2. 3 The Accounting Information System Kimmel ● Weygandt ● Kieso
Financial Accounting, Eighth Edition

3. 1 2 3 4 5 CHAPTER OUTLINE LEARNING OBJECTIVES
Analyze the effect of business transactions on the basic accounting equation. 1
Explain how accounts, debits, and credits are used to record business transactions. 2
Indicate how a journal is used in the recording process. 3
Explain how a ledger and posting help in the recording process. 4
Prepare a trial balance. 5

4. 1 Accounting Information System System of collecting and
Analyze the effect of business transactions on the basic accounting equation.
LEARNING OBJECTIVE 1
Accounting Information System
System of
collecting and
processing transaction data and
communicating financial information to decision-makers.
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5. Accounting Information System
Accounting information systems rely on a process referred to as the accounting cycle.
Analyze business transactions
Journalize
Post
Trial Balance
Adjusting Entries
Adjusted Trial Balance
Financial Statements
Closing Entries
Post-Closing Trial Balance
Most businesses use computerized accounting systems.
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6. 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.
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7. Discuss guided trip options with potential customer
ACCOUNTING TRANSACTIONS
Question: Are the following events recorded in the accounting records?
Illustration 3-1
Transaction identification process
Discuss guided trip options with potential customer
Purchase computer
Pay rent
Event
Is the financial position (assets, liabilities, or stockholders’ equity) of the company changed?
Criterion
Record/ Don’t Record
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8. Basic Accounting Equation
ANALYZING TRANSACTIONS
The process of identifying the specific effects of economic events on the accounting equation.
Basic Accounting Equation
Assets
Liabilities
Stockholders’ Equity = +
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9. ANALYZING TRANSACTIONS
Illustration 3-2
Expanded accounting equation
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10. ANALYZING 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
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11. ANALYZING 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
2. +5,000 +5,000
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12. ANALYZING TRANSACTIONS
Event (3). On October 2, Sierra purchased equipment by paying $5,000 cash to Superior Equipment Sales Co.
1. +10, ,000
2. +5,000 +5,000
3. -5,000 +5,000
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13. ANALYZING TRANSACTIONS
Event (4). On October 2, Sierra received a $1,200 cash advance from R. Knox, a client.
1. +10, ,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
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14. ANALYZING TRANSACTIONS
Event (5). On October 3, Sierra received $10,000 in cash from Copa Company for guide services performed.
1. +10, ,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
5. +10, ,000
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15. ANALYZING TRANSACTIONS
Event (6). On October 3, Sierra Corporation paid its office rent for the month of October in cash, $900.
1. +10, ,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
5. +10, ,000
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16. ANALYZING 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
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
5. +10, ,000
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17. ANALYZING 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
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
5. +10, ,000
8. +2,500 +2,500
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18. An accounting transaction has not occurred.
ANALYZING TRANSACTIONS
Event (9). On October 9, Sierra hired four new employees to begin work on October 15.
1. +10, ,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
5. +10, ,000
8. +2,500 +2,500
An accounting transaction has not occurred.
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19. ANALYZING TRANSACTIONS
Event (10). On October 20, Sierra paid a $500 dividend.
1. +10, ,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
5. +10, ,000
8. +2,500 +2,500
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20. ANALYZING TRANSACTIONS
Event (11). Employees have worked two weeks, earning $4,000 in salaries, which were paid on October 26.
1. +10, ,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
5. +10, ,000
8. +2,500 +2,500
11. -4,000 -4,000
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21. 1 DO IT! Transaction Analysis
A tabular analysis of the transactions for the month of August is shown below. Describe each transaction.
1. Company issued shares of stock for $25,000 cash.
2. Company purchased $7,000 of equipment on account.
3. Company received $8,000 cash in exchange for services performed.
4. Company paid $850 for this month’s rent.
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22. 2 Debit and Credit Procedures Double-entry system
Explain how accounts, debits, and credits are used to record business transactions.
LEARNING OBJECTIVE 2
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.
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23. DEBIT AND CREDIT PROCEDURES
If Debits are greater than Credits, the account will have a debit balance.
Transaction #1
$10,000
$3,000
Transaction #2
Transaction #3
8,000
Balance
$15,000
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24. DEBIT AND CREDIT PROCEDURES
If Debits are greater than Credits, the account will have a debit balance.
Transaction #1
$10,000
$3,000
Transaction #2
8,000
Transaction #3
Balance
$1,000
