1. Chapter 3-1

2. Chapter 3-2 The Accounting Information System Information System Financial Accounting, Fifth Edition

3. Chapter 3-3 1. 1.Analyze the effect of business transactions on the basic accounting equation. 2. 2.Explain what an account is and how it helps in the recording process. 3. 3.Define debits and credits and explain how they are used to record business transactions. 4. 4.Identify the basic steps in the recording process. 5. 5.Explain what a journal is and how it helps in the recording process. 6. 6.Explain what a ledger is and how it helps in the recording process. 7. 7.Explain what posting is and how it helps in the recording process. 8. 8.Explain the purposes of a trial balance. 9. 9.Classify cash activities as operating, investing, or financing. Study Objectives

4. Chapter 3-4 Debits and credits Debit and credit procedures Stockholders’ equity relationships Summary of debit/credit rules Accounting Transactions The Account Steps in the Recording Process The Recording Process Illustrated The Trial Balance Analyzing transactions Summary of transactions The journal The ledger Chart of accounts Posting Summary illustration of journalizing and posting Limitations of a trial balance The Accounting Information System

5. Chapter 3-5 The Accounting Information System The system of collecting and processing transaction data and communicating financial information to decision makers is known as the accounting information system.

6. Chapter 3-6 Transactions are economic events that require recording in the financial statements. May be external or internal. Not all activities represent transactions. Each transaction has a dual effect on the accounting equation. Accounting Transactions

7. Chapter 3-7 Question: Question: Are the following events recorded in the accounting records? Event Purchased a computer. Criterion Is the financial position (assets, liabilities, or stockholders’ equity) of the company changed? Pay rent. Record/ Don’t Record Accounting Transactions Discuss product design with potential customer.

8. Chapter 3-8 AssetsAssetsLiabilitiesLiabilities Stockholders’ Equity = + Transaction Analysis The process of identifying the specific effects of economic events on the accounting equation. SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation. Basic Accounting Equation Accounting Transactions

9. Chapter 3-9 Transaction Analysis SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation. Accounting Transactions Illustration 3-2 Expanded accounting equation

10. Chapter 3-10 Illustration: Illustration: 1. On October 1, cash of $10,000 is invested in Sierra Corporation by investors in exchange for $10,000 of common stock. Accounting Transactions 1.+10,000+10,000 SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation.

11. Chapter 3-11 2. On October 1, Sierra borrowed $5,000 from Castle Bank by signing a 3-month, 12%, $5,000 note payable. Accounting Transactions 1.+10,000+10,000 2.+5,000+5,000 SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation.

12. Chapter 3-12 3. On October 2, Sierra purchased office equipment by paying $5,000 cash to Superior Equipment Sales Co. Accounting Transactions 3.-5,000+5,000 1.+10,000+10,000 2.+5,000+5,000 SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation.

13. Chapter 3-13 4. On October 2, Sierra received a $1,200 cash advance from R. Knox, a client. Accounting Transactions 4.+1,200+1,200 3.-5,000+5,000 1.+10,000+10,000 2.+5,000+5,000 SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation.

14. Chapter 3-14 5. On October 3, Sierra received $10,000 in cash from Copa Company for advertising services performed. Accounting Transactions 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 SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation.

15. Chapter 3-15 6. On October 3, Sierra Corporation paid its office rent for the month of October in cash, $900. Accounting Transactions 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 SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation.

16. Chapter 3-16 7. On October 4, Sierra paid $600 for a one-year insurance policy that will expire next year on September 30. Accounting Transactions 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 SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation.

17. Chapter 3-17 8. On October 5, Sierra purchased a three-month supply of advertising materials on account from Aero Supply for $2,500. Accounting Transactions 4.+1,200+1,200 5.+10,000+10,000 6.-900-900 7.-600+600 8.+2,500+2,500 3.-5,000+5,000 1.+10,000+10,000 2.+5,000+5,000 SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation.

18. Chapter 3-18 10. On October 20, Sierra paid a $500 dividend. Accounting Transactions 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.-5,000+5,000 1.+10,000+10,000 2.+5,000+5,000 SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation.

