THE ACCOUNTING
INFORMATION
SYSTEM
3
Financial Accounting, Seventh Edition
!1
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.
!2
Preview of Chapter 3
Financial Accounting
Seventh Edition
Kimmel Weygandt Kieso
!3
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.
!4 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.
!5 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
!6 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
Assets Liabilities Stockholders’
= +
Equity
!7 LO 1 Analyze the effect of business transactions on the basic accounting equation.
Accounting Transactions
Analyzing Transactions
Illustration 3-2
Expanded accounting equation
!8 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
!9 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
!10 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
!11 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
!12 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
!13 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
!14 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
!15 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
8. +2,500 +2,500
!16 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.
!17 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
!18 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
5. +10,000 +10,000
6. -900 -900
7. -600 +600
8. +2,500 +2,500
10. -500 -500
11. -4,000 -4,000
!19
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 be Account Name
illustrated in a T-
Debit / Dr. Credit / Cr.
Account form.
!20 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.
!21 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
!22 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
!23 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
Chapter
3-23
exceed debits.
Liabilities
Debit / Dr. Credit / Cr.
Normal Balance
Chapter
3-24
!24 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
stockholder’s equity (debit).
Chapter
3-25
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
!25 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 revenues
Debit / Dr. Credit / Cr.
is to benefit the stockholders.
◆ The effect of debits and credits on
Normal Balance revenue accounts is the same as
Chapter
3-26
their effect on stockholders’
equity.
Expense
Debit / Dr. Credit / Cr.
◆ Expenses have the opposite
effect: expenses decrease
stockholders’ equity.
Normal Balance
Chapter
3-27
!26 LO 3 Define debits and credits and explain they are used to record business transactions.
Stockholders’ Equity Relationships
Illustration 3-15
!27 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
!28 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
!29 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.
!30 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.
!31 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.
!32 LO 3 Define debits and credits and explain they are used to record business transactions.
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.
!33 LO 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.
!34 LO 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 equipment for $5,000.
Instructions - Journalize these transactions.
!35 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
Date Account Title Ref. Debit Credit
Oct. 1 Cash 10,000
Common stock 10,000
!36 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
!37 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
!38 LO 5 Explain what a journal is and how it helps in the recording process.
Steps in the Recording Process
The Ledger is comprised of the entire group of accounts
maintained by a company.
Illustration 3-19
!39 LO 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.
Illustration 3-20
!40 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
!41 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.
!42 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 3-21
!43 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
!44 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
!45 LO 7 Explain what posting is and how it helps in the recording process.
The
Recording
Process
Illustrated
Additional
Transactions
Illustration 3-24
!46 LO 7 Explain what posting is and how it helps in the recording process.
The
Recording
Process
Illustrated
Additional
Transactions
Illustration 3-25
!47 LO 7 Explain what posting is and how it helps in the recording process.
The
Recording
Process
Illustrated
Additional
Transactions
Illustration 3-26
!48 LO 7 Explain what posting is and how it helps in the recording process.
The
Recording
Process
Illustrated
Additional
Transactions
Illustration 3-27
!49
The
Recording
Process
Illustrated
Additional
Transactions
Illustration 3-28
!50 LO 7 Explain what posting is and how it helps in the recording process.
The Recording Process Illustrated
Additional Transactions
Illustration 3-29
!51 LO 7 Explain what posting is and how it helps in the recording process.
The
Recording
Process
Illustrated
Additional
Transactions
Illustration 3-30
!52 LO 7 Explain what posting is and how it helps in the recording process.
The
Recording
Process
Illustrated
Additional
Transactions
Illustration 3-31
!53
LO 7
Summary Illustration of Journalizing
Illustration 3-32
!54
LO 7
Summary Illustration of Journalizing
Illustration 3-32
!55
LO 7
Summary
Illustration
of Posting
Illustration 3-33
!56 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.
!57 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.
!58 LO 8 Explain the purposes of a trial balance.
The Trial Balance
Illustration 3-34
Equal
!59 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 is
3. a journal entry is posted twice, neither ethical nor
unethical. An irregularity
4. incorrect accounts are used in is an intentional
misstatement, which
journalizing or posting, or is viewed as unethical.
5. offsetting errors are made in recording
the amount of a transaction.
!60 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.
!61 LO 8 Explain the purposes of a trial balance.
