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Financial Accounting:
Tools for Business Decision Making, 4th Ed.
Kimmel, Weygandt, Kieso
CHAPTER 3
Prepared by Ellen L. Sweatt Georgia Perimeter College
1 Chapter 3
THE ACCOUNTING INFORMATION SYSTEM
2 Chapter 3 The Accounting Information System
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.
3 Chapter 3 The Accounting Information System
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. Explain the purposes of a trial balance.
4 Transaction Analysis Transaction Analysis: the process of identifying the specific effects of economic events on the accounting equation.
Each transaction has a dual (double-sided)
effect on the accounting equation.
5 The Accounting Information System
The system of:
•collecting and processing transaction data and •communicating financial information to decision makers.
6 1 11
Accounting Transactions... are economic events that must be recorded in the financial statements because they affect assets, liabilities
and/or stockholders’ equity.
7 Accounting Transactions...
8 Transaction Analysis Transaction Analysis determines the impact of the transaction on the accounting equation. • Assets • Liabilities • Stockholders’ Equity
9 Accounting Analysis...
Analyze the effect of business
transactions on the basic accounting equation: Assets = Liabilities + Stockholders’ Equity
Must always balance. 10
Transaction Analysis If an individual asset is increased, there must be a corresponding: Decrease in another asset, or
Increase in a specific liability, or
Increase in stockholders’ equity
11 Transaction Analysis Two or more items can be affected Example: purchase computer for $10,000 by paying $6,000 in cash and signing a note for $4,000
12 Let’s Practice!
Let’s practice transaction analysis
with Sierra Corporation. . .
13 Event 1 – Investment of Cash by Stockholders Oct. 1 - Owner invested $10,000 Cash in business in exchange for $10,000 of Sierra Corporation Common Stock
14 Event 2 – Note Issued in Exchange for Cash Oct. 1 – Sierra issued a 3-month, 12%, $5,000 Note Payable to Castle Bank in exchange for cash.
15 Event 3 – Purchase of Office Equipment for Cash Oct. 2 – Sierra acquired office equipment by paying $5,000 cash to Superior Sales Co.
16 Event 4 – Receipt of Cash in Advance from Customer Oct. 2 – Sierra received a $1,200 cash advance from R. Knox, a client.
17 Event 5 – Services Rendered for Cash Oct. 3 – Sierra received $10,000 in cash from Copa Co. for advertising services performed
18 Event 5 – Services Rendered, WHAT IF these were performed “on account”?
Later, when $10,000 is collected from customer…
19 Event 6 – Payment of Rent Oct. 3 – Sierra paid its office rent for the month of October in cash, $900.
20 Event 7 – Purchase of Insurance Policy with Cash Oct. 4 – Sierra paid $600 for a one-year insurance policy that will expire next year on Sept. 30.
21 Event 8 – Purchase of Supplies on Credit Oct. 5 – Sierra purchases a three-month supply of advertising materials on account from Aero Supply for $2,500.
22 Event 9 – Hiring of New Employees Oct. 9 – Sierra hired four new employees to begin work on Oct. 15.
Accounting transaction has
NOT occurred!
23 Event 10 – Payment of Dividend Oct. 20 – Sierra paid a $500 dividend.
24 Event 11 – Payment of Cash for Employee Salaries Oct. 26 – Paid employees working two weeks, who have earned $4,000 in salaries.
25 Summary of Transactions
Assets = Liabilities + Equity
26 2 11
The Account...
An individual accounting record of
increases and decreases in a specific Asset, Liability, or Stockholders’ Equity item.
