2. Financial Accounting, Fifth Edition
The Accounting
Information System
Financial Accounting, Fifth Edition

3. Study Objectives
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.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)

4. Accounting Transactions
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.

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

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

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

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

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

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

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

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

13. Accounting Transactions
6. On October 3, Sierra Corporation paid its office rent for the month of October in cash, $900.
SO 1 Analyze the effect of business transactions on the basic accounting equation.

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

15. Accounting Transactions
8. On October 5, Sierra purchased a three-month supply of advertising materials on account from Aero Supply for $2,500.
SO 1 Analyze the effect of business transactions on the basic accounting equation.

16. Accounting Transactions
10. On October 20, Sierra paid a $500 dividend.
SO 1 Analyze the effect of business transactions on the basic accounting equation.

17. Accounting Transactions
11. Employees have worked two weeks, earning $4,000 in salaries, which were paid on October 26.

18. An Account can be illustrated in a T-Account form.
The Account
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.

19. Debit and Credit Procedures
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.
DEBITS must equal CREDITS.
SO 3 Define debits and credits and explain their use in recording business transactions.

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

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

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

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

24. Debits and Credits Summary
Balance Sheet Income Statement
Asset =
Liability +
Equity
Revenue -
Expense =
Debit
Credit
SO 3 Define debits and credits and explain their use in recording business transactions.

25. Debits and Credits Summary
Review Question
Debits:
increase both assets and liabilities.
decrease both assets and liabilities.
increase assets and decrease liabilities.
decrease assets and increase liabilities.
SO 3 Define debits and credits and explain their use in recording business transactions.

26. Debits and Credits Summary
Review Question
Accounts that normally have debit balances are:
assets, expenses, and revenues.
assets, expenses, and equity.
assets, liabilities, and dividends.
assets, dividends, and expenses.
SO 3 Define debits and credits and explain their use in recording business transactions.

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

28. The Journal Journalizing - Entering transaction data in the journal.
Illustration: Presented below is information related to Sierra Corporation.
Oct. 1
Sierra issued common stock in exchange for $10,000 cash. 1
Sierra borrowed $5,000 by signing a note. 2
Sierra purchased office equipment for $5,000.
Instructions - Journalize these transactions.
SO 4 Explain what a journal is and how it helps in the recording process.

29. Journalizing Sierra issued common stock in exchange for $10,000 cash.
Oct. 1
Sierra issued common stock in exchange for $10,000 cash.
General Journal
SO 4 Explain what a journal is and how it helps in the recording process.

30. Journalizing Sierra borrowed $5,000 by signing a note. Oct. 1
General Journal
SO 4 Explain what a journal is and how it helps in the recording process.

31. Journalizing Sierra purchased office equipment for $5,000. Oct. 2
General Journal
SO 4 Explain what a journal is and how it helps in the recording process.

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

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

34. Posting
Posting – the process of transferring amounts from the journal to the ledger accounts.
General Journal J1
101
General Ledger
Oct. 1
Owner investment J1
10,000
10,000
SO 7 Explain what posting is and how it helps in the recording process.

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

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

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

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

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

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

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

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

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

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

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

46. Summary Illustration of Journalizing
SO 7 Explain what posting is and how it helps in the recording process.

47. Summary Illustration of Journalizing
SO 7 Explain what posting is and how it helps in the recording process.

48. Summary Illustration of Posting

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

50. Copyright
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