1. Accounting, Fifth Edition3
THE ACCOUNTING INFORMATION SYSTEM
Accounting, Fifth Edition

2. Learning Objectives
After studying this chapter, you should be able to:
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.

3. Tell a story The Accounting Information System
System of
collecting and
processing transaction data and
communicating financial information to decision makers.
Most businesses use computerized accounting (EDP) systems.
Tell a story
LO 1 Analyze the effect of business transactions on the basic accounting equation.

4. Accounting Transactions
Transactions are economic events/exchanges that require recording in the financial statements.
Not all activities represent transactions.
Assets, liabilities, or stockholders’ equity items change as a result of some economic event.
Dual effect on the accounting equation.
LO 1 Analyze the effect of business transactions on the basic accounting equation.

5. Accounting Transactions
Question: Are the following events recorded in the accounting records?
Illustration 3-1
Discuss guided trip options with potential customer.
Purchase computer.
Pay rent.
Event
Is the financial position (assets, liabilities, or stockholders’ equity) of the company changed?
Criterion
Record/ Don’t Record
LO 1 Analyze the effect of business transactions on the basic accounting equation.

6. Accounting Transactions
Analyzing Transactions
The process of identifying the specific effects of economic events on the accounting equation.
Basic Accounting Equation
Assets
Liabilities
Stockholders’ Equity = +
Assets
Liabs & Equity
LO 1 Analyze the effect of business transactions on the basic accounting equation.

7. Accounting Equation Practice Problem
BE3-2, p 138
Write out the accounting equation.
Indicate the TWO accounts involved, then identify each account as an Asset, Liability, Common Stock, Dividends, Revenue or Expense.
For each account, indicate if that account increases in value or decreases.
Check to see that the accounting equation remains in balance.

8. Accounting Equation & Fin’l Statements
Analyzing Transactions
Illustration 3-2
Expanded accounting equation
Income Statement
LO 1 Analyze the effect of business transactions on the basic accounting equation.

9. Accounting Equation & Fin’l Statements
Analyzing Transactions
Illustration 3-2
Expanded accounting equation
Stmt of Retained Earnings
Net Income/Income Statement
LO 1 Analyze the effect of business transactions on the basic accounting equation.

10. Accounting Equation & Fin’l Statements
Analyzing Transactions
Balance Sheet
Illustration 3-2
Expanded accounting equation
Stmt of Retained Earnings
Net Income/Income Statement
LO 1 Analyze the effect of business transactions on the basic accounting equation.

11. Analyzing & Recording Business Transactions
Analyze each transaction and event from source documents
Record relevant transactions & events in a general journal
Post journal information to the general ledger
(t-accounts)
We begin the accounting process by analyzing source documents. For example, you usually receive a receipt when you pay cash for something. Think about the last time you went to a fast food restaurant. When you received your order you were given a receipt, a source document. If you wanted a company to reimburse you for the meal because you were traveling on company business, you must present evidence of your expenditure. This evidence takes the form of a source document, the receipt.
Once we identify a business transaction, we record it in a journal. A journal is arranged in chronological order. Transactions are recorded by date of occurrence.
At the end of the accounting period, usually a month, transactions in the journal are posted to a ledger account. Posting is the systematic process of transferring information from the journal to the ledger. The ledger groups transactions by the accounts impacted. For example, we will have a ledger account for cash. All transactions that result in increases or decreases in the cash account will be posted to the cash ledger account.
Once all transactions have been posted, we prepare a trial balance. The purpose of the trial balance is to make sure that all information has been transferred properly. The trial balance is a listing of all account balances.
Prepare and analyze the trial balance
2-11

12. Steps in the Recording Process
The General Journal
Chronological list of all business transactions. It is the book of original entry.
It records the increase or decrease in a specific asset, liability, equity, revenue, or expense account.
Helps to prevent or locate errors because the debit and credit amounts can be easily compared.
LO 5 Explain what a journal is and how it helps in the recording process.

13. Steps in the Recording Process
Chart of Accounts – listing of accounts used by a company to record transactions in the journal and general ledger.
Illustration 3-20
LO 6 Explain what a ledger is and how it helps in the recording process.

14. Steps in the Recording Process
The General Ledger is comprised of the entire group of accounts maintained by a company (like sorting coins).
Illustration 3-19
LO 6 Explain what a ledger is and how it helps in the recording process.

