3-1

THE ACCOUNTING
INFORMATION
SYSTEM

Financial Accounting, Seventh Edition

3-2
 Learning Objectives

After studying this chapter, you should be able to:

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
 Preview of Chapter 3

Financial Accounting
Seventh Edition
Kimmel Weygandt Kieso
3-4
 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 LO 1 Analyze the effect of business transactions on the basic accounting equation.
 Accounting 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 LO 1 Analyze the effect of business transactions on the basic accounting equation.
 Accounting Transactions

Question: Are the following events recorded in the

accounting records?
Illustration 3-1
Discuss guided trip
Purchase
Event options with potential Pay rent.
computer.
customer.

Criterion Is the financial position (assets, liabilities, or

stockholders’ equity) of the company changed?

Record/ Don’t
Record

3-7 LO 1 Analyze the effect of business transactions on the basic accounting equation.
 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 LO 1 Analyze the effect of business transactions on the basic accounting equation.
 Accounting Transactions

Analyzing Transactions
Illustration 3-2
Expanded accounting equation

Lũy kế profit nhiều kỳ chưa chia

lại với nhau
Chia thế nào do cổ
đông duyệt
Hội đồng quản trị đại
diện cổ đông ký

Executive director: Tham gia điều hành

Non-executive director: Ko tham gia điều hành, chỉ họp + giám sát những người điều hành
VD: Tổng giám đốc cũ --> Non-exe but not independent
Independent director: Ko có quan hệ với công ty + Ko tham gia điều hành, chỉ đóng góp ý kiến trong cuộc họp
Ban điều hành do Hội đồng quản trị đi thuê
--> Hội đồng quản trị nhận thù lao, Ban điều hành nhận lương
3-9 LO 1 Analyze the effect of business transactions on the basic accounting equation.
 Accounting Transactions
Event (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

3-10 LO 1 Analyze the effect of business transactions on the basic accounting equation.
 Accounting Transactions
Event (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

3-11 LO 1 Analyze the effect of business transactions on the basic accounting equation.
 Accounting Transactions
Event (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

3-12 LO 1 Analyze the effect of business transactions on the basic accounting equation.
 Accounting Transactions
Event (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

3-13 LO 1 Analyze the effect of business transactions on the basic accounting equation.
 Accounting Transactions
Event (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

3-14 LO 1 Analyze the effect of business transactions on the basic accounting equation.
 Accounting Transactions
Event (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

3-15 LO 1 Analyze the effect of business transactions on the basic accounting equation.
 Accounting Transactions
Event (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

3-16 LO 1 Analyze the effect of business transactions on the basic accounting equation.
 Accounting Transactions
Event (8). On October 5, Sierra purchased an estimated three months of
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 purchase on account: Mua trả chậm

8. +2,500 +2,500

3-17 LO 1 Analyze the effect of business transactions on the basic accounting equation.
 Accounting Transactions
Event (9). On October 9, Sierra hired four new employees to begin work on
October 15.

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

An accounting transaction has not occurred.

3-18 LO 1 Analyze the effect of business transactions on the basic accounting equation.
 Accounting Transactions
Event (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

3-19 LO 1 Analyze the effect of business transactions on the basic accounting equation.
 Accounting Transactions
Event (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
Opening balance = 0
5. +10,000 Total Debit = 26.200 +10,000
Total Credit = 11.00
6. -900 Số dư cuối kì: 15.200 -900
Giảm re. ear.
7. -600 +600 Tăng exp.

8. +2,500 +2,500
10. -500 -500
11. -4,000 -4,000

3-20
3-21
 The 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.

3-22 LO 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.

3-23 LO 3 Define debits and credits and explain they are used to record business transactions.
 Debit and Credit 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

3-24 LO 3 Define debits and credits and explain they are used to record business transactions.
 Debit and Credit Procedures

If Credits are greater than Debits, the account will have

a credit balance.

Account Name
Debit / Dr. Credit / Cr.

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

8,000 Transaction #3

Balance $1,000

3-25 LO 3 Define debits and credits and explain they are used to record business transactions.
 Procedures for Assets and Liabilities

Assets
Debit / Dr. Credit / Cr.
◆ Assets - Debits should
exceed credits.
Normal Balance
◆ Liabilities – Credits should
exceed debits.
Chapter
3-23

Liabilities
Debit / Dr. Credit / Cr.

