Chapter 3

2 Chapter 3 The Accounting Information System After studying Chapter 3, you should be able to: zAnalyze the effect of business transactions on the basic accounting equation. zExplain what an account is and how it helps in the recording process. zDefine debits and credits and explain how they are used to record business transactions. zIdentify the basic steps in the recording process.

3 After studying Chapter 3, you should be able to: zExplain what a journal is and how it helps in the recording process. zExplain what a ledger is and how it helps in the recording process. zExplain what posting is and how it helps in the recording process. zExplain the purposes of a trial balance. Chapter 3 The Accounting Information System

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

5 Accounting Transactions... zare economic events that must be recorded in the financial statements because they affect y assets, yliabilities yand/or stockholders’ equity.

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

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

8 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. 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. 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.

107,200 This is a tabular summary.

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

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

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

29 TITLE DEBITCREDIT The T Account

30 Total the Entries to Each Side Total DebitsTotal Credits TITLE DebitCredit

Balancing an Account Tabular SummaryAccount Form

32 Normal Balances NEW ART Illustration 3-6 Illustration 3-8Illustration 3-10

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

34 STOCKHOLDERS’ EQUITY EARNED EQUITY CAPITAL INVESTED EQUITY CAPITAL Illustration 3-14 COMMON STOCKRETAINED EARNINGS

35 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

36 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

Whichever side you increase is the normal balance!

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

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

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

41 The Recording Process zAnalyze each transaction zEnter information in a journal zTransfer the information to the appropriate accounts

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

43 Journals zCash receipts zCash disbursements zSales zPurchases zGeneral Types of Journals

44 Journals zDisclosing in one place the complete effect of a transaction; zProviding a chronological record of transactions; zHelping prevent or locate errors because debit and credit amounts can be easily compared. Journals aid the recording process by:

DateDebit Credit GENERAL JOURNAL Account Titles and Explanations 2004 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)

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

47 The General Ledger

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

49 Posting Transferring information from the journals to the general ledger accounts

GENERAL JOURNAL Account Titles and Explanations 2004 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 2004 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 2004 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

53 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