1. 1 Financial Accounting: Tools for Business Decision Making Kimmel, Weygandt, Kieso ELS

2. Chapter 3

3. 3 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.

4. 4 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

5. 5 The Accounting Information System The system of: collecting and processing transaction data and communicating financial information to interested parties.

6. 6 The Accounting Information System Analyze the effect of business transactions on the basic accounting equation: Assets = Liabilities + Stockholders’ Equity

7. 7 The Accounting Information System The Accounting Equation must always balance.

8. 8 The Accounting Information System zAccounting transactions are events that must be recorded in the Financial Statements.

9. 9 The Accounting Information System zTransactions are events that must be recorded in the Financial Statements zTransaction Analysis determines the impact on the Balance Sheet.

10. Is the financial position (assets, liabilities, and stockholders’ equity) of the company changed? Page 99 in book

11. Let’s Practice Transaction Analysis

12. a) On July 1, Cash of $95,000 was invested in the business in exchange for $95,000 worth of common stock.

14. b) Peoples, Inc., acquired land by paying $60,000 cash to Nashtown, Inc

16. c) Peoples, Inc., purchased an estimated three month supply of office supplies on account. The company will pay $600 for these supplies later.

18. d) Peoples, Inc., received $800 for services performed.

20. e) Peoples, Inc., performed services for $2,000. The company will be paid later in the month.

22. 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.

23. NO TRANSACTION

24. g) Peoples, Inc., purchased office equipment for $6,000. The Company signed a 2-year note with ACME Office Equipment Company.

26. h) Peoples, Inc., paid $1,800 for a 1-year license to operate as a business. The license expires June 30th of next year.

28. i) Peoples, Inc., collected $800 of the money owed from (e).

30. j ) Peoples, Inc., paid $400 of the amount it owed from (c).

32. k) An employee has worked and earned $600 which was paid during the month.

34. l) Peoples, Inc., received a $5,000 retainer to handle a tax audit that the company will start next month.

36. m) Peoples, Inc., paid $500 for rent during the month.

38. n) Dividends of $700 were paid during the month.

41. 107,200

42. 42 an individual accounting record of increases and decreases in a specific Asset, Liability, or Stockholders’ Equity item. Account...

43. 43 Three parts : 1) the Title of the account 2) a left or Debit side 3) a right or Credit side Account

44. 44 TITLE DEBITCREDIT The T Account

45. 45 Total the Entries to Each Side Total DebitsTotal Credits TITLE DebitCredit

46. Balancing an Account Page 105 in book Tabular SummaryAccount Form

47. 47 Normal Balances Pages 106-107 in book

48. 48 Normal Balances Pages 107-108 in book

49. 49 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

50. 50 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

51. Whichever side you increase is the normal side!

52. 52 Debits Increase assets and expenses Decrease liabilities, common stock and revenues

53. 53 Credits Decrease assets and expenses Increase liabilities, common stock and revenues

54. 54 Analyze each transaction Enter each transaction in a journal Transfer journal information to ledger accounts Page 109 in book Pages 109-110 in book

55. 55 The Recording Process zAnalyze each transaction zEnter information in a journal zTransfer the information to the appropriate accounts

56. 56 The Journal... is an accounting record where the transactions are recorded in chronological order.

57. 57 Journals zCash receipts zCash disbursements zSales zPurchases zGeneral Types of Journals

58. 58 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:

59. DateDebit Credit GENERAL JOURNAL Account Titles and Explanations 1998 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) Page 111 in book

60. 60 The General Ledger the entire group of accounts maintained by a company contains all the asset, liability, and stockholders’ equity accounts

61. 61 The General Ledger Page 113 in book

62. 62 The Ledger The entries from the journal are posted to the ledger,usually in summary form, except for the general journal.

63. 63 Posting Transferring information from the journals to the general ledger accounts

64. GENERAL JOURNAL Account Titles and Explanations 1998 Oct. 1 Cash 10,000 Common Stock 10,000 Balance Acct 1010 Account CASH Date Acct 3010 Account COMMON STOCK Dat e Balance debit credit debit credit re f Posting Entries

65. GENERAL JOURNAL Account Titles and Explanations 1998 Oct. 1 Cash 10,000 Common Stock 10,000 Balance Acct 1010 Account CASH Date Acct 3010 Account COMMON STOCK Dat e Balance debit credit debit credit re f Oct 1 gj 1 10,000 Posting Entries

66. GENERAL JOURNAL Account Titles and Explanations 1998 Oct. 1 Cash 10,000 Common Stock 10,000 Balance Acct 1010 Account CASH Date Acct 3010 Account COMMON STOCK Dat e Balance debit credit debit credit re f Oct 1 gj 1 10,000

67. 67 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.

68. Sierra Corporation Trial Balance October 31, 1998 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 Page 122 in book