THE ACCOUNTING

INFORMATION
SYSTEM
3
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 Preview of Chapter 3

!2
 The Accounting Information System

Accounting Information System

System of
► collecting and
► processing transaction data and
► communicating financial information to decision makers.

Most businesses use computerized accounting (EDP) systems.

!3 LO 1 Analyze the effect of business transactions on the basic accounting equation.

 Accounting Transactions

Transactions are economic events that require recording

in the financial statements.
◆ Not all activities represent transactions.

◆ Assets, liabilities, or stockholders’ equity items change as a

result of some economic event.

◆ Dual effect on the accounting equation.

!4 LO 1 Analyze the effect of business transactions on the basic accounting equation.

 Accounting Transactions

Question: Are the following events recorded in the accounting

records?
Illustration 3-1
Discuss guided trip
Purchase
Event options with potential Pay rent.
computer.
customer.

Criterion Is the financial position (assets, liabilities, or

stockholders’ equity) of the company changed?

Record/ Don’t
Record

!5 LO 1 Analyze the effect of business transactions on the basic accounting equation.

 Accounting Transactions

Analyzing Transactions
The process of identifying the specific effects of economic
events on the accounting equation.

Basic Accounting Equation

Assets Liabilities Stockholders’

= +
Equity

!6 LO 1 Analyze the effect of business transactions on the basic accounting equation.

 Accounting Transactions

Analyzing Transactions
Illustration 3-2
Expanded accounting equation

!7 LO 1 Analyze the effect of business transactions on the basic accounting equation.

 Accounting Transactions
Event (1). On October 1, cash of $10,000 is invested in Sierra Corporation by
investors in exchange for $10,000 of common stock.

1. +10,000 +10,000

!8 LO 1 Analyze the effect of business transactions on the basic accounting equation.

 Accounting Transactions
Event (2). On October 1, Sierra borrowed $5,000 from Castle Bank by signing
a 3-month, 12%, $5,000 note payable.

1. +10,000 +10,000
2. +5,000 +5,000

!9 LO 1 Analyze the effect of business transactions on the basic accounting equation.

 Accounting Transactions
Event (3). On October 2, Sierra purchased equipment by paying $5,000 cash to
Superior Equipment Sales Co.

1. +10,000 +10,000
2. +5,000 +5,000
3. -5,000 +5,000

!10 LO 1 Analyze the effect of business transactions on the basic accounting equation.
 Accounting Transactions
Event (4). On October 2, Sierra received a $1,200 cash advance from R. Knox, a
client.

1. +10,000 +10,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200

!11 LO 1 Analyze the effect of business transactions on the basic accounting equation.
 Accounting Transactions
Event (5). On October 3, Sierra received $10,000 in cash from Copa Company
for guide services performed.

1. +10,000 +10,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
5. +10,000 +10,000

!12 LO 1 Analyze the effect of business transactions on the basic accounting equation.
 Accounting Transactions
Event (6). On October 3, Sierra Corporation paid its office rent for the month of
October in cash, $900.

1. +10,000 +10,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
5. +10,000 +10,000
6. -900 -900

!13 LO 1 Analyze the effect of business transactions on the basic accounting equation.
 Accounting Transactions
Event (7). On October 4, Sierra paid $600 for a one-year insurance policy that
will expire next year on September 30.

1. +10,000 +10,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
5. +10,000 +10,000
6. -900 -900
7. -600 +600

!14 LO 1 Analyze the effect of business transactions on the basic accounting equation.
 Accounting Transactions
Event (8). On October 5, Sierra purchased an estimated three months of
supplies on account from Aero Supply for $2,500.

1. +10,000 +10,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
5. +10,000 +10,000
6. -900 -900
7. -600 +600
8. +2,500 +2,500

!15 LO 1 Analyze the effect of business transactions on the basic accounting equation.
 Accounting Transactions
Event (9). On October 9, Sierra hired four new employees to begin work on
October 15.

1. +10,000 +10,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
5. +10,000 +10,000
6. -900 -900
7. -600 +600
8. +2,500 +2,500

An accounting transaction has not occurred.

