Chapter 3

Report
3-1
3
THE ACCOUNTING
INFORMATION SYSTEM
3-2
Financial Accounting, Sixth Edition
Study Objectives
3-3
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.
The Accounting Information System
Accounting
Transactions
The Account
Steps in the
Recording
Process
Analyzing
transactions
Debits and
credits
The journal
Summary of
transactions
Debit and
credit
procedures
Chart of
accounts
Stockholders’
equity
relationships
Summary of
debit/credit
rules
3-4
The ledger
Posting
The
Recording
Process
Illustrated
Summary
illustration of
journalizing and
posting
The Trial
Balance
Limitations of
a trial balance
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.
3-5
Accounting Transactions
Transactions are economic events that require
recording in the financial statements.
3-6

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.
Accounting Transactions
Question: Are the following events recorded in the
accounting records?
Event
Criterion
Record/ Don’t
Record
3-7
Purchase
computer.
Discuss
guided trip
options with
potential
customer.
Illustration 3-1
Pay rent.
Is the financial position (assets, liabilities, or
stockholders’ equity) of the company changed?
Accounting Transactions
Analyzing Transactions
The process of identifying the specific effects of economic
events on the accounting equation.
Basic Accounting Equation
Assets
3-8
=
Liabilities
+
Stockholders’
Equity
SO 1 Analyze the effect of business transactions on the basic accounting equation.
Accounting Transactions
Analyzing Transactions
Illustration 3-2
Expanded accounting equation
3-9
SO 1 Analyze the effect of business transactions on the basic 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
3-10
+10,000
SO 1 Analyze the effect of business transactions on the basic accounting equation.
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
2. +5,000
3-11
+10,000
+5,000
SO 1 Analyze the effect of business transactions on the basic accounting equation.
Accounting Transactions
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
3-12
+10,000
+5,000
+5,000
SO 1 Analyze the effect of business transactions on the basic accounting equation.
Accounting Transactions
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
3-13
+10,000
+5,000
+5,000
+1,200
SO 1 Analyze the effect of business transactions on the basic accounting equation.
Accounting Transactions
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
3-14
+10,000
+5,000
+5,000
+1,200
+10,000
SO 1 Analyze the effect of business transactions on the basic accounting equation.
Accounting Transactions
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.
3-15
-900
+10,000
+5,000
+5,000
+1,200
+10,000
-900
SO 1 Analyze the effect of business transactions on the basic accounting equation.
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
3. -5,000
+5,000
+5,000
4. +1,200
+1,200
5. +10,000
6.
-900
7.
-600
3-16
+10,000
-900
+600
SO 1 Analyze the effect of business transactions on the basic accounting equation.
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
3. -5,000
+5,000
+5,000
4. +1,200
+1,200
5. +10,000
6.
-900
7.
-600
8.
3-17
+10,000
-900
+600
+2,500
+2,500
SO 1 Analyze the effect of business transactions on the basic accounting equation.
Accounting Transactions
10. On October 20, Sierra paid a $500 dividend.
1. +10,000
+10,000
2. +5,000
3. -5,000
+5,000
+5,000
4. +1,200
+1,200
5. +10,000
6.
-900
7.
-600
8.
10.
3-18
+10,000
-900
+600
+2,500
-500
+2,500
-500
SO 1 Analyze the effect of business transactions on the basic accounting equation.
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
3. -5,000
+5,000
+5,000
4. +1,200
+1,200
5. +10,000
6.
-900
7.
-600
8.
10. -500
11. -4,000
3-19
+10,000
-900
+600
+2,500
+2,500
-500
-4,000
3-20
The Account
Record of increases and decreases in
a specific asset, liability, equity,
revenue, or expense item.
Account
Debit = “Left”
Credit = “Right”
An Account can
be illustrated in a
T-Account form.
3-21
Account Name
Debit / Dr.
Credit / Cr.
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.
►
3-22
DEBITS must equal CREDITS.
SO 3 Define debits and credits and explain their use in recording business transactions.
Debit and Credit Procedures
If Debits are greater than Credits, the account will
have a debit balance.
Account N am e
D e b it / D r.
C re d it / C r.
Transaction #1
$10,000
$3,000
Transaction #3
8,000
Balance
3-23
Transaction #2
$15,000
SO 3 Define debits and credits and explain their use in recording business transactions.
Debit and Credit Procedures
If Credits are greater than Debits, the account will
have a credit balance.
Account N am e
Transaction #1
Balance
3-24
D e b it / D r.
C re d it / C r.
$10,000
$3,000
Transaction #2
8,000
Transaction #3
$1,000
SO 3 Define debits and credits and explain their use in recording business transactions.
Dr./Cr. Procedures for Assets and Liabilities
A sse ts
D e b it / D r.
C re d it / C r.

Assets - Debits should
exceed credits.

Liabilities – Credits should
exceed debits.

The normal balance is on
the increase side.
N o rm a l B a la n c e
C h a p te r
3 -2 3
L ia b ilit ie s
D e b it / D r.
C re d it / C r.
N o rm a l B a la n c e
C h a p te r
3 -2 4
3-25
SO 3 Define debits and credits and explain their use in recording business transactions.
Dr./Cr. Procedures for Stockholders’ Equity
Stockholders’ Equity
Debit / Dr.

Owner’s investments and
revenues increase stockholders’
equity (credit).

