Financial Accounting: Tools for Business Decision Making, 3rd Ed. Kimmel, Weygandt, Kieso ELS

Chapter 3

Chapter 3 The 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.

Chapter 3 The Accounting Information System 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.

The Accounting Information System The system of: collecting and processing transaction data and communicating financial information to decision makers.

Accounting Transactions... are economic events that must be recorded in the financial statements because they affect assets, liabilities and/or stockholders’ equity.

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

Assets = Liabilities + Stockholders’ Equity Accounting Analysis... analyze the effect of business transactions on the basic accounting equation: Assets = Liabilities + Stockholders’ Equity

The Accounting Equation... Must always balance.

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

Let’s Practice Transaction Analysis

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 services performed.

e) Peoples, Inc. , performed services for $2,000 e) Peoples, Inc., performed 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 1 of next year. No Transaction

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

h) Peoples, Inc., paid $1,800 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 $5,000 retainer to handle a tax audit that the company will start next month.

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

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

This is a tabular summary. 107,200 This is a tabular summary.

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

Is a list of a company’s accounts. Chart of Accounts... Is a list of a company’s accounts. ASSETS Cash Accounts Receivable Advertising Supplies Prepaid Insurance Office Equipment Accumulated Depreciation -

Account Three parts : 1) the Title of the account 2) a left or Debit side 3) a right or Credit side

The T Account TITLE DEBIT CREDIT

Total the Entries to Each Side Total Debits Total Credits TITLE Debit Credit

Tabular Summary Account Form Balancing an Account

NEW ART Normal Balances Illustration 3-6 Illustration 3-8

Normal Balances Illustration 3-11 Illustration 3-13 NEW ART

Normal Balances Illustration 3-14 NEW ART

Total the Entries to Each Side Total Debits Total Credits TITLE Debit Credit If the greater sum is on the left, the account has a Debit Balance.

Total the Entries to Each Side Total Debits Total Credits TITLE Debit Credit If the greater sum is on the right, the account has a Credit Balance.

Whichever side you increase is the normal balance!

Debits Increase assets and expenses Decrease liabilities, common stock and revenues

Credits Decrease assets and expenses Increase liabilities, common stock and revenues

Analyze each transaction Enter each transaction in a journal Illustration 3-16 Analyze each transaction Enter each transaction in a journal Transfer journal information to ledger accounts Page 109 in book

The Recording Process Analyze each transaction Enter information in a journal Transfer the information to the appropriate accounts

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

Journals Types of Journals Cash receipts Cash disbursements Sales Purchases General

Journals Journals aid the recording process by: 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.

Account Titles and Explanations GENERAL JOURNAL Account Titles and Explanations 2004 Oct. 1 Cash 10,000 Common Stock 10,000 (Invested cash in business) Date Debit Credit 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)

The General Ledger the entire group of accounts maintained by a company contains all the asset, liability, and stockholders’ equity accounts

The General Ledger

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

Posting Transferring information from the journals to the general ledger accounts

Account Titles and Explanations Posting Entries GENERAL JOURNAL Account Titles and Explanations 2004 Oct. 1 Cash 10,000 Common Stock 10,000 Acct 1010 Account CASH Date Balance ref debit credit debit credit Account COMMON STOCK Acct 3010 Date Balance ref debit credit debit credit

Account Titles and Explanations Posting Entries GENERAL JOURNAL Account Titles and Explanations 2004 Oct. 1 Cash 10,000 Common Stock 10,000 Acct 1010 Account CASH Date Balance ref debit credit debit credit Oct 1 gj 1 10,000 10,000 Account COMMON STOCK Acct 3010 Date Balance ref debit credit debit credit Oct 1 gj 1 10,000 10,000

Account Titles and Explanations Posting Entries GENERAL JOURNAL Account Titles and Explanations 2004 Oct. 1 Cash 10,000 Common Stock 10,000 Acct 1010 Account CASH Date Balance ref debit credit debit credit Oct 1 gj 1 10,000 10,000 Account COMMON STOCK Acct 3010 Date Balance ref debit credit debit credit Oct 1 gj 1 10,000 10,000

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 Corporation Trial Balance October 31, 2004 Debit Credit Cash $15,200 Advertising Supplies 2,500 Prepaid Insurance 600 Office Equipment 5,000 Notes Payable $ 5,000 Accounts Payable 2,500 Unearned Service Revenue 1,200 Common Stock 10,000 Dividends 500 Service Revenue 10,000 Salaries Expense 4,000 Rent Expense 900 $28,700 $28,700