27 The Account
Three parts : 1) the Title of the account 2) a left or Debit side 3) a right or Credit side
28 3 11
Debits and Credits
•Debit means left • thus, entry on left side is debiting • Credit means right • thus, entry on right side is crediting •Normal balance is the side the increase happens on. 29 Examples
30 Total the Entries to Each Side
TITLE Debit Credit Total Debits Total Credits
If the greater sum is on the left,
the account has a Debit Balance
31 Total the Entries to Each Side
TITLE Debit Credit Total Debits Total Credits
If the greater sum is on the right,
the account has a Credit Balance
32 Whichever side you increase is the normal balance!
33 Normal Balances for Assets and Liabilities
34 Normal Balances for Stockholders’ Equity
35 Normal Balances for Expenses and Revenues
36 Expansion of Basic Equation
37 Review What is the normal balance for the following accounts? Cash Debit Accounts Payable Credit Accounts Receivable Debit Service Revenue Credit Common Stock Credit Salaries Expense Debit 38 Review What is the normal balance for the following accounts? Dividends Debit Building Debit Taxes Payable Credit Unearned Revenus Credit Prepaid Insurance Debit Rent Expense Debit 39 4 11 Basic Steps in the Recording Process. 1.Analyze 2.Journalize 3.Post
40 5 11
Recording Process Step 1
Analyze each transaction
and effect on accounts
41 The Journal...
is an accounting record where the
transactions are recorded in chronological order.
42 Recording Process Step 2
Enter transaction information in a
journal, a process called journalizing 43 Recording Process Step 3
Transfer (post) the journal information to
the appropriate accounts in the ledger 44 GENERAL JOURNAL
Date Account Titles and Explanations Debit Credit
2007 Oct. 1 Cash 10,000 Common Stock 10,000 (Invested cash in business) 1 Cash 5,000 Notes Payable 5,000 (Issued 3-month, 12% note payable for cash) 2 Office Equipment 5,000 Cash 5,000 (Purchased office equipment for cash) Let’s Review Using Sierra’s Transactions Cash Common Stock
10,000 10,000 What is the normal balance for the following accounts?
Oct. 1 - Owner invested $10,000 Cash in
business in exchange for $10,000 of Sierra Corporation Common Stock 52 46 Let’s Review Using Sierra’s Transactions Cash Note Payable
5,000 5,000
Oct. 1 – Sierra issued a 3-month, 12%,
$5,000 Note Payable to Castle Bank.
52 47 Let’s Review Using Sierra’s Transactions Office Equipment Cash
5,000 10,000 5,000
5,000
Oct. 2 – Sierra acquired office equipment by
paying $5,000 cash to Superior Sales Co.
52 48 6 11
The General Ledger
6
•the entire group of accounts
maintained by a company •contains all the asset, liability, and stockholders’ equity accounts
49 Chart of Accounts... is a list of a company’s accounts.
50 The General Ledger 51 The General Ledger 52 The Ledger
The entries from the journal are
posted to the ledger,usually in summary form, except for the general journal.
53 7 11
Posting
Transferring information from the journals to the general ledger accounts
54 Posting Entries GENERAL JOURNAL Account Titles and Explanations 2007 Oct. 1 Cash 10,000 Common Stock 10,000 Account CASH Acct 1010 Date Balance ref debit credit debit credit
Account COMMON STOCK Acct 3010
Date Balance ref debit credit debit credit Posting Entries GENERAL JOURNAL Account Titles and Explanations 2007 Oct. 1 Cash 10,000 Common Stock 10,000 Account CASH Acct 1010 Date Balance ref debit credit debit credit Oct 1 gj 1 10,000 10,000 Account COMMON STOCK Acct 3010 Date Balance ref debit credit debit credit Oct 1 gj 1 10,000 10,000 Posting Entries GENERAL JOURNAL Account Titles and Explanations 2007 Oct. 1 Cash 10,000 Common Stock 10,000 Account CASH Acct 1010 Date Balance ref debit credit debit credit Oct 1 gj 1 10,000 10,000 Account COMMON STOCK Acct 3010 Date Balance ref debit credit debit credit Oct 1 gj 1 10,000 10,000 8 11
Trial Balance A list of all the accounts and their balances at a given time.
It serves to prove the
mathematical equality of debits and credits after posting.
