Chapter 3-1 The Accounting Information System Information System Accounting, Third Edition

Chapter 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. Study Objectives

Chapter 3-3 Debits and credits Debit and credit procedures Stockholders’ equity relationships Summary of debit/credit rules Accounting Transactions The Account Steps in the Recording Process The Recording Process Illustrated The Trial Balance Analyzing transactions Summary of transactions The journal The ledger Chart of accounts Posting Summary illustration of journalizing and posting Limitations of a trial balance The Accounting Information System

Chapter 3-4 The Accounting Information System The system of collecting and processing transaction data and communicating financial information to decision makers is known as the accounting information system.

Chapter 3-5 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

Chapter 3-6 Question: Question: Are the following events recorded in the accounting records? Event Purchased a computer. Criterion Is the financial position (assets, liabilities, or stockholders’ equity) of the company changed? Pay rent. Record/ Don’t Record Accounting Transactions Discuss product design with potential customer.

Chapter 3-7 AssetsAssetsLiabilitiesLiabilities Stockholders’ Equity = + Transaction Analysis The process of identifying the specific effects of economic events on the accounting equation. SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation. Basic Accounting Equation Accounting Transactions

Chapter 3-8 Transaction Analysis SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation. Accounting Transactions Illustration 3-2 Expanded accounting equation

Chapter 3-9 Illustration: Illustration: 1. On October 1, cash of $10,000 is invested in Sierra Corporation by investors in exchange for $10,000 of common stock. Accounting Transactions 1.+10,000+10,000 SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation.

Chapter On October 1, Sierra borrowed $5,000 from Castle Bank by signing a 3-month, 12%, $5,000 note payable. Accounting Transactions 1.+10,000+10, ,000+5,000 SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation.

Chapter On October 2, Sierra purchased office equipment by paying $5,000 cash to Superior Equipment Sales Co. Accounting Transactions 3.-5,000+5, ,000+10, ,000+5,000 SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation.

Chapter On October 2, Sierra received a $1,200 cash advance from R. Knox, a client. Accounting Transactions 4.+1,200+1, ,000+5, ,000+10, ,000+5,000 SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation.

Chapter On October 3, Sierra received $10,000 in cash from Copa Company for advertising services performed. Accounting Transactions 4.+1,200+1, ,000+10, ,000+5, ,000+10, ,000+5,000 SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation.

Chapter On October 3, Sierra Corporation paid its office rent for the month of October in cash, $900. Accounting Transactions 4.+1,200+1, ,000+10, ,000+5, ,000+10, ,000+5,000 SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation.

Chapter On October 4, Sierra paid $600 for a one-year insurance policy that will expire next year on September 30. Accounting Transactions 4.+1,200+1, ,000+10, ,000+5, ,000+10, ,000+5,000 SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation.

Chapter On October 5, Sierra purchased a three-month supply of materials on account from Aero Supply for $2,500. Accounting Transactions 4.+1,200+1, ,000+10, ,500+2, ,000+5, ,000+10, ,000+5,000 SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation.

Chapter On October 20, Sierra paid a $500 dividend. Accounting Transactions 4.+1,200+1, ,000+10, ,500+2, ,000+5, ,000+10, ,000+5,000 SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation.

Chapter Employees have worked two weeks, earning $4,000 in salaries, which were paid on October 26. Accounting Transactions 4.+1,200+1, ,000+10, ,500+2, ,000-4, ,000+5, ,000+10, ,000+5,000

Chapter 3-19 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. The Account

Chapter 3-20 Double-entry 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. must equal DEBITS must equal CREDITS. SO 3 Define debits and credits and explain their use in recording business transactions. Debit and Credit Procedures

Chapter 3-21 greater than If Debits are greater than Credits, the account will have a debit balance. $10,000Transaction #2$3,000 $15,000 8,000Transaction #3 Balance Transaction #1 SO 3 Define debits and credits and explain their use in recording business transactions. Debit and Credit Procedures

Chapter 3-22 greater than If Credits are greater than Debits, the account will have a credit balance. $10,000Transaction #2$3,000 Balance Transaction #1 $1,000 8,000Transaction #3 SO 3 Define debits and credits and explain their use in recording business transactions. Debit and Credit Procedures

Chapter 3-23 Assets - Debits should exceed credits. Liabilities – Credits should exceed debits. The normal balance is on the increase side. Dr./Cr. Procedures for Assets and Liabilities SO 3 Define debits and credits and explain their use in recording business transactions.

Chapter 3-24 Owner’s investments and revenues increase stockholder’s equity (credit). Dividends and expenses decrease stockholder’s equity (debit). Dr./Cr. Procedures for Stockholders’ Equity SO 3 Define debits and credits and explain their use in recording business transactions.

Chapter 3-25 The purpose of earning revenues is to benefit the stockholders. The effect of debits and credits on revenue accounts is the same as their effect on stockholders’ equity. Expenses have the opposite effect: expenses decrease stockholders’ equity. SO 3 Define debits and credits and explain their use in recording business transactions. Dr./Cr. Procedures for Revenue and Expense

Chapter 3-26 Normal Balance Credit Normal Balance Debit Debits and Credits Summary SO 3 Define debits and credits and explain their use in recording business transactions.

