Transaction 3

3-1
3
THE ACCOUNTING
INFORMATION SYSTEM
3-2
Financial Accounting, Sixth Edition
Study
Study Objectives
Objectives
1. Analyze the effect of business transactions on the basic accounting
equation.
2. Explain what an account is and how it helps in the recording process.
3. Define debits and credits and explain how they are used to record
business transactions.
4. Identify the basic steps in the recording process.
5. Explain what a journal is and how it helps in the recording process.
6. Explain what a ledger is and how it helps in the recording process.
7. Explain what posting is and how it helps in the recording process.
8. Explain the purposes of a trial balance.
9. Classify cash activities as operating, investing, or financing.
3-3
The
The Accounting
Accounting Information
Information System
System
The
Steps in the
Accounting Recording The Trial
The Account Recording
Transactions Process Balance
Process
Illustrated
Analyzing Debits and The journal Summary Limitations of

transactions credits The ledger illustration of a trial balance
Summary of Debit and journalizing and
Chart of
transactions credit posting
accounts
procedures
Posting
Stockholders’
equity
relationships
Summary of
debit/credit
rules
3-4
The
The Accounting
Accounting Information
Information System
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.
3-5
Accounting
Accounting Transactions
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.
3-6
Accounting
Transactions
Question: Are the following events recorded in the

accounting records?
Discuss Illustration 3-1
guided trip
Purchase
Event options with Pay rent.
computer.
potential
customer.
Criterion Is the financial position (assets, liabilities, or

stockholders’ equity) of the company changed?
Record/ Don’t
Record
3-7
Accounting
Transactions
Analyzing Transactions
The process of identifying the specific effects of economic
events on the accounting equation.
Basic Accounting Equation
Stockholders’
Assets = Liabilities +
Equity
3-8 SO 1 Analyze the effect of business transactions on the basic accounting equation.
Accounting
Transactions
Analyzing Transactions
Illustration 3-2
Expanded accounting equation
Accounting
Transactions
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
Accounting
Transactions
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
Accounting
Transactions
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
Accounting
Transactions
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
Accounting
Transactions
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
Accounting
Transactions
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
Accounting
Transactions
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
Accounting
Transactions
8. On October 5, Sierra purchased 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
Accounting
Transactions
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
Accounting
Transactions
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
3-19
3-20
The
The Account
Account
Record of increases and decreases in
Account a specific asset, liability, equity,
revenue, or expense item.
Debit = “Left”
Credit = “Right”
An Account can Account Name

be illustrated in a Debit / Dr. Credit / Cr.
T-Account form.
3-21 SO 2 Explain what an account is and how it helps in the recording process.
The
The Account
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.
3-22 SO 3 Define debits and credits and explain their use in recording business transactions.
Debit
Debit and
and Credit
Credit Procedures
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
Debit
Debit and
and Credit
Credit Procedures
Procedures
If Credits are greater than Debits, the account will

have a credit balance.
Account Name
Transaction #1 $10,000 $3,000 Transaction #2

8,000 Transaction #3
Balance $1,000
Dr./Cr.
Dr./Cr. Procedures
Procedures for
for Assets
Assets and
and Liabilities
Liabilities
Assets
 Assets - Debits should
exceed credits.
Normal Balance
Chapter
3-23
 Liabilities – Credits should
exceed debits.
Liabilities
Debit / Dr. Credit / Cr.  The normal balance is on
the increase side.
Normal Balance
Chapter
3-24
Dr./Cr.
Dr./Cr. Procedures
Procedures for
for Stockholders’
Stockholders’ Equity
Equity
Stockholders’ Equity  Owner’s investments and

Credit / Cr.
Debit / Dr.
revenues increase stockholders’
equity (credit).
Normal Balance  Dividends and expenses decrease
Chapter
3-25
stockholder’s equity (debit).
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
Dr./Cr.
Dr./Cr. Procedures
Procedures for
for Revenue
Revenue and
and Expense
Expense
Revenue  The purpose of earning

revenues is to benefit the
stockholders.
Normal Balance
Chapter
 The effect of debits and credits
3-26
on revenue accounts is the

Expense
same as their effect on
Debit / Dr. Credit / Cr. stockholders’ equity.
 Expenses have the opposite

Normal Balance
effect: expenses decrease
Chapter
3-27
stockholders’ equity.
Stockholders’
Equity Relationships
Relationships
Illustration 3-15
3-28
SO 3 Define debits and credits and explain their use in recording business transactions.
Summary
Summary of
of Debit/Credit
Debit/Credit Rules
Rules
Liabilities
Normal
Normal Normal
Normal
Balance
Balance Balance
Balance
Debit
Debit Credit
Credit Normal Balance
Assets Chapter
Stockholders’
3-24

