,000 Service Revenue(f)(g) 6,000 6,000 (h) (1,800) 1,800 (I) 800 (800) (j) (400) (400) (k) (600) (600) Salaries Expense(l) 5,000 5,000

l) Peoples, Inc., received a $5,000 retainer to handle a tax audit that the company will start next month.

Assets = Liabilities Stockholders' Equity Type of TransactionAccounts Accoiunts Notes Unearned Common Retained

Cash + Receivable + Supplies + License + Equipment + Land = Payable + Payable + Revenue Stock + Earnings(a) 95,000 95,000 (b) (60,000) 60,000 (c) 600 600 (d) 800 800 Service Revenue(e) 2,000 2,000 Service Revenue(f)(g) 6,000 6,000 (h) (1,800) 1,800 (I) 800 (800) (j) (400) (400) (k) (600) (600) Salaries Expense(l) 5,000 5,000 (m) (500) (500) Rent Expense

m) Peoples, Inc., paid $500 for rent during the month.

Assets = Liabilities Stockholders' Equity Type of TransactionAccounts Accoiunts Notes Unearned Common Retained

Cash + Receivable + Supplies + License + Equipment + Land = Payable + Payable + Revenue Stock + Earnings(a) 95,000 95,000 (b) (60,000) 60,000 (c) 600 600 (d) 800 800 Service Revenue(e) 2,000 2,000 Service Revenue(f)(g) 6,000 6,000 (h) (1,800) 1,800 (I) 800 (800) (j) (400) (400) (k) (600) (600) Salaries Expense(l) 5,000 5,000 (m) (500) (500) Rent Expense(n) (700) (700) Dividends

n) Dividends of $700 were paid during the month.

Assets = Liabilities Stockholders' Equity Type of TransactionAccounts Accoiunts Notes Unearned Common Retained

Cash + Receivable + Supplies + License + Equipment + Land = Payable + Payable + Revenue Stock + Earnings(a) 95,000 95,000 (b) (60,000) 60,000 (c) 600 600 (d) 800 800 Service Revenue(e) 2,000 2,000 Service Revenue(f)(g) 6,000 6,000 (h) (1,800) 1,800 (I) 800 (800) (j) (400) (400) (k) (600) (600) Salaries Expense(l) 5,000 5,000 (m) (500) (500) Rent Expense(n) (700) (700) DividendsTotal 37,600 1,200 600 1,800 6,000 60,000 200 6,000 5,000 95,000 1,000

107,200 107,200

This is a tabular summary.

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an individual accounting record of increases and decreases in a specific Asset, Liability, or Stockholders’ Equity item.

Account...

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Chart of Accounts...

Is a list of a company’s accounts.ASSETSCashAccounts ReceivableAdvertising SuppliesPrepaid InsuranceOffice EquipmentAccumulated Depreciation - Office Equipment

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Three parts :

1) the Title of the account

2) a left or Debit side

3) a right or Credit side

Account

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TITLE

DEBIT CREDIT

The T Account

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Total the Entries to Each Side

Total Debits Total Credits

TITLE

Debit Credit

Balancing an Account

Tabular Summary Account Form

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Normal Balances

NEW ART

Illustration 3-6

Illustration 3-8 Illustration 3-10

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Normal Balances

Illustration 3-11

Illustration 3-13

NEW ART

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STOCKHOLDERS’ EQUITY

EARNED EQUITY

CAPITAL

INVESTED EQUITY

CAPITAL

Illustration 3-14

COMMON STOCK RETAINED EARNINGS

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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

Whichever side you increase is the

normal balance!

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Debits

Increase assets and expenses

Decrease liabilities, common stock and revenues

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Credits

Decrease assets and expenses

Increase liabilities, common stock and revenues

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Analyze each transaction

Enter each transaction in a journal

Transfer journal information to ledger accounts

Illustration 3-16

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The Recording Process

Analyze each transactionEnter information in a journalTransfer the information to the

appropriate accounts

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The Journal...

is an accounting record where the transactions are recorded in chronological order.

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Journals

Cash receiptsCash disbursementsSalesPurchasesGeneral

Types of Journals

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Journals

Disclosing in one place the complete effect of a transaction;

Providing a chronological record of transactions;

Helping prevent or locate errors because debit and credit amounts can be easily compared.

Journals aid the recording process by:

Date Debit Credit

GENERAL JOURNAL

Account Titles and Explanations

2004 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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The General Ledger

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The Ledger

The entries from the journal are posted to the ledger,usually in summary form, except for the general journal.

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Posting

Transferring information from the journals to the general ledger accounts

GENERAL JOURNAL

Account Titles and Explanations

2004 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

2004 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

2004 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.

Sierra CorporationTrial Balance

October 31, 2004

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