Normal Balance

Chapter
3-24

3-26 LO 3 Define debits and credits and explain they are used to record business transactions.
 Procedures for Stockholders’ Equity

Stockholders’ Equity ◆ Investments by stockholders and

Debit / Dr. Credit / Cr.
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

3-27 LO 3 Define debits and credits and explain they are used to record business transactions.
 Procedures for Revenue and Expense

Revenue ◆ The purpose of earning

Debit / Dr. Credit / Cr.
revenues is to benefit the
stockholders.
Normal Balance
◆ The effect of debits and credits
on revenue accounts is the same
Chapter
3-26

as their effect on stockholders’

Expense
Debit / Dr. Credit / Cr.
equity.

◆ Expenses have the opposite

Normal Balance
effect: expenses decrease
Chapter
stockholders’ equity.
3-27

3-28 LO 3 Define debits and credits and explain they are used to record business transactions.
 Stockholders’ Equity Relationships

Illustration 3-15

3-29 LO 3 Define debits and credits and explain they are used to record business transactions.
 Summary of Debit/Credit Rules
Liabilities
Debit / Dr. Credit / Cr.
Normal Normal
Balance Balance
Debit Credit Normal Balance

Assets Chapter
3-24

Stockholders’ Equity
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-23

Expense Chapter
3-25
Revenue
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-27 Chapter
3-26

3-30 LO 3 Define debits and credits and explain they are used to record business transactions.
 Summary of Debit/Credit Rules

Balance Sheet Income Statement

Asset = Liability + Equity Revenue - Expense =

Debit

Credit

3-31 LO 3 Define debits and credits and explain they are used to record business transactions.
 Summary of Debit/Credit 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.

3-32 LO 3 Define debits and credits and explain they are used to record 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.

3-33 LO 3 Define debits and credits and explain they are used to record 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.

3-34 LO 3 Define debits and credits and explain they are used to record business transactions.
3-35
 Steps in the Recording 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.

3-36 LO 4 Identify the basic steps in the recording process.

 Steps in the Recording Process

The Journal
Ghi chép đầy đủ tất cả giao dịch, theo thứ tự
◆ 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.

3-37 LO 5 Explain what a journal is and how it helps in the recording process.
 The Journal
POSTING: TỪ SỔ NHẬT KÝ CHUNG SANG SỔ CÁI

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 equipment for $5,000.

Instructions - Journalize these transactions.

3-38 LO 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
Mã hiệu tài khoản
Date Account Title Ref. Debit Credit
Để dễ thống
Oct. 1 Cash nhất với 10,000
mọi người
Common stock 10,000

3-39 LO 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 Account Title Ref. Debit Credit
Oct. 1 Cash 5,000
Notes payable 5,000

3-40 LO 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 Account Title Ref. Debit Credit
Oct. 2 Equipment 5,000
Cash 5,000

3-41 LO 5 Explain what a journal is and how it helps in the recording process.
3-42
 Steps in the Recording Process
General Ledger = Journal --> Sổ chung
Quyển sổ cái theo dõi giao dịch cho từng tài khoản cụ thể Account Ledger --> Sổ cái
The Ledger is comprised of the entire group of accounts
maintained by a company.
Illustration 3-19

3-43 LO 6 Explain what a ledger is and how it helps in the recording process.
 Steps in the Recording Process
Liệt kê tất cả danh mục tài khoản để hạch toán. Danh sách này tại các công ty khác nhau là khác nhau

Chart of Accounts – listing of accounts used by a

company to record transactions.
Illustration 3-20

3-44 LO 6 Explain what a ledger is and how it helps in the recording process.
 Steps in the Recording Process

Posting – the process of transferring journal entry

amounts to ledger accounts.

General Journal J1
Date Account Title Ref. Debit Credit
Oct. 1 Cash 101 10,000
Common stock 10,000

General Ledger
Cash Acct. No. 101
Date Explanation Ref. Debit Credit Balance
Oct. 1 Stock issued J1 10,000 10,000

3-45 LO 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.