!16 LO 1 Analyze the effect of business transactions on the basic accounting equation.
 Accounting Transactions
Event (10). On October 20, Sierra paid a $500 dividend.

1. +10,000 +10,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
5. +10,000 +10,000
6. -900 -900
7. -600 +600
8. +2,500 +2,500
10. -500 -500

!17 LO 1 Analyze the effect of business transactions on the basic accounting equation.
 Accounting Transactions
Event (11). Employees have worked two weeks, earning $4,000 in salaries,
which were paid on October 26.

1. +10,000 +10,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
5. +10,000 +10,000
6. -900 -900
7. -600 +600
8. +2,500 +2,500
10. -500 -500
11. -4,000 -4,000

!18
!19
 The Account

◆ Record of increases and decreases in

Account a specific asset, liability, equity,
revenue, or expense item.
◆ Debit = “Left”
◆ Credit = “Right”

An Account can be Account Name

illustrated in a T-
Debit / Dr. Credit / Cr.
Account form.

!20 LO 2 Explain what an account is and how it helps in the recording process.
 The Account

Debit and Credit Procedures

Double-entry system
◆ Each transaction must affect two or more accounts to
keep the basic accounting equation in balance.

◆ Recording done by debiting at least one account and

crediting another.
◆ DEBITS must equal CREDITS.

!21 LO 3 Define debits and credits and explain they are used to record business transactions.
 Debit and Credit Procedures

If Debits are greater than Credits, the account will have

a debit balance.

Account Name
Debit / Dr. Credit / Cr.

Transaction #1 $10,000 $3,000 Transaction #2

Transaction #3 8,000

Balance $15,000

!22 LO 3 Define debits and credits and explain they are used to record business transactions.
 Debit and Credit Procedures

If Credits are greater than Debits, the account will have

a credit balance.

Account Name
Debit / Dr. Credit / Cr.

Transaction #1 $10,000 $3,000 Transaction #2

8,000 Transaction #3

Balance $1,000

!23 LO 3 Define debits and credits and explain they are used to record business transactions.
 Procedures for Assets and Liabilities

Assets
Debit / Dr. Credit / Cr. ◆ Assets - Debits should exceed
credits.
Normal Balance ◆ Liabilities – Credits should
Chapter
3-23
exceed debits.

Liabilities
Debit / Dr. Credit / Cr.

Normal Balance

Chapter
3-24

!24 LO 3 Define debits and credits and explain they are used to record business transactions.
 Procedures for Stockholders’ Equity

Stockholders’ Equity ◆ Investments by stockholders and

Debit / Dr. Credit / Cr. revenues increase stockholders’
equity (credit).

Normal Balance
◆ Dividends and expenses decrease
stockholder’s equity (debit).
Chapter
3-25

Common Stock Retained Earnings Dividends

Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.

Normal Balance Normal Balance Normal Balance

Chapter Chapter Chapter

3-25 3-25 3-23

!25 LO 3 Define debits and credits and explain they are used to record business transactions.
 Procedures for Revenue and Expense

Revenue ◆ The purpose of earning revenues

Debit / Dr. Credit / Cr.
is to benefit the stockholders.
◆ The effect of debits and credits on
Normal Balance revenue accounts is the same as
Chapter
3-26
their effect on stockholders’
equity.
Expense
Debit / Dr. Credit / Cr.
◆ Expenses have the opposite
effect: expenses decrease
stockholders’ equity.
Normal Balance

Chapter
3-27

!26 LO 3 Define debits and credits and explain they are used to record business transactions.
 Stockholders’ Equity Relationships

Illustration 3-15

!27 LO 3 Define debits and credits and explain they are used to record business transactions.
 Summary of Debit/Credit Rules
Liabilities
Debit / Dr. Credit / Cr.
Normal Normal
Balance Balance
Debit Credit Normal Balance

Assets Chapter
3-24

Stockholders’ Equity
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-23

Expense Chapter
3-25
Revenue
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-27 Chapter
3-26

!28 LO 3 Define debits and credits and explain they are used to record business transactions.
 Summary of Debit/Credit Rules

Balance Sheet Income Statement

Asset = Liability + Equity Revenue - Expense =

Debit

Credit

!29 LO 3 Define debits and credits and explain they are used to record business transactions.
 Summary of Debit/Credit Rules

Relationship among the assets, liabilities and stockholders’

equity of a business:
Illustration 3-16
Basic
Assets = Liabilities + Stockholders’ Equity
Equation

Expanded
Basic
Equation

The equation must be in balance after every transaction. For

every Debit there must be a Credit.

