Copyright  2006 Pearson Education Canada Inc. 3-1

Copyright  2006 Pearson Education Canada Inc. 3-2 Outline  Accounting as an Information System  Business Transactions  The Accounting Cycle  Rules of Debit and Credit  The Journal  Transactional Analysis  The General Journal: Illustration

Copyright  2006 Pearson Education Canada Inc. 3-3 Accounting as an Information System INPUT ---- PROCESS ---- OUTPUT SOURCE ACCOUNTING INFORMATION DOCUMENTS CYCLE TO MANAGEMENT Business Transactions Financial Statements

Copyright  2006 Pearson Education Canada Inc. 3-4 Business Transactions  Raw Material of the accounting process  Like crude oil or food supplies, transactions must be processed in order to get the end product

Copyright  2006 Pearson Education Canada Inc. 3-5 The Accounting Cycle  Processing of the accounting raw material (business transactions) in order to get the final product-Information to Management in the form of Financial Statements

Copyright  2006 Pearson Education Canada Inc. 3-6 The Accounting Cycle The accounting cycle: first 3 steps  Identification of Business Transactions  Journalizing-recording the business transactions in chronological order in a Journal  Posting to the General Ledger

Copyright  2006 Pearson Education Canada Inc. 3-7 The Accounting Cycle STEP ONE IDENTIFYING BUSINESS TRANSACTIONS STEP TWO JOURNALIZING STEP THREE POSTING

Copyright  2006 Pearson Education Canada Inc. 3-8 Identifying Business Transactions: Step 1  Identification of Business Transactions  Values Received=Values Given  VR=VG  Debits = Credits  Dr= Cr

Copyright  2006 Pearson Education Canada Inc. 3-9 Rules of Debits and Credits DEBIT CREDIT ASSETS INCREASE DECREASE LIABILITIES DECREASE INCREASE OWNERS’ EQUITY DECREASE INCREASE REVENUE DECREASE INCREASE EXPENSE INCREASE DECREASE

Copyright  2006 Pearson Education Canada Inc Journalizing: Step 2

Copyright  2006 Pearson Education Canada Inc The Journal  A book of original entry  Transactions are recorded in chronological order  Used to complete Step 2 of the Accounting Cycle

Copyright  2006 Pearson Education Canada Inc The General Journal Date Account Names Ref Dr Cr

Copyright  2006 Pearson Education Canada Inc Recording Transactions in the General Journal – Step 2 of the Accounting Cycle 1. Mr. Carlton invests $30,000 in a new travel agency 2. The business borrows $50,000 at 8% APR 3. First month rent is paid, $1,000.

Copyright  2006 Pearson Education Canada Inc Transactional Analysis 1. Value Received by the Travel Agency is $30,000 in Cash- Debit Cash; Value Given by the Travel Agency is ownership interest in the amount of $30,000- Credit M. Carlton, Capital 2. Value Received is $50,000 in Cash- Debit Cash; Value given is the promise to pay $50,000 in the future- Credit notes payable 3. Value Received is the use of the premises rented worth $1,000- Debit Rent Expense; Value Given is a payment of $1,000 in Cash- Credit Cash

Copyright  2006 Pearson Education Canada Inc The General Journal: Illustration Date Account Names Ref Dr. Cr. Sep. 1 Cash 30,000- M.Carlton, Capital 30,000- Owner’s investment Sep. 2 Cash 50,000- Notes Payable 50,000- Company borrows money at 12% APR Sep. 3 Rent Expense 1,000- Cash 1,000- Rent is paid