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Financial Accounting: Tools for Business Decision Making, 4th Ed.
Kimmel, Weygandt, Kieso CHAPTER 3 Prepared by Ellen L. Sweatt Georgia Perimeter College
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THE ACCOUNTING INFORMATION SYSTEM
Chapter 3 THE ACCOUNTING INFORMATION SYSTEM
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Chapter 3 The Accounting Information System
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.
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Chapter 3 The Accounting Information System
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.
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Transaction Analysis 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.
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The Accounting Information System
The system of: collecting and processing transaction data and communicating financial information to decision makers.
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Accounting Transactions...
11 1 Accounting Transactions... are economic events that must be recorded in the financial statements because they affect assets, liabilities and/or stockholders’ equity.
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Accounting Transactions...
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Transaction Analysis Transaction Analysis determines the impact of the transaction on the accounting equation. Assets Liabilities Stockholders’ Equity
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Assets = Liabilities + Stockholders’ Equity
Accounting Analysis... Analyze the effect of business transactions on the basic accounting equation: Assets = Liabilities + Stockholders’ Equity Must always balance.
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Transaction Analysis If an individual asset is increased, there must be a corresponding: Decrease in another asset, or Increase in a specific liability, or Increase in stockholders’ equity
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Transaction Analysis 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
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Let’s practice transaction analysis with Sierra Corporation. . .
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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
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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.
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Event 3 – Purchase of Office Equipment for Cash
Oct. 2 – Sierra acquired office equipment by paying $5,000 cash to Superior Sales Co.
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Event 4 – Receipt of Cash in Advance from Customer
Oct. 2 – Sierra received a $1,200 cash advance from R. Knox, a client.
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Event 5 – Services Rendered for Cash
Oct. 3 – Sierra received $10,000 in cash from Copa Co. for advertising services performed
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Event 5 – Services Rendered, WHAT IF these were performed “on account”?
Later, when $10,000 is collected from customer…
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Event 6 – Payment of Rent Oct. 3 – Sierra paid its office rent for the month of October in cash, $900.
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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.
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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.
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Event 9 – Hiring of New Employees
Oct. 9 – Sierra hired four new employees to begin work on Oct. 15. Accounting transaction has NOT occurred!
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Event 10 – Payment of Dividend
Oct. 20 – Sierra paid a $500 dividend.
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Event 11 – Payment of Cash for Employee Salaries
Oct. 26 – Paid employees working two weeks, who have earned $4,000 in salaries.
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Summary of Transactions
Assets = Liabilities + Equity
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11 2 The Account... An individual accounting record of increases and decreases in a specific Asset, Liability, or Stockholders’ Equity item.
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The Account Three parts : 1) the Title of the account
2) a left or Debit side 3) a right or Credit side
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Debits and Credits 3 Debit means left
11 3 Debits and Credits Debit means left thus, entry on left side is debiting Credit means right thus, entry on right side is crediting Normal balance is the side the increase happens on.
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Examples
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Total the Entries to Each Side
Total Debits Total Credits TITLE Debit Credit If the greater sum is on the left, the account has a Debit Balance
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Total the Entries to Each Side
Total Debits Total Credits TITLE Debit Credit If the greater sum is on the right, the account has a Credit Balance
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Whichever side you increase is the normal balance!
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Normal Balances for Assets and Liabilities
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Normal Balances for Stockholders’ Equity
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Normal Balances for Expenses and Revenues
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Expansion of Basic Equation
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What is the normal balance for the following accounts?
Review What is the normal balance for the following accounts? Cash Debit Accounts Payable Credit Accounts Receivable Debit Service Revenue Credit Common Stock Credit Salaries Expense Debit
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What is the normal balance for the following accounts?
Review What is the normal balance for the following accounts? Dividends Debit Building Debit Taxes Payable Credit Unearned Revenus Credit Prepaid Insurance Debit Rent Expense Debit
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Basic Steps in the Recording Process.
11 4 Basic Steps in the Recording Process. Analyze Journalize Post
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Recording Process Step 1
11 5 Recording Process Step 1 Analyze each transaction and effect on accounts
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The Journal... is an accounting record where the transactions are recorded in chronological order.
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Recording Process Step 2
Enter transaction information in a journal, a process called journalizing
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Recording Process Step 3
Transfer (post) the journal information to the appropriate accounts in the ledger
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Account Titles and Explanations
GENERAL JOURNAL Account Titles and Explanations Oct. 1 Cash , Common Stock , (Invested cash in business) Date Debit Credit 1 Cash , Notes Payable , (Issued 3-month, 12% note payable for cash) 2 Office Equipment , Cash , (Purchased office equipment for cash)
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Let’s Review Using Sierra’s Transactions
Cash Common Stock 10,000 10,000 What is the normal balance for the following accounts? Oct. 1 - Owner invested $10,000 Cash in business in exchange for $10,000 of Sierra Corporation Common Stock 52 52
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Let’s Review Using Sierra’s Transactions
Cash Note Payable 5,000 5,000 Oct. 1 – Sierra issued a 3-month, 12%, $5,000 Note Payable to Castle Bank. 52 52
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Let’s Review Using Sierra’s Transactions
Office Equipment Cash 5,000 10,000 5,000 5,000 Oct. 2 – Sierra acquired office equipment by paying $5,000 cash to Superior Sales Co. 52 52
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11 6 The General Ledger 6 the entire group of accounts maintained by a company contains all the asset, liability, and stockholders’ equity accounts
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Chart of Accounts... is a list of a company’s accounts.
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The General Ledger
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The General Ledger
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The Ledger The entries from the journal are posted to the ledger,usually in summary form, except for the general journal.
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11 7 Posting Transferring information from the journals to the general ledger accounts
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Account Titles and Explanations
Posting Entries GENERAL JOURNAL Account Titles and Explanations Oct. 1 Cash , Common Stock ,000 Acct 1010 Account CASH Date Balance ref debit credit debit credit Account COMMON STOCK Acct 3010 Date Balance ref debit credit debit credit
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Account Titles and Explanations
Posting Entries GENERAL JOURNAL Account Titles and Explanations Oct. 1 Cash , Common Stock ,000 Acct 1010 Account CASH Date Balance ref debit credit debit credit Oct 1 gj 1 10,000 10,000 Account COMMON STOCK Acct 3010 Date Balance ref debit credit debit credit Oct 1 gj 1 10,000 10,000
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Account Titles and Explanations
Posting Entries GENERAL JOURNAL Account Titles and Explanations Oct. 1 Cash , Common Stock ,000 Acct 1010 Account CASH Date Balance ref debit credit debit credit Oct 1 gj 1 10,000 10,000 Account COMMON STOCK Acct 3010 Date Balance ref debit credit debit credit Oct 1 gj 1 10,000 10,000
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11 8 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.
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Sierra Corporation Trial Balance October 31, 2007 Debit Credit
Cash $15,200 Advertising Supplies ,500 Prepaid Insurance Office Equipment ,000 Notes Payable $ 5,000 Accounts Payable ,500 Unearned Service Revenue ,200 Common Stock ,000 Dividends Service Revenue ,000 Salaries Expense ,000 Rent Expense $28,700 $28,700
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Copyright © 2007 John Wiley & Sons, Inc. All rights reserved
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.
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