!30 LO 3 Define debits and credits and explain they are used to record business transactions.
 Summary of Debit/Credit Rules

Review Question
Debits:

a. increase both assets and liabilities.

b. decrease both assets and liabilities.

c. increase assets and decrease liabilities.

d. decrease assets and increase liabilities.

!31 LO 3 Define debits and credits and explain they are used to record business transactions.
 Summary of Debit/Credit Rules

Review Question
Accounts that normally have debit balances are:

a. assets, expenses, and revenues.

b. assets, expenses, and equity.

c. assets, liabilities, and dividends.

d. assets, dividends, and expenses.

!32 LO 3 Define debits and credits and explain they are used to record business transactions.
!33
 Steps in the Recording Process

Illustration 3-17

Transfer journal information to

Analyze each transaction Enter transaction in a journal
ledger accounts

Source documents, such as a sales slip, a check, a bill, or a cash

register tape, provide evidence of the transaction.

!34 LO 4 Identify the basic steps in the recording process.

 Steps in the Recording Process

The Journal
◆ Book of original entry.

◆ Transactions recorded in chronological order.

◆ Contributions to the recording process:

1. Discloses the complete effects of a transaction.

2. Provides a chronological record of transactions.

3. Helps to prevent or locate errors because the debit

and credit amounts can be easily compared.

!35 LO 5 Explain what a journal is and how it helps in the recording process.
 The Journal

Journalizing - Entering transaction data in the journal.

Illustration: Presented below is information related to Sierra
Corporation.

Oct. 1 Sierra issued common stock in exchange for $10,000

cash.
1 Sierra borrowed $5,000 by signing a note.
2 Sierra purchased equipment for $5,000.

Instructions - Journalize these transactions.

!36 LO 5 Explain what a journal is and how it helps in the recording process.
 Journalizing

Oct. 1 Sierra issued common stock in exchange for

$10,000 cash.

General Journal
Date Account Title Ref. Debit Credit
Oct. 1 Cash 10,000
Common stock 10,000

!37 LO 5 Explain what a journal is and how it helps in the recording process.
 Journalizing

Oct. 1 Sierra borrowed $5,000 by signing a note.

General Journal
Date Account Title Ref. Debit Credit
Oct. 1 Cash 5,000
Notes payable 5,000

!38 LO 5 Explain what a journal is and how it helps in the recording process.
 Journalizing

Oct. 2 Sierra purchased equipment for $5,000.

General Journal
Date Account Title Ref. Debit Credit
Oct. 2 Equipment 5,000
Cash 5,000

!39 LO 5 Explain what a journal is and how it helps in the recording process.
 Steps in the Recording Process

The Ledger is comprised of the entire group of accounts

maintained by a company.
Illustration 3-19

!40 LO 6 Explain what a ledger is and how it helps in the recording process.
 Steps in the Recording Process

Chart of Accounts – listing of accounts used by a

company to record transactions.

!41 LO 6 Explain what a ledger is and how it helps in the recording process.
 Steps in the Recording Process

Posting – the process of transferring journal entry amounts

to ledger accounts.

General Journal J1
Date Account Title Ref. Debit Credit
Oct. 1 Cash 101 10,000
Common stock 10,000

General Ledger
Cash Acct. No. 101
Date Explanation Ref. Debit Credit Balance
Oct. 1 Stock issued J1 10,000 10,000

!42 LO 7
 The Recording Process Illustrated

Follow these steps:

1. Determine what type
of account is
involved.
2. Determine what
items increased or
decreased and by
how much.
3. Translate the
increases and
decreases into
debits and credits.