15. Assets = Liabilities + Owners’ Equity
Advantage of T Accounts (aka Posting)
“T” accounts provide a better visual trail for an individual account. They are often useful in helping one find where an “Out of Balance” exists.
Assets = Liabilities + Owners’ Equity

16. A T-account represents a general ledger account.
Recording Transactions using T Accts
A T-account represents a
general ledger account.
Accountants often use a T-account to represent a general ledger account. It is a quick way to analyze transaction before we enter the information in the journal. The left side of a T-account is always called the debit side, and the right side is always called the credit side. This terminology comes from the time when the first double-entry system was first developed. We still use the terms as a convention. The words do not have any significant meaning other than that they stand for the left and right side of a ledger.
2-16

17. The Account Debit and Credit Procedures Double-entry 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.
LO 3 Define debits and credits and explain they are used to record business transactions.

18. Double-Entry Accounting
Debit and Credit Procedures
Liabilities
Equity
Assets = +
Debit Credit
ASSETS
LIABILITIES
EQUITIES
After we decide on the terms to use for the left and right side of a ledger account, we must establish the mathematics of the double-entry system. Liabilities and equity have the opposite sign of assets. If we were to move the liabilities to the left side of the equation, it would read assets minus liabilities equal equity. As a convention of double-entry accounting we have decided that a debit, or left side, to an asset account will represent an increase in the asset account balance. Once this decision is made all the remaining math is determined. Because liabilities and equity have the opposite sign of assets, a debit to a liability or equity account must mean a decrease and a credit means an increase. Instead of using the terms increase and decrease we use the terms debit and credit. It is important to remember whether we are talking about an asset, liability or equity account for the meaning of a debit or a credit.
It will take you a short while to become accustomed to using the terms debit and credit, but with practice you will master the concept easily.
2-18

19. Equity _ + - + + - Debit and Credit Procedures Revenues Expenses
Common Stock
Dividends _ +
Debit Credit
Stock
Dividends
Expenses
Revenues
Here is the expanded accounting equation showing the equity section. Because revenues increase equity, a revenue account must be recorded just like the common stock account. A credit is an increase in revenues and a debit is an increase in expenses. The common stock and revenue accounts are both increased with a credit and decreased with a debit. Dividends and expenses have an opposite sign, so these accounts are increased with a debit and decreased with a credit.
2-19

20. T-Account Summary – Normal Balances
Debit
Credit
Assets
Dividends
Expenses
Liabilities
Capital/Equity
Revenue

21. Assets = Liabilities + Owners’ Equity
Journalizing Transactions
Read the transaction. Decide which accounts are involved. Look first to see if cash is involved.
Classify the accounts involved (asset, liability, capital, revenue or expense). Decide if the accounts increase or decrease in value.
Properly allocate the transaction as debit(s) and credit(s).
Check to see the debits for that transaction equal the credits and that the fundamental equation still works:
Assets = Liabilities + Owners’ Equity

22. Journalizing & Posting
Sierra issued common stock in exchange for $10,000 cash.
Oct. 1
General Journal
Cash
10,000
Common stock
10,000
10,000
+ Debit (Dr)
Credit (Cr) -
- Debit (Dr)
Credit (Cr) +
A - Cash
E – Common Stock
Posting:
LO 5 Explain what a journal is and how it helps in the recording process.

23. Journalizing & Posting
Sierra borrowed $5,000 by signing a note.
Oct. 1
General Journal
Cash
Notes payable
5,000
+ Debit (Dr)
Credit (Cr) -
- Debit (Dr)
Credit (Cr) +
A - Cash
L – Notes Payable
Posting:
5,000
LO 5 Explain what a journal is and how it helps in the recording process.

24. Journalizing & Posting
Sierra purchased equipment for $5,000.
Oct. 2
General Journal
Equipment
Cash
5,000
+ Debit (Dr)
Credit (Cr) -
A - Cash
5,000
A - Equipment
Posting:
+ Debit (Dr)
Credit (Cr) -
5,000
LO 5 Explain what a journal is and how it helps in the recording process.

25. Journalizing Business Transactions Practice Problem
P3-6B, p 151
Set up a “T” account for each account listed in the Trial Balance and each additional account listed in part (a).
For each “T” account, indicate whether that account is an Asset, Liability, Common Stock, Dividends, Revenues or Expense account.
For each “T”, mark the + and – side, using Slides
Now proceed to solve for (b) and (c). You can also solve for (c) then (b), if preferred.
Calculate the ending balance for each T account, then create the trial balance.

26. The Trial Balance Trial Balance
A list of accounts and their balances at a given time.
Accounts are listed in the order in which they appear in the ledger.
Purpose is to prove that debits equal credits.
May also uncover errors in journalizing and posting.
Useful in the preparation of financial statements.
LO 8 Explain the purposes of a trial balance.

27. The Trial Balance
Illustration 3-34
Equal
LO 8