PROCESSING BUSINESS TRANSACTIONS CHAPTER 3 PROCESSING BUSINESS TRANSACTIONS 3-1

Outline Accounting as an Information System Business Transactions The Accounting Cycle Rules of Debit and Credit The Journal Transactional Analysis The General Journal: Illustration 3-2

Accounting as an Information System INPUT ---- PROCESS ---- OUTPUT SOURCE ACCOUNTING INFORMATION DOCUMENTS CYCLE TO MANAGEMENT Business Transactions Financial Statements 3-3

Business Transactions Raw Material of the accounting process Like crude oil or food supplies, transactions must be processed in order to get the end product 3-4

The Accounting Cycle The accounting cycle: first 3 steps Identification of Business Transactions Journalizing-recording the business transactions in chronological order in a General Journal Posting to the General Ledger 3-5

Identifying Business Transactions: Step 1 Identification of Business Transactions Values Received=Values Given Debits = Credits (Dr = Cr) 3-6

Rules of Debits and Credits ASSETS INCREASE DECREASE LIABILITIES OWNERS’ EQUITY REVENUE EXPENSE 3-7

Journalizing: Step 2 Once we recognize that a transaction has occurred, We record it in the “book of original entry”, usually known as THE GENERAL JOURNAL 3-8

The Journal A book of original entry Transactions are recorded in chronological order Used to complete Step 2 of the Accounting Cycle 3-9

The General Journal Date Account Names Ref Dr Cr 3-10

Recording Transactions in the General Journal – Step 2 of the Accounting Cycle Mr. Carlton invests $30,000 in a new travel agency The business borrows $50,000 at 8% per annum. First month rent is paid, $1,000. 3-11

Transactional Analysis 1. Value Received by the Travel Agency is $30,000 in Cash- Debit Cash; Value Given by the Travel Agency is ownership interest in the amount of $30,000- Credit M. Carlton, Capital 2. Value Received is $50,000 in Cash- Debit Cash; Value given is the promise to pay $50,000 in the future- Credit notes payable 3. Value Received is the use of the premises rented worth $1,000- Debit Rent Expense; Value Given is a payment of $1,000 in Cash- Credit Cash See journal entries in the next slide 3-12

The General Journal: Illustration Date Account Names Ref Dr. Cr. Sep. 1 Cash 30,000- M.Carlton, Capital 30,000- Owner’s investment Sep. 2 Cash 50,000- Notes Payable 50,000- Company borrows money at 12% per annum Sep. 3 Rent Expense 1,000- Cash 1,000- Rent is paid 3-13