Normal Balance
Normal Balance
Chapter
Expense
3-23
Revenue
Chapter
3-25

Normal Balance
Normal Balance
Chapter
3-27 Chapter
3-26
Summary
Summary of
of Debit/Credit
Debit/Credit Rules
Rules
Balance Sheet Income Statement
Asset = Liability + Equity Revenue - Expense =
Debit
Credit
Summary
Summary of
of Debit/Credit
Debit/Credit Rules
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.
Summary
Summary of
of Debit/Credit
Debit/Credit Rules
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.
Summary
Summary of
of Debit/Credit
Debit/Credit Rules
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.
3-34
Steps
Steps in
in the
the Recording
Recording Process
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.
3-35 SO 4 Identify the basic steps in the recording process.

Steps
Steps in
in the
the Recording
Recording Process
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.
3-36 SO 5 Explain what a journal is and how it helps in the recording process.
The
The Journal
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.
Journalizing
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
Journalizing
Journalizing
Oct. 1 Sierra borrowed $5,000 by signing a note.
General Journal
Oct. 1 Cash 5,000
Notes payable 5,000
Journalizing
Journalizing
Oct. 2 Sierra purchased equipment for $5,000.
General Journal
Oct. 2 Equipment 5,000
Cash 5,000
3-41
Steps
Steps in
in the
the Recording
Recording Process
Process
The Ledger contains the entire group of accounts

maintained by a company.
Illustration 3-19
3-42 SO 6 Explain what a ledger is and how it helps in the recording process.
Steps
Steps in
in the
the Recording
Recording Process
Process
Chart of Accounts – listing of accounts used by a

company to record transactions.
3-43 SO 6 Explain what a ledger is and how it helps in the recording process.
Steps
Steps in
in the
the Recording
Recording Process
Process
Posting – the process of transferring amounts from the
journal to the ledger accounts.
General Journal J1
Oct. 1 Cash 101 10,000
Common stock 10,000
General Ledger
Cash Acct. No. 101
Date Explanation Ref. Debit Credit Balance
Oct. 1 Owner investment J1 10,000 10,000
3-44 SO 7
Steps
Steps in
in the
the Recording
Recording Process
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.
3-45 SO 7 Explain what posting is and how it helps in the recording process.
The
The Recording
Recording Process
Process Illustrated
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
The
The Recording
Recording Process
Process Illustrated
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
3-47
SO 7 Explain what posting is and how it helps in the recording process.
The
The Recording
Recording Process
Process Illustrated
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
3-48
SO 7 Explain what posting is and how it helps in the recording process.
The
The
Recording
Recording
Process
Process
Illustrated
Illustrated
Additional
Transactions
Illustration 3-24
The
The
Recording
Recording
Process
Process
Illustrated
Illustrated
Additional
Transactions
Illustration 3-25
The
The
Recording
Recording
Process
Process
Illustrated
Illustrated
Additional
Transactions
Illustration 3-26
The
The
Recording
Recording
Process
Process
Illustrated
Illustrated
Additional
Transactions
Illustration 3-27
3-52
The
The
Recording
Recording
Process
Process
Illustrated
Illustrated
Additional
Transactions
Illustration 3-28
The
The Recording
Recording Process
Process Illustrated
Illustrated
Additional Transactions
Illustration 3-29
The
The
Recording
Recording
Process
Process
Illustrated
Illustrated
Additional
Transactions
Illustration 3-30
The
The
Recording
Recording
Process
Process
Illustrated
Illustrated
Additional
Transactions
Illustration 3-31
3-56
SO 7
Summary
Summary Illustration
Illustration of
of Journalizing
Journalizing
Illustration 3-32
Summary
Summary Illustration
Illustration of
of Journalizing
Journalizing
Illustration 3-32
Summary
Summary
Illustration
Illustration
of
of Posting
Posting
Illustration 3-33
The
The Trial
Trial Balance
Balance
 A list of accounts and their balances at a given time.
 Purpose is to prove that debits equal credits.
Illustration 3-34
3-60
The
The Trial
Trial Balance
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.
3-61 SO 8 Explain the purposes of a trial balance.

The
The Trial
Trial Balance
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.
3-62 SO 8 Explain the purposes of a trial balance.