Dividends and expenses decrease
stockholder’s equity (debit).
Credit / Cr.
Normal Balance
Chapter
3-25
Common Stock
Debit / Dr.
Retained Earnings
Credit / Cr.
Debit / Dr.
Normal Balance
Chapter
3-25
3-26
Chapter
3-25
Dividends
Credit / Cr.
Debit / Dr.
Normal Balance
Normal Balance
Credit / Cr.
Chapter
3-23
SO 3 Define debits and credits and explain their use in recording business transactions.
Dr./Cr. Procedures for Revenue and Expense
R e ve n u e
D e b it / D r.

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.
C re d it / C r.
N o rm a l B a la n c e
C h a p te r
3 -2 6
E x p e n se
D e b it / D r.
N o rm a l B a la n c e
C h a p te r
3 -2 7
3-27
C re d it / C r.
SO 3 Define debits and credits and explain their use in recording business transactions.
Stockholders’ Equity Relationships
Illustration 3-15
3-28
SO 3 Define debits and credits and explain their use in recording business transactions.
Summary of Debit/Credit Rules
L ia b ilit ie s
Normal
Balance
Debit
A sse ts
C re d it / C r.
N o rm a l B a la n c e
C h a p te r
3 -2 4
Stockholders’ Equity
C re d it / C r.
D e b it / D r.
D e b it / D r.
Normal
Balance
Credit
Debit / Dr.
Credit / Cr.
N o rm a l B a la n c e
Normal Balance
C h a p te r
3 -2 3
E x p e n se
D e b it / D r.
R e ve n u e
Chapter
3-25
C re d it / C r.
D e b it / D r.
N o rm a l B a la n c e
C h a p te r
3 -2 7
3-29
C re d it / C r.
N o rm a l B a la n c e
C h a p te r
3 -2 6
SO 3 Define debits and credits and explain their use in recording business transactions.
Summary of Debit/Credit Rules
Balance Sheet
Asset = Liability + Equity
Income Statement
Revenue - Expense =
Debit
Credit
3-30
SO 3 Define debits and credits and explain their use in recording business transactions.
Summary of Debit/Credit Rules
Relationship among the assets, liabilities and
stockholders’ equity of a business:
Illustration 3-16
Basic
Equation
Assets = Liabilities +
Stockholders’ Equity
Expanded
Basic
Equation
The equation must be in balance after every transaction. For
every Debit there must be a Credit.
3-31
SO 3 Define debits and credits and explain their use in recording 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.
3-32
SO 3 Define debits and credits and explain their use in recording 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.
3-33
SO 3 Define debits and credits and explain their use in recording business transactions.
3-34
Steps in the Recording Process
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.
3-35
SO 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.
3-36
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.
3-37
SO 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
Oct. 1
3-38
Account Title
Cash
Common stock
Ref.
Debit
Credit
10,000
10,000
SO 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
Oct. 1
3-39
Account Title
Cash
Notes payable
Ref.
Debit
Credit
5,000
5,000
SO 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
Oct. 2
3-40
Account Title
Equipment
Cash
Ref.
Debit
Credit
5,000
5,000
SO 5 Explain what a journal is and how it helps in the recording process.
3-41
Steps in the Recording 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 in the Recording 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 in the Recording Process
Posting – the process of transferring amounts from the
journal to the ledger accounts.
General Journal
Date
Oct. 1
Account Title
J1
Ref.
Debit
101
10,000
Cash
Common stock
Credit
10,000
General Ledger
Cash
Date
Oct. 1
3-44
Acct. No. 101
Explanation
Ref.
Debit
Owner investment
J1
10,000
Credit
Balance
10,000
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.
3-45
SO 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 3-21
3-46
SO 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
3-47
SO 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
3-48
SO 7 Explain what posting is and how it helps in the recording process.
The
Recording
Process
Illustrated
Additional
Transactions
Illustration 3-24
3-49
SO 7 Explain what posting is and how it helps in the recording process.
The
Recording
Process
Illustrated
Additional
Transactions
Illustration 3-25
3-50
SO 7 Explain what posting is and how it helps in the recording process.
The
Recording
Process
Illustrated
Additional
Transactions
Illustration 3-26
3-51
SO 7 Explain what posting is and how it helps in the recording process.
The
Recording
Process
Illustrated
Additional
Transactions
Illustration 3-27
3-52
The
Recording
Process
Illustrated
Additional
Transactions
Illustration 3-28
3-53
SO 7 Explain what posting is and how it helps in the recording process.
The Recording Process Illustrated
Additional Transactions
Illustration 3-29
3-54
SO 7 Explain what posting is and how it helps in the recording process.
The
Recording
Process
Illustrated
Additional
Transactions
Illustration 3-30
3-55
SO 7 Explain what posting is and how it helps in the recording process.
The
Recording
Process
Illustrated
Additional
Transactions
Illustration 3-31
3-56
SO 7
Summary Illustration of Journalizing
Illustration 3-32
3-57
SO 7 Explain what posting is and how it helps in the recording process.
Summary Illustration of Journalizing
Illustration 3-32
3-58
SO 7 Explain what posting is and how it helps in the recording process.
Summary
Illustration
of Posting
Illustration 3-33
3-59
SO 7 Explain what posting is and how it helps in the recording process.
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
3-60
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.
3-61
SO 8 Explain the purposes of a trial balance.
The Trial Balance
Review Question
A trial balance will not balance if:
3-62
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.
SO 8 Explain the purposes of a trial balance.
Key Points
3-63

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.
Key Points
3-64

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.
Key Points

3-65
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.
Key Points

3-66
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.
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 © 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
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programs or from the use of the information contained herein.
3-71

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