C3 The Accounting Information System

3
THE ACCOUNTING INFORMATION SYSTEM
3-1
Accounting, Fourth Edition
Study Objectives
1. 2. 3. 4. Analyze the effect of business transactions on the basic accounting equation. Explain what an account is and how it helps in the recording process. Define debits and credits and explain how they are used to record business transactions. Identify the basic steps in the recording process.
5.
6. 7.
Explain what a journal is and how it helps in the recording process.

Explain what a ledger is and how it helps in the recording process. Explain what posting is and how it helps in the recording process.
8.
9.
3-2
Explain the purposes of a trial balance.

Classify cash activities as operating, investing, or financing.
The Accounting Information System
Accounting Transactions
The Account
Steps in the Recording Process

The journal
The Recording Process Illustrated

Summary illustration of journalizing and posting
The Trial Balance
Analyzing transactions Summary of transactions
Debits and credits Debit and credit procedures Stockholders equity relationships Summary of debit/credit rules
The ledger
Chart of accounts Posting
Limitations of a trial balance
3-3
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.

3-4
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.
3-5
Question: Are the following events recorded in the
accounting records? Event
Purchase computer. Discuss guided trip options with potential customer.
Illustration 3-1
Pay rent.
Criterion
Is the financial position (assets, liabilities, or stockholders equity) of the company changed?
Record/ Dont Record
3-6
Analyzing Transactions
The process of identifying the specific effects of economic events on the accounting equation.
Basic Accounting Equation

Assets Liabilities
Stockholders Equity
3-7
SO 1 Analyze the effect of business transactions on the basic accounting equation.
Analyzing Transactions
Illustration 3-2 Expanded accounting equation
3-8
Illustration: 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
3-9
2. On October 1, Sierra borrowed $5,000 from Castle Bank by signing a 3-month, 12%, $5,000 note payable.
1. +10,000 2. +5,000 +5,000
+10,000
3-10
3. On October 2, Sierra purchased equipment by paying $5,000 cash to Superior Equipment Sales Co.
1. +10,000 2. +5,000 3. -5,000 +5,000 +5,000
+10,000
3-11
4. On October 2, Sierra received a $1,200 cash advance from R. Knox, a client.
1. +10,000 2. +5,000 3. -5,000 4. +1,200 +5,000 +5,000 +1,200
+10,000
3-12
5. On October 3, Sierra received $10,000 in cash from Copa Company for guide services performed.
1. +10,000 2. +5,000 3. -5,000 4. +1,200 5. +10,000 +5,000 +5,000 +1,200
+10,000
+10,000
3-13
6. On October 3, Sierra Corporation paid its office rent for the month of October in cash, $900.
1. +10,000 2. +5,000 3. -5,000 4. +1,200 5. +10,000 6. -900 +5,000 +5,000 +1,200
+10,000
+10,000 -900
3-14
7. On October 4, Sierra paid $600 for a one-year insurance policy that will expire next year on September 30.
1. +10,000 2. +5,000 3. -5,000 4. +1,200 5. +10,000 6. 7. -900 -600 +600 +5,000 +5,000 +1,200
+10,000
+10,000 -900
3-15
8. On October 5, Sierra purchased supplies on account from Aero Supply for $2,500.
1. +10,000 2. +5,000 3. -5,000 4. +1,200 5. +10,000 6. 7. 8. -900 -600 +2,500 +600 +2,500 +5,000 +5,000 +1,200
+10,000
+10,000 -900
3-16
10. On October 20, Sierra paid a $500 dividend.
1. +10,000 2. +5,000 3. -5,000 4. +1,200 5. +10,000 6. 7. 8. 10. -500 -900 -600 +2,500 +600 +2,500 +5,000 +5,000 +1,200
+10,000
+10,000 -900
-500
3-17
11. Employees have worked two weeks, earning $4,000 in salaries, which were paid on October 26.
1. +10,000 2. +5,000 3. -5,000 4. +1,200 5. +10,000 6. 7. 8. 10. -500 11. -4,000 -900 -600 +2,500 +600 +2,500 +5,000 +5,000 +1,200
+10,000
+10,000 -900
-500 -4,000
3-18
The Account
Account
Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item.
Debit = Left Credit = Right
An Account can be illustrated in a T-Account form.
Account Name
Debit / Dr. Credit / Cr.
3-19
SO 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.
3-20
SO 3 Define debits and credits and explain their use in recording business transactions.