Key Points
 Transaction analysis is the same under IFRS and GAAP
however different standards sometimes impact how
transactions are recorded.
 European companies rely less on historical cost and more
on fair value than U.S. companies. The double-entry
system is the basis of accounting systems worldwide.
 Both the IASB and FASB go beyond the basic definitions
provided in this textbook for the key elements of financial
statements, that is, assets, liabilities, equity, revenues, and
expenses.
3-63
Key Points
 A trial balance under IFRS follows the same format as
shown in the textbook.
 As shown in the textbook, dollars signs are typically used
only in the trial balance and the financial statements. The
same practice is followed under IFRS, using the currency
of the country that the reporting company is
headquartered.
3-64
Key Points
 In deciding whether the United States should adopt IFRS,
some of the issues the SEC said should be considered
are:
► Whether IFRS is sufficiently developed and consistent
in application.
► Whether the IASB is sufficiently independent.
► Whether IFRS is established for the benefit of
investors.
3-65
Key Points
 Some of the issues the SEC said should be considered are:
► The issues involved in educating investors about IFRS.
► The impact of a switch to IFRS on U.S. laws and
regulations.
► The impact on companies including changes to their
accounting systems, contractual arrangements,
corporate governance, and litigation.
► The issues involved in educating accountants, so they
can prepare statements under IFRS.
3-66
Looking into the Future
The basic recording process shown in this textbook is followed
by companies across the globe. It is unlikely to change in the
future. The definitional structure of assets, liabilities, equity,
revenues, and expenses may change over time as the IASB and
FASB evaluate their overall conceptual framework for
establishing accounting standards.
3-67
Which statement is correct regarding IFRS?
a) IFRS reverses the rules of debits and credits, that is,

debits are on the right and credits are on the left.
b) IFRS uses the same process for recording transactions

as GAAP.
c) The chart of accounts under IFRS is different because

revenues follow assets.
d) None of the above statements are correct.
3-68
A trial balance:
a) is the same under IFRS and GAAP.
b) proves that transactions are recorded correctly.
c) proves that all transactions have been recorded.
d) will not balance if a correct journal entry is posted

twice.
3-69
One difference between IFRS and GAAP is that:
a) GAAP uses accrual-accounting concepts and IFRS

uses primarily the cash basis of accounting.
b) IFRS uses a different posting process than GAAP.
c) IFRS uses more fair value measurements than GAAP.
d) the limitations of a trial balance are different between

IFRS and GAAP.
3-70
Copyright
Copyright
Copyright © 2011 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
3-71

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3-1

Analyzing Debits and The journal Summary Limitations of

Accounting Information System

Most businesses use computerized accounting (EDP)

Transactions are economic events that require

Question: Are the following events recorded in the

Criterion Is the financial position (assets, liabilities, or

Basic Accounting Equation

An Account can Account Name

Debit and Credit Procedures

► Recording done by debiting at least one account and

► DEBITS must equal CREDITS.

If Debits are greater than Credits, the account will

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

If Credits are greater than Debits, the account will

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

Stockholders’ Equity  Owner’s investments and

Common Stock Retained Earnings Dividends

Normal Balance Normal Balance Normal Balance

Chapter Chapter Chapter

Revenue  The purpose of earning

on revenue accounts is the

 Expenses have the opposite

Debit / Dr. Credit / Cr.

Debit / Dr. Credit / Cr.

The equation must be in balance after every transaction.

b. decrease both assets and liabilities.

c. increase assets and decrease liabilities.

d. decrease assets and increase liabilities.

Accounts that normally have debit balances are:

b. assets, expenses, and equity.

c. assets, liabilities, and dividends.

d. assets, dividends, and expenses.

Transfer journal information to

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

3-35 SO 4 Identify the basic steps in the recording process.

2. Provides a chronological record of transactions.

Journalizing - Entering transaction data in the journal.

Illustration: Presented below is information related to Sierra

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

Instructions - Journalize these transactions.

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

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

The Ledger contains the entire group of accounts

Chart of Accounts – listing of accounts used by a

b. transfers ledger transaction data to the journal.

c. is an optional step in the recording process.

d. transfers journal entries to ledger accounts.

The trial balance may balance even when

3-61 SO 8 Explain the purposes of a trial balance.

3-62 SO 8 Explain the purposes of a trial balance.

a) IFRS reverses the rules of debits and credits, that is,

b) IFRS uses the same process for recording transactions

c) The chart of accounts under IFRS is different because

d) None of the above statements are correct.

a) is the same under IFRS and GAAP.

b) proves that transactions are recorded correctly.

c) proves that all transactions have been recorded.

d) will not balance if a correct journal entry is posted

a) GAAP uses accrual-accounting concepts and IFRS

b) IFRS uses a different posting process than GAAP.

c) IFRS uses more fair value measurements than GAAP.

d) the limitations of a trial balance are different between