ACCT 1235 – Introduction to

Financial Accounting I & II

Chapter 3

The Accounting Information System

Copyright ©2020 John Wiley & Sons, Inc.

Learning Objectives
LO 1: Analyze the effect of transactions on the accounting
equation.
LO 2: Explain how accounts, debits, and credits are used
to record transactions.
LO 3: Journalize transactions in the general journal.
LO 4: Post transactions to the general ledger.
LO 5: Prepare a trial balance.
Accounting Information System
• The system used to collect and process transaction data
and communicate financial information
• Can vary widely based on factors such as:
o Type of business and its transactions
o Size of company
o Amount of data
o Information needed by management and others
Steps in the Recording Process
• Step 1: Analyze each transaction to determine its effect
on accounts (if any)
o Evidence comes from a source document
• Step 2: Record transaction as a journal entry in the
general journal
• Step 3: Transfer journal entries recorded to appropriate
accounts in the general ledger
• Step 4: Prepare a trial balance
Accounting Transactions
• Transactions are economic events that must be
recorded in the financial statements
• Not all events are recorded and reported as accounting
transactions:
o Only those that effect or change assets, liabilities, or
shareholders’ equity accounts
Transaction Identification Process
Step 1 of Accounting Cycle: Analyzing
Transactions
• Transaction analysis determines impact on the
accounting equation
Assets = Liabilities + Shareholders’ Equity
• The accounting equation must always balance
o Therefore, each transaction has a dual (double-sided)
effect on the equation
Analyzing Transactions
Account
• An individual accounting record of increases and decreases
in a specific asset, liability, or shareholders’ equity item,
along with opening and closing balances
• T Account—three parts:
1) Title of the account
2) A left or debit side
3) A right or credit side
• In its simplest form, these parts are positioned like the
letter T; therefore, called a T account
Debits and Credits
• Describe where entries are made in the T accounts:
Debiting: entering an amount on the left side
Crediting: entering an amount on the right side
• If debit amounts exceed credit amounts, account has a
debit balance
• If credit amounts exceed debit amounts, account has a
credit balance
The T Account – Debit Balance
The T Account – Credit Balance
Normal Balances (1 of 2)
Normal Balances (2 of 2)
• Increases in shareholders’ equity:

• Decreases in shareholders’ equity:

Expanded Accounting Equation
Step 2 of Accounting Cycle: Journalize
Transactions
• An accounting record is where the transactions are
recorded in chronological order
• General journal is most common
• Other journals can include:
o Cash receipts
o Cash disbursements
o Sales
o Purchases
• Entering transaction data is known as journalizing
Step 3 of Accounting Cycle: Post to Ledger
Accounts
• The general ledger contains all the asset, liability, and
shareholders’ equity, dividends declared, revenue and
expense accounts
• Each account has a number so it is easier to identify
• Posting is the process of transferring journal entries
from the general journal to the general ledger accounts
• List of all accounts maintained by a company is called
a chart of accounts
Step 4 of Accounting Cycle: Trial Balance

• List of the general ledger accounts and their balances at a

specific time – usually the end of an accounting period
• Serves to prove that debits equal credits after posting:
o Sum of debits = sum of credits
• Aids in the preparation of financial statements
• Subject to limitations
o Does not prove that the general ledger is correct
o Examples: missing transactions, incorrect account(s),
duplicate postings
Trial Balance - Example
Summary of the Accounting Cycle
Chapter 3
1. Analyze transactions
2. Journalize the transactions
3. Post to the ledger accounts
4. Prepare a trial balance
Chapter 4 (next chapter)
5. Journalize and post adjusting entries
6. Prepare an adjusted trial balance
7. Prepare financial statements
8. Journalize and post closing entries
9. Prepare a post-closing trial balance