C3 the Accounting Information System

8/13/2019 C3 the Accounting Information System

1/59

3-1

THE ACCOUNTINGINFORMATION SYSTEM

Accounting, Fourth Edition

3


2/59

3-2

1. Analyze the effect of business transactions on the basic accountingequation.

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.

Study Objectives


3/59

3-3

Debits andcreditsDebit andcreditproceduresStockholdersequityrelationshipsSummary ofdebit/creditrules

AccountingTransactions The Account

Steps in theRecording

Process

TheRecording

ProcessIllustrated

The TrialBalance

AnalyzingtransactionsSummary oftransactions

The journalThe ledgerChart ofaccountsPosting

Summaryillustration of

journalizing andposting

Limitations ofa trial balance

The Accounting Information System


4/59

3-4

The Accounting Information System

Accounting Information System

System of

collecting and

processing transaction data and

communicating financial information to decisionmakers.

Most businesses use computerized accounting (EDP)systems.


5/59

3-5

Transactions are economic events that requirerecording in the financial statements.

Not all activities represent transactions.

Assets, liabilities, or stockholders equity itemschange as a result of some economic event.

Dual effect on the accounting equation.

Accounting Transactions


6/59

3-6

Question: Are the following events recorded in theaccounting records?

EventPurchasecomputer.

Criterion Is the financial position (assets, liabilities, orstockholders equity) of the company changed?

Pay rent.

Record/ DontRecord


Discussguided trip

options withpotential

customer.

Illustration 3-1


7/59

3-7

Assets Liabilities Stockholders

Equity= +

Analyzing Transactions

SO 1 Analyze the effec t of bus iness t ransac t ions on the bas ic accou nt ing equat ion .

Basic Accounting Equation


The process of identifying the specific effects of economicevents on the accounting equation.


8/59

3-8

Analyzing Transactions



Illustration 3-2Expanded accounting equation


9/59

3-9

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



10/59

3-10

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



11/59

3-11

3. On October 2, Sierra purchased equipment by paying $5,000 cash

to Superior Equipment Sales Co.


3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000



12/59

3-12

4. On October 2, Sierra received a $1,200 cash advance from R.

Knox, a client.


4. +1,200 +1,200

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000



13/59

3-13

5. On October 3, Sierra received $10,000 in cash from Copa Company

for guide services performed.


4. +1,200 +1,200

5. +10,000 +10,000

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000



14/59

3-14

6. On October 3, Sierra Corporation paid its office rent for the month

of October in cash, $900.


4. +1,200 +1,200

5. +10,000 +10,000

6. -900 -900

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000



15/59

3-15

7. On October 4, Sierra paid $600 for a one-year insurance policy that

will expire next year on September 30.


4. +1,200 +1,200

5. +10,000 +10,000

6. -900 -900

7. -600 +600

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000



16/59

3-16

8. On October 5, Sierra purchased supplies on account from Aero

Supply for $2,500.


4. +1,200 +1,200

5. +10,000 +10,000

6. -900 -900

7. -600 +6008. +2,500 +2,500

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000



17/59

3-17

10. On October 20, Sierra paid a $500 dividend.


4. +1,200 +1,200

5. +10,000 +10,000

6. -900 -900

7. -600 +6008. +2,500 +2,500

10. -500 -500

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000



18/59

3-18

11. Employees have worked two weeks, earning $4,000 in salaries,

which were paid on October 26.


4. +1,200 +1,200

5. +10,000 +10,000

6. -900 -900

7. -600 +6008. +2,500 +2,500

10. -500 -50011. -4,000 -4,000

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000


19/59

3-19

Account Name

Debit / Dr. Credit / Cr.

Record of increases and decreases ina specific asset, liability, equity,revenue, or expense item.

Debit = Left

Credit = Right

Account

An Account canbe illustrated in aT-Account form.

SO 2 Expla in what an account i s and how i t he lps in the record ing process .

The Account


20/59

3-20

Double-entry system

Each transaction must affect two or more accounts tokeep the basic accounting equation in balance.

Recording done by debiting at least one account andcrediting another.

DEBITS must equal CREDITS .

SO 3 Define debi t s and credi t s and expla in the ir use in recording bu s iness t ransac t ions .

Debit and Credit Procedures

The Account


21/59

3-21

Account Name


If Debits are greater than Credits, the account willhave a debit balance.

$10,000 Transaction #2$3,000

$15,000

8,000Transaction #3

Balance

Transaction #1




22/59

3-22

Account Name

Debit / Dr. Credit / Cr.$10,000 Transaction #2$3,000

Balance

Transaction #1

$1,000

8,000 Transaction #3



If Credits are greater than Debits, the account willhave a credit balance.


23/59

3-23

Assets - Debits shouldexceed credits.

Liabilities Credits shouldexceed debits.

The normal balance is on

the increase side.

Dr./Cr. Procedures for Assets and Liabilities

Chapter3-23

AssetsAssetsDebit / Dr. Credit / Cr.

Normal BalanceNormal Balance

Chapter3-24

LiabilitiesLiabilitiesDebit / Dr. Credit / Cr.




24/59

3-24

Owners investments andrevenues increase stockholdersequity (credit).

Dividends and expenses decrease

stockholders equity (debit).

Dr./Cr. Procedures for Stockholders Equity

Chapter3-25



Common StockCommon Stock

Chapter3-23

DividendsDividendsDebit / Dr. Credit / Cr.