If Debits are greater than Credits, the account will have a debit balance.
Account Name
Transaction #1
Transaction #3
$10,000
8,000
$3,000
Transaction #2
Balance
$15,000
3-21

If Credits are greater than Debits, the account will have a credit balance.
Account Name
Transaction #1
$10,000
$3,000
8,000
Transaction #2
Transaction #3
Balance
$1,000
3-22
Dr./Cr. Procedures for Assets and Liabilities

Assets
Assets - Debits should exceed credits. Liabilities Credits should exceed debits. The normal balance is on the increase side.
Normal Balance
Chapter 3-23
Liabilities
Normal Balance
Chapter 3-24
3-23
Dr./Cr. Procedures for Stockholders Equity

Stockholders Equity
Owners investments and revenues increase stockholders equity (credit). Dividends and expenses decrease stockholders equity (debit).
Normal Balance
Chapter 3-25
Common Stock
Retained Earnings
Dividends
Normal Balance
Normal Balance
Normal Balance
Chapter 3-25
Chapter 3-25
Chapter 3-23
3-24
Dr./Cr. Procedures for Revenue and Expense

Revenue
The purpose of earning revenues is to benefit the stockholders. The effect of debits and credits on revenue accounts is the same as their effect on stockholders equity. Expenses have the opposite effect: expenses decrease stockholders equity.
Normal Balance
Chapter 3-26
Expense
Normal Balance
Chapter 3-27
3-25
Stockholders Equity Relationships

Illustration 3-15
3-26
Summary of Debit/Credit Rules

Liabilities
Normal Balance Debit

Assets
Normal Balance Credit

Chapter 3-24
Debit / Dr.
Credit / Cr.
Normal Balance
Stockholders Equity
Normal Balance
Normal Balance
Chapter 3-23
Expense
Chapter 3-25
Revenue
Normal Balance
Normal Balance
Chapter 3-27
Chapter 3-26
3-27

Balance Sheet
Asset = Liability + Equity
Income Statement
Revenue - Expense =
Debit
Credit
3-28

Relationship among the assets, liabilities and stockholders equity of a business:
Illustration 3-16
Basic Equation Expanded Basic Equation
Assets = Liabilities +
Stockholders Equity
The equation must be in balance after every transaction. For every Debit there must be a Credit.
3-29
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.
3-30
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.
3-31
3-32

Illustration 3-17
Analyze each transaction
Enter transaction in a journal
Transfer journal information to ledger accounts
Source documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction.
3-33
SO 4 Identify the basic 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.
3-34
SO 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 office equipment for $5,000. Instructions - Journalize these transactions.
3-35
Journalizing
Oct. 1 Sierra issued common stock in exchange for $10,000 cash.
General Journal
Date Oct. 1 Account Title Ref. Debit Credit
Cash Common stock
10,000
10,000
3-36
Journalizing
Oct. 1 Sierra borrowed $5,000 by signing a note.
General Journal
Cash Notes payable
5,000 5,000
3-37
Journalizing
Oct. 2 Sierra purchased equipment for $5,000.
General Journal
Equipment Cash
5,000 5,000
3-38

The Ledger contains the entire group of accounts
maintained by a company.
Illustration 3-19
3-39
SO 6 Explain what a ledger is and how it helps in the recording process.

Chart of Accounts listing of accounts used by a
company to record transactions.
3-40
SO 6 Explain what a ledger is and how it helps in the recording process.

Posting the process of transferring amounts from the
journal to the ledger accounts.
General Journal
Date Oct. 1 Account Title Cash Common stock Ref.
101
J1
Debit 10,000
Credit 10,000
General Ledger
Cash
Date
Oct. 1
Acct. No. 101

Debit
10,000
Explanation
Owner investment
Ref.
J1
Credit
Balance
10,000
3-41
SO 7
Steps in the Recording Process Review Question

Posting:
a. normally occurs before journalizing. b. transfers ledger transaction data to the journal. c. is an optional step in the recording process. d. transfers journal entries to ledger accounts.
3-42
SO 7 Explain what posting is and how it helps in the recording process.

