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ACCT1220 * Chapter 3 * The Accounting Information System

Intoduction to Financial Accounting (University of Guelph)

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Chapter 3
The Accounting Information System

Accounting information system: the system of collecting and processing transaction data and
communicating financial information to interested parties

ACCOUNTING TRANSACTIONS
Accounting transaction: an economic event that is recorded in the financial statements
because it involved an exchange that affects assets, liabilities, or shareholder’ equity
 Investment by shareholders
 Purchase of equipment
 Payment of rent
 Purchase of insurance
 Hiring of new employees
 Purchase of supplies on account
 Services performed on account
 Receipt of cash in advance from customer
 Payment on account
 Payment of salaries
 Payment of dividend
 Collection on account
 Payment of income tax

THE ACCOUNT
Account: an individual accounting record of increases and decreases in a specific asset,
liability, or shareholders’ equity item; consists of the title of the account, the debt side, and the
credit side
 T account (general ledger account): the basic form of account, with a debit side and a
credit side showing the effect of transactions on the account
o Credit: the right side of an account
 Increases in liabilities must be entered on this side
 Decreases in assets must be entered on this side
 Increase in shareholders’ equity must be entered on this side; revenues
increase shareholders’ equity
o Debit: the left side of an account
 Increases in assets must be entered on this side
 Decreases in liabilities must be entered on this side
 Decreases in shareholders’ equity must be entered on this side;
expenses and dividends decrease shareholders’ equity

 The debit movement must equal the credit movement in the accounts at all times

Double-entry accounting system: a system that records the dual effect of each transaction in
appropriate accounts

THE JOURNAL
Accounting cycle: a series of nine steps followed by accountants record transactions and
prepare financial statements; these 4 steps are part of the recording process
1. Analyze transactions
2. Journalize transactions
3. Post transactions to general ledger accounts
4. Prepare a trial balance

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Chapter 3
The Accounting Information System

General journal: the book of original entry in which transactions are recorded in chronological
order
 Shows the debit and credit effects on specific accounts
 Discloses the complete effect of a transaction in one place, including an explanation,
where applicable, and identification of the source
 Helps prevent and locate errors
 Features of a journal entry include…
o The date the transaction is entered
o The account to be debited and the account to be credited, indented on the line
under
o The amount for debit on the left column, and credit on the right column
o A brief explanation of the transaction
 Types of journal entries
o Simple journal entry: when the journal entry only affects two accounts (one
debit and one credit)
o Compound entry: when three or more accounts are required in one journal
entry

THE LEDGER
General ledger: the book of accounts that contains a company’s asset, liability, and
shareholders’ equity, revenue, and expense accounts
 Often arranged in the order in which accounts are presented in the financial
statements, beginning with the statement of financial position accounts
o Asset accounts -> liability accounts -> shareholders’ equity accounts

Chart of accounts: a list of a company’s accounts and account numbers that identify where the
accounts are in the general ledger

Posting: the procedure of transferring journal entries to the general ledger accounts

THE TRIAL BALANCE

Trial balance: a list of general ledger accounts and their balances at a specific time, usually at
the end of the accounting period
 Procedure for preparing a trial balance
o List the account titles and their balances in the same order as the general
ledger
o Total the debit and credit columns and ensure they are equal
 A trial balance doesn’t prove that all transactions recorded, or general ledgers are
correct even if the debit an credit columns are equal if…
o A transaction is not journalized
o A correct journal entry is not posted
o A journal entry is posted twice
o Incorrect accounts are used in journalizing or posting
o Errors that cancel each other’s effect are made in recording the amount of
transactions

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