Chapter3-25



StockholdersStockholders

EquityEquity

Chapter3-25



Retained EarningsRetained Earnings



25/59

3-25

The purpose of earningrevenues is to benefit thestockholders.

The effect of debits and creditson revenue accounts is thesame as their effect onstockholders equity.

Expenses have the oppositeeffect: expenses decreasestockholders equity. Chapter3-27



ExpenseExpense

Chapter3-26



RevenueRevenue


Dr./Cr. Procedures for Revenue and Expense


26/59

3-26

Stockholders Equity Relationships

Illustration 3-15

SO 3 Define debi t s and credi t s and expla in the i r use in recording bu s iness t ransac t ions .


27/59

3-27

Chapter3-23

AssetsAssetsDebit / Dr. Credit / Cr.


Chapter3-27



ExpenseExpense

Chapter3-24

LiabilitiesLiabilitiesDebit / Dr. Credit / Cr.


Chapter3-25



StockholdersStockholders

EquityEquity

Chapter3-26



RevenueRevenue

Normal

BalanceCredit

Normal

BalanceDebit

Summary of Debit/Credit Rules



28/59


29/59

3-29


Relationship among the assets, liabilities andstockholders equity of a business:

The equation must be in balance after every transaction. Forevery Debit there must be a Credit .

Illustration 3-16

Assets Liabilities= Stockholders Equity BasicEquation

ExpandedBasicEquation

+



30/59

3-30

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.

Review Question




31/59

3-31

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.

Review Question




32/59

3-32


33/59

3-33

Source documents , such as a sales slip, a check, a bill,or a cash register tape, provide evidence of thetransaction.

Steps in the Recording Process

SO 4 Ident i fy the bas ic s teps in the recordin g pro cess .

Illustration 3-17

Analyze each transaction Enter transaction in a journal Transfer journal information toledger accounts


34/59


35/59

3-35

Journalizing - Entering transaction data in the journal.

Illustration: Presented below is information related to SierraCorporation.

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

Oct. 1

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

Sierra purchased office equipment for $5,000.2Instructions - Journalize these transactions.

The Journal

SO 5 Expla in what a journal i s and how i t he lps in the record ing pro cess .


36/59

3-36

Account Title Ref. Debit CreditOct. 1

Date

Journalizing

General Journal


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

CashCommon stock

10,00010,000


37/59

3-37

Account Title Ref. Debit Credit

Oct. 1

Date

Journalizing

General Journal


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

CashNotes payable

5,0005,000


38/59

3-38

Account Title Ref. Debit Credit

Oct. 2

Date

Journalizing

General Journal


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

EquipmentCash

5,0005,000


39/59

3-39

The Ledger contains the entire group of accountsmaintained by a company.

SO 6 Expla in what a ledger i s and how i t he lps in the record ing pro cess .

Illustration 3-19



40/59

3-40


SO 6 Expla in what a ledger i s and how i t he lps in the record ing pro cess .

Chart of Accounts listing of accounts used by acompany to record transactions.


41/59

3-41

Cash Acct. No. 101Date Explanation Ref. Debit Credit Balance

General Ledger

Date Account Title Ref. Debit CreditOct. 1 Cash 10,000

Common stock 10,000

General Journal

Oct. 1 Owner investment J1 10,000 10,000

101

J1


SO 7

Posting the process of transferring amounts from the journal to the ledger accounts.


42/59

3-42

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.

Review Question

SO 7 Expla in what pos t ing i s and how i t he lps in the record ing proc ess .



43/59

3-43

The Recording Process Illustrated

Follow these steps:

1. Determine whattype of account isinvolved.

2. Determine whatitems increased ordecreased and byhow much.

3. Translate the

increases anddecreases intodebits and credits.

Illustration 3-21



44/59

3-44



Follow these steps:



3. Translate the


Illustration 3-22


45/59

3-45



Follow these steps:



3. Translate the


Illustration 3-23


46/59

3-46 SO 7 Expla in what pos t ing i s and how i t he lps in the recordin g proc ess .

AdditionalTransactions

TheRecordingProcessIllustrated

Illustration 3-24


47/59




Illustration 3-25


48/59




Illustration 3-26


49/59

3-49



Illustration 3-27


50/59




Illustration 3-28


51/59



Additional TransactionsIllustration 3-29


52/59




Illustration 3-30


53/59

3-53 SO 7



Illustration 3-31


54/59

3-54

Summary Illustration of Journalizing

SO 7 Expla in what pos t ing i s and how i t he lps in the recordin g proc ess .

Illustration 3-32


55/59

3-55

Summary Illustration of Journalizing


Illustration 3-32


56/59

3-56

SummaryIllustration

of Posting

Illustration 3-33



57/59


58/59

3-58

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 atransaction.

The Trial Balance

SO 8 Explain the purp os es of a t r ial balance.

Limitations of a Trial Balance


59/59

A trial balance will not balance if:

a. a correct journal entry is posted twice.

b. the purchase of supplies on account is debited toSupplies and credited to Cash.

c. a $100 cash dividends is debited to the Dividendsaccount for $1,000 and credited to Cash for $100.

d. a $450 payment on account is debited to AccountsPayable for $45 and credited to Cash for $45.

Review Question

The Trial Balance

C3 the Accounting Information System

Documents

Transcript of C3 the Accounting Information System