Financial Accounting, Fifth Edition The Accounting Information System Financial Accounting, Fifth Edition

Study Objectives 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. 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. Classify cash activities as operating, investing, or financing. 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)

Accounting Transactions Transactions are economic events that require recording in the financial statements. May be external or internal. Not all activities represent transactions. Each transaction has a dual effect on the accounting equation.

Accounting Transactions Question: Are the following events recorded in the accounting records? Discuss product design with potential customer. Purchased a computer. Event Pay rent. Is the financial position (assets, liabilities, or stockholders’ equity) of the company changed? Criterion Record/ Don’t Record

Accounting Transactions Transaction Analysis The process of identifying the specific effects of economic events on the accounting equation. Basic Accounting Equation Assets Liabilities Stockholders’ Equity = + SO 1 Analyze the effect of business transactions on the basic accounting equation.

Accounting Transactions Transaction Analysis Illustration 3-2 Expanded accounting equation SO 1 Analyze the effect of business transactions on the basic accounting equation.

Accounting Transactions Illustration: 1. On October 1, cash of $10,000 is invested in Sierra Corporation by investors in exchange for $10,000 of common stock. SO 1 Analyze the effect of business transactions on the basic accounting equation.

Accounting Transactions 2. On October 1, Sierra borrowed $5,000 from Castle Bank by signing a 3-month, 12%, $5,000 note payable. SO 1 Analyze the effect of business transactions on the basic accounting equation.

Accounting Transactions 3. On October 2, Sierra purchased office equipment by paying $5,000 cash to Superior Equipment Sales Co. SO 1 Analyze the effect of business transactions on the basic accounting equation.

Accounting Transactions 4. On October 2, Sierra received a $1,200 cash advance from R. Knox, a client. SO 1 Analyze the effect of business transactions on the basic accounting equation.

Accounting Transactions 5. On October 3, Sierra received $10,000 in cash from Copa Company for advertising services performed. SO 1 Analyze the effect of business transactions on the basic accounting equation.

Accounting Transactions 6. On October 3, Sierra Corporation paid its office rent for the month of October in cash, $900. SO 1 Analyze the effect of business transactions on the basic accounting equation.

Accounting Transactions 7. On October 4, Sierra paid $600 for a one-year insurance policy that will expire next year on September 30. SO 1 Analyze the effect of business transactions on the basic accounting equation.

Accounting Transactions 8. On October 5, Sierra purchased a three-month supply of advertising materials on account from Aero Supply for $2,500. SO 1 Analyze the effect of business transactions on the basic accounting equation.

Accounting Transactions 10. On October 20, Sierra paid a $500 dividend. SO 1 Analyze the effect of business transactions on the basic accounting equation.

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

An Account can be illustrated in a T-Account form. The Account Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. Debit = “Left” Credit = “Right” Account An Account can be illustrated in a T-Account form. SO 2 Explain what an account is and how it helps in the recording process.

Debit and Credit Procedures Double-entry accounting 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 equal CREDITS. SO 3 Define debits and credits and explain their use in recording business transactions.

Debit and Credit Procedures If Debits are greater than Credits, the account will have a debit balance. Transaction #1 $10,000 $3,000 Transaction #2 Transaction #3 8,000 Balance $15,000 SO 3 Define debits and credits and explain their use in recording business transactions.

Debit and Credit Procedures If Credits are greater than Debits, the account will have a credit balance. Transaction #1 $10,000 $3,000 Transaction #2 8,000 Transaction #3 Balance $1,000 SO 3 Define debits and credits and explain their use in recording business transactions.

Debits and Credits Summary Normal Balance Debit Normal Balance Credit SO 3 Define debits and credits and explain their use in recording business transactions.

Dr./Cr. Procedures for Stockholders’ Equity Owner’s investments and revenues increase stockholder’s equity (credit). Dividends and expenses decrease stockholder’s equity (debit). SO 3 Define debits and credits and explain their use in recording business transactions.

Debits and Credits Summary Balance Sheet Income Statement Asset = Liability + Equity Revenue - Expense = Debit Credit SO 3 Define debits and credits and explain their use in recording business transactions.

