CHAPTER 7

THE ACCOUNTING
INFORMATION SYSTEM

THE FOUR STEPS IN THE

ACCOUNTING CYCLE
1 Analyze transactions
2 Record the effect of transactions in a
journal entry
3 Summarize the effects of
transactions
a Post journal entries to the ledger
b Prepare a trial balance
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THE FOUR STEPS IN THE

ACCOUNTING CYCLE
4 Prepare reports
a Make adjusting entries
b Prepare financial statements
c Close the books

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 TRANSACTION ANALYSIS
USING DEBITS AND CREDITS
Recall the accounting equation:

Assets = Liabilities + Owners’

Owners’ Equity

DEBITS AND CREDITS FOR

BALANCE SHEET ACCOUNTS
• All increases in • All increases in
assets are liabilities and
represented as equities are
debits (left side of represented as
the account) credits (right side
of the account)

DEBITS AND CREDITS FOR

REVENUES, EXPENSES,
AND DIVIDENDS
• Revenues increase with credits
• Expenses increase with debits
• The dividends account is
increased with a debit

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 DEBITS AND CREDITS
FOR ALL ACCOUNTS
Owners’
Owners’
Assets = Liabilities + Equity
Dr. Cr. Dr. Cr. Dr. Cr.
+ - - + - +

Paid-
Paid-in Retained
Capital Earnings
Dr. Cr. Dr. Cr.
- + - +

Expenses Revenues
Dr. Cr. Dr. Cr.
+ - - +
Dividends
Dr. Cr.
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+ -

RECORDING THE EFFECTS

OF TRANSACTIONS
• The journal is a • Each journal
book in which all entry has its debit
transactions are amounts equal to
recorded in its credit amounts
chronological to ensure that the
order accounting
equation remains
in balance

RECORDING THE EFFECTS

OF TRANSACTIONS
• A journal entry involves a three-
step process:
1 Identify which accounts are involved
2 For each account, determine if it is
increased or decreased
3 For each account, determine by how
much it changed

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RECORDING THE EFFECTS
OF TRANSACTIONS
• The account debited is always
listed first, followed by the account
credited
• Also, the credit entry is indented
• Some selected transactions from
Veda Landscape Solutions are
presented next as examples…
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Transaction 1
• Investment of $700,000 cash into
the business for 10,000 shares of
stock.

Cash 700,000
? 700,000

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Transaction 2
• Borrowed $300,000 cash from the
bank.

Cash 300,000
Bank Loan Payable 300,000

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 Transaction 3
• Purchased land costing $50,000 and
buildings costing $400,000. Paid
$100,000 in cash and signed a
mortgage for the balance.

Land 50,000
Buildings 400,000
Cash 100,000
Mortgage Payable 350,000

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Transaction 4
• Purchased equipment for $650,000
in cash.

Equipment 650,000
Cash 650,000

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Transaction 7
• Purchased inventory costing
$90,000 for $10,000 in cash and the
remaining $80,000 on account.

Inventory 90,000
Cash 10,000
Accounts Payable 80,000
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 Transaction 8
• Paid $15,000 cash for an insurance
policy.

Prepaid Insurance 15,000

Cash 15,000

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Transaction 10
• Sold inventory costing $800,000 to
customers for $1,100,000. the
customers paid $200,000 in cash and
the remaining $900,000 was put on the
customers’ accounts.

Cash 200,000
Accounts Receivable 900,000
Sales 1,100,000
Cost of Goods Sold 800,000
Inventory 800,000

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Transaction 11
• Performed landscaping consulting
services and billed clients
$200,000 for these services.

Accounts Receivable 200,000

Consulting Revenue 200,000

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 Transaction 14
• Collected $820,000 cash from
customers as payment on their
accounts.

Cash 820,000
Accounts Receivable 820,000

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Transaction 15
• Paid $1,200,000 in cash to
suppliers as payment on account.

Accounts Payable 1,200,000

Cash 1,200,000

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Transaction 18
• Paid cash of $150,000 for
advertising, utilities, and office
supplies.

Selling, General, and

Administrative Expense 150,000
Cash 150,000

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 Transaction 23
• Paid cash dividends of $5,000.

Dividends 5,000
Cash 5,000

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