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25. Procedures for Assets and Liabilities
Assets - Debits should exceed credits.
Liabilities – Credits should exceed debits.
▼ HELPFUL HINT
The normal balance is the side where increases in the account are recorded.
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26. Procedures for Stockholders’ Equity
Investments by stockholders and revenues increase stockholders’ equity (credit).
Dividends and expenses decrease stockholder’s equity (debit).
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27. Procedures for Stockholders’ Equity
Revenues increase stockholder’s equity.
Expenses have the opposite effect: expenses decrease stockholders’ equity.
The effect of debits and credits on revenue and expense accounts is the same as their effect on stockholders’ equity.
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28. STOCKHOLDERS’ EQUITY RELATIONSHIPS
ILLUSTRATION 3-15
Stockholders’ equity
relationships
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29. DEBIT/CREDIT RULES
Normal Balance Debit
Normal Balance Credit
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30. SUMMARY OF DEBIT/CREDIT RULES
Balance Sheet Income Statement
Asset =
Liability +
Equity
Revenue -
Expense =
Debit
Credit
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31. 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.
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32. SUMMARY OF DEBIT/CREDIT RULES
Review Question
Debits:
increase both assets and liabilities.
decrease both assets and liabilities.
increase assets and decrease liabilities.
decrease assets and increase liabilities.
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33. SUMMARY OF DEBIT/CREDIT RULES
Review Question
Accounts that normally have debit balances are:
assets, expenses, and revenues.
assets, expenses, and equity.
assets, liabilities, and dividends.
assets, dividends, and expenses.
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34. Indicate how a journal is used in the recording process.
LEARNING OBJECTIVE 3
The Recording Process
Analyze each transaction in terms of its effect on the accounts.
Enter the transaction information in a journal.
Transfer the journal information to the appropriate accounts in the ledger.
Journalize the transaction
Analyze business transactions
Post to ledger accounts
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35. THE RECORDING PROCESS Analyze transaction Enter transaction
Journalize the transaction
Post to ledger accounts
Analyze business transactions
ILLUSTRATION 3-17
The recording process
Analyze transaction
Enter
transaction
Transfer from journal to ledger
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36. THE JOURNAL
Transactions recorded in chronological order in a journal before they are transferred to the accounts.
Contributions to the recording process:
Discloses the complete effects of a transaction.
Provides a chronological record of transactions.
Helps to prevent or locate errors because the debit and credit amounts can be easily compared.
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37. 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.
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38. THE JOURNAL
Oct. 1 Sierra issued common stock in exchange for $10,000 cash.
General Journal
Oct. 1
Cash
10,000
Common Stock
10,000
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39. THE JOURNAL Oct. 1 Sierra borrowed $5,000 by signing a note. Oct. 1
General Journal
Oct. 1
Cash
5,000
Notes Payable
5,000
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40. THE JOURNAL Oct. 2 Sierra purchased equipment for $5,000. Oct. 2
General Journal
Oct. 2
Equipment
5,000
Cash
5,000
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41. THE JOURNAL LO 3 ILLUSTRATION 3-18 Recording transactions in
journal form
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42. 3
DO IT!
Journal Entries
The following events occurred during the first month of business of Hair It Is Inc., Kate Browne’s beauty salon:
Issued common stock to shareholders in exchange for $20,000 cash.
Purchased $4,800 of equipment on account (to be paid in 30 days).
Interviewed three people for the position of stylist.
The three activities are recorded as follows:
1. Cash 20,000
Common Stock 20,000
2. Equipment 4,800
Accounts Payable 4,800
3. No entry because no transaction occurred.
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43. Explain how a ledger and posting help in the recording process.
LEARNING OBJECTIVE 4
The Accounting Cycle
Post to ledger accounts
Analyze business transactions
Journalize the transaction
Trial Balance
Adjusting Entries
Adjusted Trial Balance
Financial Statements
Closing Entries
Post-Closing Trial Balance
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44. THE LEDGER
The Ledger is comprised of the entire group of accounts maintained by a company.
ILLUSTRATION 3-19
The general ledger
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45. CHART OF ACCOUNTS
Listing of accounts used by a company to record transactions.
ILLUSTRATION 3-20
Chart of accounts for Sierra
Corporation
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46. POSTING
The process of transferring journal entry amounts to ledger accounts.
General Journal J1
Oct. 1
Cash
101
10,000
Common Stock
10,000
General Ledger
Oct. 1
Stock issued J1
10,000
10,000
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47. POSTING Review Question Posting: normally occurs before journalizing.
transfers ledger transaction data to the journal.
is an optional step in the recording process.
transfers journal entries to ledger accounts.
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48. 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
Investment of cash by
stockholders
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49. LO 4
ILLUSTRATION 3-22