Debits and Credits Summary Review Question Debits: increase both assets and liabilities. decrease both assets and liabilities. increase assets and decrease liabilities. decrease assets and increase liabilities. SO 3 Define debits and credits and explain their use in recording business transactions.

Debits and Credits Summary Review Question Accounts that normally have debit balances are: assets, expenses, and revenues. assets, expenses, and equity. assets, liabilities, and dividends. assets, dividends, and expenses. SO 3 Define debits and credits and explain their use in recording business transactions.

Summary of Debit/Credit Rules Relationship among the assets, liabilities and stockholders’ equity of a business: Illustration 3-16 Basic Equation Assets = Liabilities + Stockholders’ Equity Expanded Basic Equation The equation must be in balance after every transaction. For every Debit there must be a Credit. SO 3 Define debits and credits and explain their use in recording business transactions.

The Journal Journalizing - Entering transaction data in the journal. Illustration: Presented below is information related to Sierra Corporation. Oct. 1 Sierra issued common stock in exchange for $10,000 cash. 1 Sierra borrowed $5,000 by signing a note. 2 Sierra purchased office equipment for $5,000. Instructions - Journalize these transactions. SO 4 Explain what a journal is and how it helps in the recording process.

Journalizing Sierra issued common stock in exchange for $10,000 cash. Oct. 1 Sierra issued common stock in exchange for $10,000 cash. General Journal SO 4 Explain what a journal is and how it helps in the recording process.

Journalizing Sierra borrowed $5,000 by signing a note. Oct. 1 General Journal SO 4 Explain what a journal is and how it helps in the recording process.

Journalizing Sierra purchased office equipment for $5,000. Oct. 2 General Journal SO 4 Explain what a journal is and how it helps in the recording process.

The Ledger Ledger contains the entire group of accounts maintained by a company. Illustration 3-19 SO 6 Explain what a ledger is and how it helps in the recording process.

Chart of Accounts Accounts arranged in sequence in which they are presented in the financial statements. SO 6 Explain what a ledger is and how it helps in the recording process.

Posting Posting – the process of transferring amounts from the journal to the ledger accounts. General Journal J1 101 General Ledger Oct. 1 Owner investment J1 10,000 10,000 SO 7 Explain what posting is and how it helps in the recording process.

The Recording Process Illustrated Illustration 3-21 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. SO 7 Explain what posting is and how it helps in the recording process.

The Recording Process Illustrated Illustration 3-22 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. SO 7 Explain what posting is and how it helps in the recording process.

The Recording Process Illustrated Illustration 3-23 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. SO 7 Explain what posting is and how it helps in the recording process.

The Recording Process Illustrated Additional Transactions Illustration 3-24 SO 7 Explain what posting is and how it helps in the recording process.

The Recording Process Illustrated Additional Transactions Illustration 3-25 SO 7 Explain what posting is and how it helps in the recording process.

The Recording Process Illustrated Additional Transactions Illustration 3-26 SO 7 Explain what posting is and how it helps in the recording process.

The Recording Process Illustrated , Additional Transactions Illustration 3-27 SO 7 Explain what posting is and how it helps in the recording process.

The Recording Process Illustrated Additional Transactions Illustration 3-28 SO 7 Explain what posting is and how it helps in the recording process.

The Recording Process Illustrated Additional Transactions Illustration 3-29 SO 7 Explain what posting is and how it helps in the recording process.

The Recording Process Illustrated Additional Transactions Illustration 3-30 SO 7 Explain what posting is and how it helps in the recording process.

The Recording Process Illustrated Additional Transactions Illustration 3-31 SO 7 Explain what posting is and how it helps in the recording process.

Summary Illustration of Journalizing SO 7 Explain what posting is and how it helps in the recording process.

Summary Illustration of Journalizing SO 7 Explain what posting is and how it helps in the recording process.

Summary Illustration of Posting

The Trial Balance A list of accounts and their balances at a given time. Purpose is to prove that debits equal credits. Illustration 3-34

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