Illustration 3-21

!43 LO 7 Explain what posting is and how it helps in the recording process.
 The Recording Process Illustrated

Follow these steps:

1. Determine what type
of account is
involved.
2. Determine what
items increased or
decreased and by
how much.
3. Translate the
increases and
decreases into
debits and credits.

Illustration 3-22

!44 LO 7 Explain what posting is and how it helps in the recording process.
 The Recording Process Illustrated

Follow these steps:

1. Determine what type
of account is
involved.
2. Determine what
items increased or
decreased and by
how much.
3. Translate the
increases and
decreases into
debits and credits.

Illustration 3-23

!45 LO 7 Explain what posting is and how it helps in the recording process.
 The
Recording
Process
Illustrated

Additional
Transactions

Illustration 3-24

!46 LO 7 Explain what posting is and how it helps in the recording process.
 The
Recording
Process
Illustrated

Additional
Transactions

Illustration 3-25

!47 LO 7 Explain what posting is and how it helps in the recording process.
 The
Recording
Process
Illustrated

Additional
Transactions

Illustration 3-26

!48 LO 7 Explain what posting is and how it helps in the recording process.
 The
Recording
Process
Illustrated

Additional
Transactions

Illustration 3-27

!49
 The
Recording
Process
Illustrated

Additional
Transactions

Illustration 3-28

!50 LO 7 Explain what posting is and how it helps in the recording process.
 The Recording Process Illustrated

Additional Transactions
Illustration 3-29

!51 LO 7 Explain what posting is and how it helps in the recording process.
 The
Recording
Process
Illustrated

Additional
Transactions

Illustration 3-30

!52 LO 7 Explain what posting is and how it helps in the recording process.
 The
Recording
Process
Illustrated

Additional
Transactions

Illustration 3-31

!53
LO 7
 Summary Illustration of Journalizing

Illustration 3-32

!54
LO 7
 Summary Illustration of Journalizing

Illustration 3-32

!55
LO 7
 Summary
Illustration
of Posting

Illustration 3-33

!56 LO 7 Explain what posting is and how it helps in the recording process.
 Selected transactions from the journal of Faital Inc. during its first
month of operations are presented below. Post these transactions to T-accounts.

!57 LO 7 Explain what posting is and how it helps in the recording process.
 The Trial Balance

Trial Balance
◆ A list of accounts and their balances at a given time.
◆ Accounts are listed in the order in which they appear in
the ledger.

◆ Purpose is to prove that debits

equal credits.

◆ May also uncover errors in

journalizing and posting.

◆ Useful in the preparation of

financial statements.

!58 LO 8 Explain the purposes of a trial balance.

 The Trial Balance
Illustration 3-34

Equal
!59 LO 8
 The Trial Balance

Limitations of a Trial Balance

The trial balance may balance even when
1. a transaction is not journalized,
Ethics Note An error is
2. a correct journal entry is not posted, the result of an
unintentional mistake. It is
3. a journal entry is posted twice, neither ethical nor
unethical. An irregularity
4. incorrect accounts are used in is an intentional
misstatement, which
journalizing or posting, or is viewed as unethical.

5. offsetting errors are made in recording

the amount of a transaction.

!60 LO 8 Explain the purposes of a trial balance.

 The Trial Balance

Review Question
A trial balance will not balance if:

a. a correct journal entry is posted twice.

b. the purchase of supplies on account is debited to

Supplies and credited to Cash.

c. a $100 cash dividends is debited to the Dividends

account for $1,000 and credited to Cash for $100.

d. a $450 payment on account is debited to Accounts

Payable for $45 and credited to Cash for $45.

!61 LO 8 Explain the purposes of a trial balance.

 The Cash account and the related cash
transactions indicate why cash changed during October. To make this
information useful for analysis it is summarized in a statement of cash
flows. The statement of cash flows classifies each transaction as an
operating activity, an investing activity, or a financing activity.

Sierra Corporation’s:
◆ Operating activities involve providing guide services.
◆ Investing activities include the purchase or sale of long-lived
assets used in operating the business, or the purchase or sale of
investment securities.
◆ Financing activities are borrowing money, issuing shares of
stock, and paying dividends.

!62 LO 9 Classify cash activities as operating, investing, or financing.