THE ACCOUNTING INFORMATION SYSTEM
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1 Study Objectives THE ACCOUNTING INFORMATION SYSTEM 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 Financial Accounting, Sixth Edition 3-3 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. 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. Question: Are the following events recorded in the accounting records? Event Criterion Record/ Don t Record Purchased a 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? Analyzing Analyzing Illustration: 1. On October 1, cash of $10,000 is invested in Sierra Corporation by investors in exchange for $10,000 of common stock. process of identifying the specific effects of economic events on the accounting equation. Illustration 3-2 Expanded accounting equation Basic Accounting Equation Assets =
2 2. On October 1, Sierra borrowed $ from Castle Bank by signing a 3-month, 12%, $ note payable. 3. On October 2, Sierra purchased equipment by paying $ cash to Superior Equipment Sales Co. 4. On October 2, Sierra received a $1,200 cash advance from R. Knox, a client On October 3, Sierra received $10,000 in cash from Copa Company for guide services performed. 6. On October 3, Sierra Corporation paid its office rent for the month of October in cash, $ On October 4, Sierra paid $600 for a one-year insurance policy that will expire next year on September On October 5, Sierra purchased supplies on account from Aero Supply for $2, On October 20, Sierra paid a $500 dividend. 11. Employees have worked two weeks, earning $4,000 in salaries, which were paid on October ,500 +2, ,500 +2, ,500 +2, ,000-4,
3 Account Account Debit and Credit Procedures Account An Account can be illustrated in a T-Account form. Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. Debit = Left Credit = Right Account Name Debit and Credit Procedures Double-entry entry system Each transaction must affect two or more accounts to keep the basic accounting equation in balance. done by debiting at least one account and crediting another. DEBITS must equal CREDITS. If Debits are greater than Credits, the account will have a debit balance. Transaction #1 Transaction #3 Account Name $10,000 $3,000 Transaction #2 8,000 $ SO 2 Explain what an account is and how it helps in the recording process Debit and Credit Procedures Dr./Cr. Procedures for Assets and Liabilities Dr./Cr. Procedures for Stockholders Equity If Credits are greater than Debits, the account will have a credit balance. Transaction #1 Account Name $10,000 $3,000 Transaction #2 Assets Assets - Debits should exceed credits. Liabilities Credits should exceed debits. Stockholders Equity Owner s investments and revenues increase stockholder s equity (credit). Dividends and expenses decrease stockholder s equity (debit). 8,000 Transaction #3 $1,000 Liabilities normal balance is on the increase side. Common Stock Retained Earnings Dividends Dr./Cr. Procedures for Revenue and Expense Revenue Expense purpose of earning revenues is to benefit the stockholders. 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. Stockholders Equity Relationships Illustration 3-15 Summary of of Debit/Credit Rules Normal Debit Assets Expense Normal Credit Stockholders Equity Liabilities Revenue
4 Summary of Debit/Credit Rules Debit Credit Sheet Income Statement Asset = Liability + Equity Revenue - Expense = Summary of Debit/Credit Rules 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. Summary of Debit/Credit Rules 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 Steps in the Steps in the Illustration 3-17 Journal Book of original entry. recorded in chronological order. Contributions to the recording process: Analyze each transaction Enter transaction in a journal Transfer journal information to ledger accounts 1. Discloses the complete effects of a transaction. Source documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the 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 SO 4 Identify the basic steps in the recording process Journal Journalizing Journalizing Journalizing - Entering transaction data in the journal. Sierra issued common stock in exchange for $10,000 cash. Sierra borrowed $ by signing a note. Illustration: Presented below is information related to Sierra Corporation. Sierra issued common stock in exchange for $10,000 cash. 1 2 Sierra borrowed $ by signing a note. Sierra purchased office equipment for $. Instructions - Journalize these transactions. Date General Journal Account Title Ref. Debit Credit Cash Common stock 10,000 10,000 Date General Journal Account Title Ref. Debit Credit Cash Notes payable
5 Journalizing Steps in the Steps in the Oct. 2 Sierra purchased equipment for $. Ledger contains the entire group of accounts maintained by a company. Chart of Accounts listing of accounts used by a company to record transactions. Illustration 3-19 Date Oct. 2 General Journal Account Title Ref. Debit Credit Equipment Cash SO 6 Explain what a ledger is and how it helps in the recording process SO 6 Explain what a ledger is and how it helps in the recording process. Steps in the 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. 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. 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 Illustration 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 Illustration 3-24 Illustration
6 Illustration 3-26 Illustration 3-28 Illustration Illustration 3-29 Illustration 3-30 Illustration SO 7 Summary Illustration of Journalizing Illustration 3-32 Summary Illustration of Journalizing Illustration 3-32 Summary Illustration of Posting Illustration
7 Trial Trial Trial A list of accounts and their balances at a given time. Purpose is to prove that debits equal credits. Limitations of a Trial 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. 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. Illustration SO 8 Explain the purposes of a trial balance SO 8 Explain the purposes of a trial balance. 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. purchaser may make back-up copies for his/her own use only and not for distribution or resale. Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein. 3-58
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