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
3-43

Illustration 3-22
3-44

Illustration 3-23
3-45

Additional Transactions
Illustration 3-24
3-46

Illustration 3-25
3-47

Illustration 3-26
3-48

Illustration 3-27
3-49

Illustration 3-28
3-50

Illustration 3-29
3-51

Illustration 3-30
3-52

Illustration 3-31
3-53
SO 7
Summary Illustration of Journalizing

Illustration 3-32
3-54
Summary Illustration of Journalizing

Illustration 3-32
3-55
Summary Illustration of Posting
Illustration 3-33
3-56
The Trial Balance

A list of accounts and their balances at a given time. Purpose is to prove that debits equal credits.
Illustration 3-34
3-57
The Trial Balance

Limitations of a Trial Balance
The trial balance may balance even when
1. a transaction is not journalized, 2. a correct journal entry is not posted,
3. a journal entry is posted twice,

4. incorrect accounts are used in journalizing or posting, or 5. offsetting errors are made in recording the amount of a
transaction.
3-58
SO 8 Explain the purposes of a trial balance.
The Trial Balance Review Question

A trial balance will not balance if:
a. b. c. a correct journal entry is posted twice. the purchase of supplies on account is debited to Supplies and credited to Cash. 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.
3-59
SO 8 Explain the purposes of a trial balance.

C3 The Accounting Information System

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3

THE ACCOUNTING INFORMATION SYSTEM

Accounting, Fourth Edition

Explain what a journal is and how it helps in the recording process.

Explain the purposes of a trial balance.

The Accounting Information System

Steps in the Recording Process

The Recording Process Illustrated

The Trial Balance

Analyzing transactions Summary of transactions

Limitations of a trial balance

The Accounting Information System

Most businesses use computerized accounting (EDP) systems.

Not all activities represent transactions.

Record/ Dont Record

Basic Accounting Equation

SO 1 Analyze the effect of business transactions on the basic accounting equation.

SO 1 Analyze the effect of business transactions on the basic accounting equation.

SO 1 Analyze the effect of business transactions on the basic accounting equation.

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

SO 1 Analyze the effect of business transactions on the basic accounting equation.

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

SO 1 Analyze the effect of business transactions on the basic accounting equation.

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

SO 1 Analyze the effect of business transactions on the basic accounting equation.

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

SO 1 Analyze the effect of business transactions on the basic accounting equation.

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

SO 1 Analyze the effect of business transactions on the basic accounting equation.

SO 1 Analyze the effect of business transactions on the basic accounting equation.

SO 1 Analyze the effect of business transactions on the basic accounting equation.

SO 1 Analyze the effect of business transactions on the basic accounting equation.

An Account can be illustrated in a T-Account form.

SO 2 Explain what an account is and how it helps in the recording process.

Recording done by debiting at least one account and

DEBITS must equal CREDITS.

Debit and Credit Procedures

Debit and Credit Procedures

Dr./Cr. Procedures for Assets and Liabilities

Dr./Cr. Procedures for Stockholders Equity

Dr./Cr. Procedures for Revenue and Expense

Stockholders Equity Relationships

Summary of Debit/Credit Rules

Normal Balance Debit

Normal Balance Credit

Summary of Debit/Credit Rules

Summary of Debit/Credit Rules

Basic Equation Expanded Basic Equation

Summary of Debit/Credit Rules Review Question

Summary of Debit/Credit Rules Review Question

Steps in the Recording Process

Analyze each transaction

Enter transaction in a journal

Transfer journal information to ledger accounts

SO 4 Identify the basic steps in the recording process.

Steps in the Recording Process

Book of original entry.

3. Helps to prevent or locate errors because the debit

SO 5 Explain what a journal is and how it helps in the recording process.

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

SO 5 Explain what a journal is and how it helps in the recording process.

Cash Common stock