The Accounting information system

Collects and processes transaction data

Communicates financial information to decision makers
Transactions
Events that must be recorded in the financial statements.
Transaction analysis
the process of considering the transaction or event that has taken place and
identifying how the transaction is going to impact the accounting equation.

Investment of Cash by Stockholders

E.g.: On October 1, cash of $10,000 is invested in the business by investors in
exchange for $10,000 of common stock
Ans : There is an increase in the asset Cash and an increase of $10,000 in Common
Stock on the books of Sierra Corporation.

E.g. : On October 1, Sierra borrowed $5,000 from Castle Bank by signing a 3-

month, 12%, $5,000 note payable.
Ans :

SUMMARY OF TRANSACTIONS
THE ACCOUNT
An account is an individual accounting record of increases and decreases in a
specific asset, liability, or stockholders' equity item.
A company will have separate accounts for such item as cash, salaries
expense, accounts payable, and so on.

DEBITS AND CREDITS

The term debit means left and credit means right respectively.
The act of entering an amount on the left side of an account is called debiting the
account and making an entry on the right side is crediting the account.
When the debit amounts exceed the credits, an account has a debit balance; when
the reverse is true, the account has a credit balance.
DEBIT AND CREDIT EFFECTS - COMMON
STOCK

DEBIT AND CREDIT EFFECT AND NORMAL

BALANCE - RETAINED EARNINGS

DEBIT AND CREDIT EFFECT AND NORMAL

BALANCE - DIVIDENDS
DEBIT AND CREDIT EFFECTS - REVENUES AND
EXPENSES

DEBIT AND CREDIT EFFECTS - ASSETS,

LIABILITIES
DOUBLE-ENTRY SYSTEM
In a double-entry system, equal debits and credits are made in the accounts for
each transaction.
Thus, the total debits will always equal the total credits and the accounting
equation will always stay in balance.

NORMAL BALANCE
Every account classification has a normal balance, whether it is a debit or credit.
For that particular account, the opposite side entries should never exceed the
normal balance.
THE BASIC STEPS IN THE RECORDING
PROCESS
THE JOURNAL
Transactions are initially recorded in chronological order in a journal before being transferred
to the accounts.
The journal shows the debit and credit effects on specific accounts for each transaction.
Every company has a general journal.

The journal makes several significant contributions to the recording process:

It discloses in one place the complete effect of a transaction.
It provides a chronological record of transactions.
It helps to prevent or locate errors because the debit and credit amounts for each entry can be
readily compared.

JOURNALIZING
Entering transaction data in the journal is known as journalizing.
Separate journal entries are made for each transaction.
A complete entry consists of:
the date of the transaction,
the accounts and amounts to be debited and credited,
a brief explanation of the transaction.

TECHNIQUE OF JOURNALIZING
 GENERAL JOURNAL

Date Account Titles and Explanation Dr. Cr.

2017 Cash 10,000

Oct. 1 10,000
Common Stock

(Issued shares of stock for cash)

1 Cash 5,000
5,000
Notes Payable

(Issued 3-month, 12% note payable for cash)

The date of the transaction is entered in the date column.

The amounts for the debit are recorded in the Debit column and the amounts for
the credit are recorded in the Credit column.
A brief explanation of the transaction shown here.
THE LEDGER
The entire group of accounts maintained by a company is called the ledger.
A general ledger contains all the assets, liabilities, and stockholders’ equity
accounts.

THE GENERAL LEDGER

PURPOSE OF THE LEDGER

Information in the ledger provides management with the balances in
various accounts.
CHART OF ACCOUNTS
Accounts in the general ledger are listed in the chart of accounts.
SIERRA CORPORATION-Chart of Accounts

Stockholders'
Assets Liabilities Equity Revenues Expenses

Cash Notes Common Service Salaries

Payable Stock Revenue Expense

Accounts Accounts Retained Supplies

Receivable Payable Earnings Expense

Advertising Interest Dividends Rent Expense

Supplies Payable

Prepaid Insurance Unearned Income Insurance

Service Summary Expense
Revenue

Office Equipment Salaries Interest

Payable Expense

Accumulated Depreciation
Depreciation- Expense
Office Equipment
POSTING
Transferring journal entries to the ledger accounts is called posting.
Posting accumulates the effects of journalized transactions into individual
accounts.

EXAMPLE OF POSTING
PURPOSES OF TRIAL BALANCE
A trial balance is a list of accounts and their balances at a given time.
The primary purpose of the trial balance is to prove the mathematical equality
of debits and credits after posting.
A trial balance may uncover errors in journalizing and posting.
A trial balance is useful in the preparation of financial statements.

LIMITATIONS OF TRIAL BALANCE

A trial balance is limited in that it will balance, and therefore not uncover an error
when:
A transaction is not journalized,
A correct journal entry is not posted,
A journal entry is posted twice,
Incorrect accounts are used in journalizing and posting,
Offsetting errors are made in recording the amount of a transaction.