1 Financial Accounting: Tools for Business Decision Making, 4th Ed. Kimmel, Weygandt, Kieso CHAPTER 3 Prepared by Ellen L. Sweatt Georgia Perimeter College

2 Chapter 3 THE ACCOUNTING INFORMATION SYSTEM

3 Transaction Analysis Transaction Analysis:the process of identifying the specific effects of economic events on the accounting equation. Transaction Analysis: the process of identifying the specific effects of economic events on the accounting equation. Each transaction has a dual (double-sided) effect on the accounting equation. Each transaction has a dual (double-sided) effect on the accounting equation.

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

5 Accounting Transactions... are economic events that must be recorded in the financial statements because they affect assets, liabilities and/or stockholders’ equity. 11 1

6 Accounting Transactions...

7 Transaction Analysis Transaction Analysis determines the impact of the transaction on the accounting equation. Assets Liabilities Stockholders’ Equity

8 Accounting Analysis... Analyze the effect of business transactions on the basic accounting equation: Assets = Liabilities + Stockholders’ Equity Must always balance.

9 Transaction Analysis Two or more items can be affected Two or more items can be affected Example: purchase computer for $10,000 by paying $6,000 in cash and signing a note for $4,000 Example: purchase computer for $10,000 by paying $6,000 in cash and signing a note for $4,000

10 Let’s Practice! Let’s practice transaction analysis with Sierra Corporation...

11 Event 1 – Investment of Cash by Stockholders Oct. 1 - Owner invested $10,000 Cash in business in exchange for $10,000 of Sierra Corporation Common Stock

12 Event 2 – Note Issued in Exchange for Cash Oct. 1 – Sierra issued a 3-month, 12%, $5,000 Note Payable to Castle Bank in exchange for cash.

13 Event 3 – Purchase of Office Equipment for Cash Oct. 2 – Sierra acquired office equipment by paying $5,000 cash to Superior Sales Co.

14 Event 4 – Receipt of Cash in Advance from Customer Oct. 2 – Sierra received a $1,200 cash advance from R. Knox, a client.

15 Event 5 – Services Rendered for Cash Oct. 3 – Sierra received $10,000 in cash from Copa Co. for advertising services performed

16 Event 5 – Services Rendered, WHAT IF these were performed “on account”? Later, when $10,000 is collected from customer…

17

18 Event 6 – Payment of Rent Oct. 3 – Sierra paid its office rent for the month of October in cash, $900.

19 Event 7 – Purchase of Insurance Policy with Cash Oct. 4 – Sierra paid $600 for a one-year insurance policy that will expire next year on Sept. 30.

20 Event 8 – Purchase of Supplies on Credit Oct. 5 – Sierra purchases a three-month supply of advertising materials on account from Aero Supply for $2,500.

21 Event 9 – Hiring of New Employees Oct. 9 – Sierra hired four new employees to begin work on Oct. 15. Accounting transaction has NOT occurred!

22 Event 10 – Payment of Dividend Oct. 20 – Sierra paid a $500 dividend.

23 Event 11 – Payment of Cash for Employee Salaries Oct. 26 – Paid employees working two weeks, who have earned $4,000 in salaries.

24 Summary of Transactions Assets = Liabilities + Equity

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

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

27 Debits and Credits Debit means leftDebit means left thus, entry on left side is debiting thus, entry on left side is debiting Credit means right Credit means right thus, entry on right side is crediting thus, entry on right side is crediting Normal balance is the side the increase happens on.Normal balance is the side the increase happens on. 11 3

28 Examples

29 Total the Entries to Each Side If the greater sum is on the left, the account has a Debit Balance Total DebitsTotal Credits TITLE DebitCredit

30 Total the Entries to Each Side If the greater sum is on the right, the account has a Credit Balance Total DebitsTotal Credits TITLE DebitCredit

31 Whichever side you increase is the normal balance!

32 Normal for Assets and Liabilities Normal Balances for Assets and Liabilities

33 Normal Balances for Stockholders’ Equity

34 Normal Balances for Expenses and Revenues

35 Expansion of Basic Equation

36 Review What is the normal balance for the following accounts? Cash Service Revenue Accounts Receivable Accounts Payable Common Stock Salaries Expense Debit Credit Debit Credit Credit Debit

37 Review What is the normal balance for the following accounts? Dividends Unearned Revenus Taxes Payable Building Prepaid Insurance Rent Expense Debit Debit Credit Credit Debit Debit

38 Basic Steps in the Recording Process. 1.Analyze 2.Journalize 3.Post 11 4

39 Recording Process Step 1 Analyze each transaction and effect on accounts 11 5

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

41 Recording Process Step 2 Enter transaction information in a journal, a process called journalizing

42 Recording Process Step 3 Transfer (post) the journal information to the appropriate accounts in the ledger

DateDebit Credit GENERAL JOURNAL Account Titles and Explanations 2007 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)

44 52 Let’s Review Using Sierra’s Transactions Oct. 1 - Owner invested $10,000 Cash in business in exchange for $10,000 of Sierra Corporation Common Stock Cash Common Stock 10,00010,000 What is the normal balance for the following accounts?

45 52 Let’s Review Using Sierra’s Transactions Cash Note Payable 5,0005,000 Oct. 1 – Sierra issued a 3-month, 12%, $5,000 Note Payable to Castle Bank.

46 52 Let’s Review Using Sierra’s Transactions Office Equipment Cash 5,0005,000 Oct. 2 – Sierra acquired office equipment by paying $5,000 cash to Superior Sales Co. 5,000 10,000

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

48 Chart of Accounts... is a list of a company’s accounts.

49 The General Ledger

50 The General Ledger

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

52 Posting Transferring information from the journals to the general ledger accounts 11 7

GENERAL JOURNAL Account Titles and Explanations 2007 Oct. 1 Cash 10,000 Common Stock 10,000 Balance Acct 1010 Account CASH Date Acct 3010 Account COMMON STOCK DateBalance debit credit debit credit ref Posting Entries

GENERAL JOURNAL Account Titles and Explanations 2007 Oct. 1 Cash 10,000 Common Stock 10,000 Balance Acct 1010 Account CASH Date Acct 3010 Account COMMON STOCK DateBalance debit credit debit credit ref Oct 1 gj 1 10,000 Posting Entries

GENERAL JOURNAL Account Titles and Explanations 2007 Oct. 1 Cash 10,000 Common Stock 10,000 Balance Acct 1010 Account CASH Date Acct 3010 Account COMMON STOCK DateBalance debit credit debit credit ref Oct 1 gj 1 10,000

56 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. 11 8

Sierra Corporation Trial Balance October 31, 2007 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

58 Copyright © 2007 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that named in Section 117 of the United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.