50. LO 4
ILLUSTRATION 3-23

51. LO 4
ILLUSTRATION 3-24

52. LO 4
ILLUSTRATION 3-25

53. LO 4
ILLUSTRATION 3-26

54. LO 4
ILLUSTRATION 3-27

55. LO 4
ILLUSTRATION 3-28

56. ILLUSTRATION 3-29
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57. LO 4
ILLUSTRATION 3-30

58. LO 4
ILLUSTRATION 3-31

59. JOURNALIZING SUMMARY LO 4 ILLUSTRATION 3-32
General journal for Sierra Corporation
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60. Illustration 3-32
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61. POSTING SUMMARY ILLUSTRATION 3-33
General ledger for Sierra Corporation

62. 4
DO IT!
Posting
Selected transactions from the journal of Faital Inc. during its first month of operations are presented below. Post these transactions to T-accounts.
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63. 5 Prepare a trial balance. The Accounting Cycle LEARNING OBJECTIVE
Analyze business transactions
Journalize the transaction
Post to ledger accounts
Adjusting Entries
Adjusted Trial Balance
Financial Statements
Closing Entries
Post-Closing Trial Balance
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64. 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.
▼ HELPFUL HINT
Note that the order of
presentation in the trial balance is:
Assets
Liabilities
Stockholders’ equity
Revenues
Expenses
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65. TRIAL BALANCE
ILLUSTRATION 3-34
Sierra Corporation
trial balance
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66. LIMITATIONS OF A TRIAL BALANCE
The trial balance may balance even when
a transaction is not journalized,
a correct journal entry is not posted,
a journal entry is posted twice,
incorrect accounts are used in journalizing or posting, or
offsetting errors are made in recording the amount of a transaction.
ETHICS NOTE An error is the result of an unintentional mistake. It is neither ethical nor unethical. An irregularity is an intentional misstatement, which is viewed as unethical.
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67. TRIAL BALANCE Review Question A trial balance will not balance if:
a correct journal entry is posted twice.
the purchase of supplies on account is debited to Supplies and credited to Cash.
a $100 cash dividends is debited to the Dividends account for $1,000 and credited to Cash for $100.
a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash for $45.
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68. 5
DO IT!
Trial Balance
The following accounts come from the ledger of SnowGo Corporation at December 31, 2017.
Equipment $88,000
Dividends 8,000
Accounts Payable 22,000
Salaries and Wages
Expense 42,000
Accounts Receivable 4,000
Service Revenue 95,000
Common Stock $20,000
Salaries and Wages
Payable 2,000
Notes Payable (due in
3 months) 19,000
Utilities Expense 3,000
Prepaid Insurance 6,000
Cash 7,000
Prepare a trial balance in good form.
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69. LO 5