3-46 LO 7 Explain what posting is and how it helps in the recording process.
3-47
 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

3-48 LO 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

3-49 LO 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

3-50 LO 7 Explain what posting is and how it helps in the recording process.
 The
Recording
Process
Illustrated

Additional
Transactions

Illustration 3-24

3-51 LO 7 Explain what posting is and how it helps in the recording process.
 The
Recording
Process
Illustrated

Additional
Transactions

Illustration 3-25

3-52 LO 7 Explain what posting is and how it helps in the recording process.
 The
Recording
Process
Illustrated

Additional
Transactions

Illustration 3-26

3-53 LO 7 Explain what posting is and how it helps in the recording process.
 The
Recording
Process
Illustrated

Additional
Transactions

Illustration 3-27

3-54
 The
Recording
Process
Illustrated

Additional
Transactions

Illustration 3-28

3-55 LO 7 Explain what posting is and how it helps in the recording process.
 The Recording Process Illustrated

Additional Transactions
Illustration 3-29

3-56 LO 7 Explain what posting is and how it helps in the recording process.
 The
Recording
Process
Illustrated

Additional
Transactions

Illustration 3-30

3-57 LO 7 Explain what posting is and how it helps in the recording process.
 The
Recording
Process
Illustrated

Additional
Transactions

Illustration 3-31

3-58
LO 7
 Summary Illustration of Journalizing

Illustration 3-32

3-59
LO 7
 Summary Illustration of Journalizing

Illustration 3-32

3-60
LO 7
 Summary
Illustration
of Posting

Illustration 3-33

3-61 LO 7 Explain what posting is and how it helps in the recording process.
 Selected transactions from the journal of Faital Inc. during its first
month of operations are presented below. Post these transactions to T-accounts.

3-62 LO 7 Explain what posting is and how it helps in the recording process.
 The Trial Balance

Trial Balance
◆ A list of accounts and their balances at a given time.

◆ Accounts are listed in the order in which they appear

in the ledger.

◆ Purpose is to prove that debits

equal credits.

◆ May also uncover errors in

journalizing and posting.

◆ Useful in the preparation of

financial statements.
3-63 LO 8 Explain the purposes of a trial balance.
 The Trial Balance
Illustration 3-34

Equal
3-64 LO 8
 The Trial Balance

Limitations of a Trial Balance

The trial balance may balance even when
1. a transaction is not journalized,
Ethics Note An error is
2. a correct journal entry is not posted, the result of an
unintentional mistake. It
3. a journal entry is posted twice, is neither ethical nor
unethical. An irregularity
is an intentional
4. incorrect accounts are used in
misstatement, which
journalizing or posting, or is viewed as unethical.

5. offsetting errors are made in recording

the amount of a transaction.

3-65 LO 8 Explain the purposes of a trial balance.

 The Trial 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.

3-66 LO 8 Explain the purposes of a trial balance.

 The Cash account and the related cash
transactions indicate why cash changed
during October. To make this information useful for analysis it is
summarized in a statement of cash flows. The statement of cash flows
classifies each transaction as an operating activity, an investing
activity, or a financing activity.

Sierra Corporation’s:

◆ Operating activities involve providing guide services.

◆ Investing activities include the purchase or sale of long-lived

assets used in operating the business, or the purchase or sale
of investment securities.

◆ Financing activities are borrowing money, issuing shares of

stock, and paying dividends.
3-67 LO 9 Classify cash activities as operating, investing, or financing.
 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.

3-68 LO 10 Compare the procedures for the recording process under GAAP and IFRS.
 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 in which
the reporting company is headquartered.

3-69 LO 10 Compare the procedures for the recording process under GAAP and IFRS.
 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.

3-70 LO 10 Compare the procedures for the recording process under GAAP and IFRS.
 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.

3-71 LO 10 Compare the procedures for the recording process under GAAP and IFRS.
 Looking to 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.

3-72 LO 10 Compare the procedures for the recording process under GAAP and IFRS.
 IFRS Practice
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.

3-73 LO 10 Compare the procedures for the recording process under GAAP and IFRS.
 IFRS Practice
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.

3-74 LO 10 Compare the procedures for the recording process under GAAP and IFRS.
 IFRS Practice
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.

3-75 LO 10 Compare the procedures for the recording process under GAAP and IFRS.
 Copyright

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3-76