Chapter 3-27 Balance Sheet Income Statement Balance Sheet Income Statement = + = - AssetLiabilityEquityRevenueExpense Debit Credit Debits and Credits Summary SO 3 Define debits and credits and explain their use in recording business transactions.

Chapter 3-28 Stockholders’ Equity Relationships Illustration 3-15 SO 3 Define debits and credits and explain their use in recording business transactions.

Chapter 3-29 Summary of Debit/Credit Rules Relationship among the assets, liabilities and stockholders’ equity of a business: The equation must be in balance after every transaction. For every Debit there must be a Credit. Illustration 3-16 AssetsLiabilities = Stockholders’ Equity Basic Equation Expanded Basic Equation + SO 3 Define debits and credits and explain their use in recording business transactions.

Chapter 3-30 Business documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction. Steps in the Recording Process SO 4 Identify the basic steps in the recording process. Illustration 3-17 Analyze each transactionEnter transaction in a journal Transfer journal information to ledger accounts

Chapter 3-31 Book of original entry. Transactions recorded in chronological order. Contributions to the recording process: 1. Discloses the complete effects of a transaction. 2. Provides a chronological record of transactions. 3. Helps to prevent or locate errors because the debit and credit amounts can be easily compared. The Journal SO 5 Explain what a journal is and how it helps in the recording process.

Chapter 3-32 Journalizing - Entering transaction data in the journal. Illustration: Presented below is information related to Sierra Corporation. SO 4 Explain what a journal is and how it helps in the recording process. Sierra issued common stock in exchange for $10,000 cash. Oct. 1 Sierra borrowed $5,000 by signing a note.1 Sierra purchased office equipment for $5,000.2 Instructions - Journalize these transactions. The Journal

Chapter 3-33 JournalizingJournalizing General Journal SO 4 Explain what a journal is and how it helps in the recording process. Sierra issued common stock in exchange for $10,000 cash. Oct. 1 Cash Common stock 10,000

Chapter 3-34 JournalizingJournalizing General Journal SO 4 Explain what a journal is and how it helps in the recording process. Sierra borrowed $5,000 by signing a note. Oct. 1 Cash Notes payable 5,000

Chapter 3-35 JournalizingJournalizing General Journal SO 4 Explain what a journal is and how it helps in the recording process. Sierra purchased office equipment for $5,000. Oct. 2 Office equipment Cash 5,000

Chapter 3-36 Ledger contains the entire group of accounts maintained by a company. The Ledger SO 6 Explain what a ledger is and how it helps in the recording process. Illustration 3-19

Chapter 3-37 Accounts arranged in sequence in which they are presented in the financial statements. Chart of Accounts SO 6 Explain what a ledger is and how it helps in the recording process.

Chapter 3-38 Posting Posting – the process of transferring amounts from the journal to the ledger accounts. General Ledger General Journal Oct. 1Owner investmentJ110, J1 PostingPosting SO 7 Explain what posting is and how it helps in the recording process.

Chapter 3-39 The Recording Process Illustrated SO 7 Explain what posting is and how it helps in the recording process. 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. Illustration 3-21

Chapter 3-40 The Recording Process Illustrated SO 7 Explain what posting is and how it helps in the recording process. 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. Illustration 3-22

Chapter 3-41 The Recording Process Illustrated SO 7 Explain what posting is and how it helps in the recording process. 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. Illustration 3-23

Chapter 3-42 SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-24 Additional Transactions The Recording Process Illustrated

Chapter 3-43 SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-25 Additional Transactions The Recording Process Illustrated

Chapter 3-44 SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-26 Additional Transactions The Recording Process Illustrated

Chapter 3-45 SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-27 Additional Transactions The Recording Process Illustrated,

Chapter 3-46 SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-28 Additional Transactions The Recording Process Illustrated

Chapter 3-47 SO 7 Explain what posting is and how it helps in the recording process. The Recording Process Illustrated Additional Transactions Illustration 3-29

Chapter 3-48 SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-30 Additional Transactions The Recording Process Illustrated

Chapter 3-49 SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-31 Additional Transactions The Recording Process Illustrated

Chapter 3-50 Summary Illustration of Journalizing SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-32

Chapter 3-51 Summary Illustration of Journalizing SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-32

Chapter 3-52 Summary Illustration of Posting Illustration 3-33

Chapter 3-53 A list of accounts and their balances at a given time. Purpose is to prove that debits equal credits. The Trial Balance Illustration 3-34

Chapter 3-54 The trial balance may balance even when 1. a transaction is not journalized, 2. a correct journal entry is not posted, 3. a journal entry is posted twice, 4. incorrect accounts are used in journalizing or posting, or 5. offsetting errors are made in recording the amount of a transaction. The Trial Balance SO 8 Explain the purposes of a trial balance. Limitations of a Trial Balance