19. Chapter 3-19 11. Employees have worked two weeks, earning $4,000 in salaries, which were paid on October 26. Accounting Transactions 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 3.-5,000+5,000 1.+10,000+10,000 2.+5,000+5,000

20. Chapter 3-20

21. Chapter 3-21 Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. Debit = “Left” Credit = “Right” Account An Account can be illustrated in a T-Account form. SO 2 Explain what an account is and how it helps in the recording process. The Account

22. Chapter 3-22 Double-entry Double-entry accounting 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. must equal DEBITS must equal CREDITS. SO 3 Define debits and credits and explain their use in recording business transactions. Debit and Credit Procedures

23. Chapter 3-23 greater than If Debits are greater than Credits, the account will have a debit balance. $10,000Transaction #2$3,000 $15,000 8,000Transaction #3 Balance Transaction #1 SO 3 Define debits and credits and explain their use in recording business transactions. Debit and Credit Procedures

24. Chapter 3-24 greater than If Credits are greater than Debits, the account will have a credit balance. $10,000Transaction #2$3,000 Balance Transaction #1 $1,000 8,000Transaction #3 SO 3 Define debits and credits and explain their use in recording business transactions. Debit and Credit Procedures

25. Chapter 3-25 Assets - Debits should exceed credits. Liabilities – Credits should exceed debits. The normal balance is on the increase side. Dr./Cr. Procedures for Assets and Liabilities SO 3 Define debits and credits and explain their use in recording business transactions.

26. Chapter 3-26 Owner’s investments and revenues increase stockholder’s equity (credit). Dividends and expenses decrease stockholder’s equity (debit). Dr./Cr. Procedures for Stockholders’ Equity SO 3 Define debits and credits and explain their use in recording business transactions.

27. Chapter 3-27 The purpose of earning revenues is to benefit the stockholders. The 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. SO 3 Define debits and credits and explain their use in recording business transactions. Dr./Cr. Procedures for Revenue and Expense

28. Chapter 3-28 Normal Balance Credit Normal Balance Debit Debits and Credits Summary SO 3 Define debits and credits and explain their use in recording business transactions.

29. Chapter 3-29 Balance Sheet Income Statement Balance Sheet Income Statement = + = - AssetLiabilityEquityRevenueExpense Debit Credit Debits and Credits Summary SO 3 Define debits and credits and explain their use in recording business transactions.

30. Chapter 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 Debits and Credits Summary SO 3 Define debits and credits and explain their use in recording business transactions.

31. Chapter 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 Debits and Credits Summary SO 3 Define debits and credits and explain their use in recording business transactions.

32. Chapter 3-32

33. Chapter 3-33 Stockholders’ Equity Relationships Illustration 3-15 SO 3 Define debits and credits and explain their use in recording business transactions.

34. Chapter 3-34 Summary of Debit/Credit Rules Relationship among the assets, liabilities and stockholders’ equity of a business: The equation must be in balance after every transaction. For every Debit there must be a Credit. Illustration 3-16 AssetsLiabilities = Stockholders’ Equity Basic Equation Expanded Basic Equation + SO 3 Define debits and credits and explain their use in recording business transactions.

35. Chapter 3-35 Business documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction. Steps in the Recording Process SO 4 Identify the basic steps in the recording process. Illustration 3-17 Analyze each transactionEnter transaction in a journal Transfer journal information to ledger accounts

36. Chapter 3-36 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. The Journal SO 5 Explain what a journal is and how it helps in the recording process.

37. Chapter 3-37 Journalizing - Entering transaction data in the journal. Illustration: Presented below is information related to Sierra Corporation. SO 4 Explain what a journal is and how it helps in the recording process. Sierra issued common stock in exchange for $10,000 cash. Oct. 1 Sierra borrowed $5,000 by signing a note.1 Sierra purchased office equipment for $5,000.2 Instructions - Journalize these transactions. The Journal

38. Chapter 3-38 JournalizingJournalizing General Journal SO 4 Explain what a journal is and how it helps in the recording process. Sierra issued common stock in exchange for $10,000 cash. Oct. 1 Cash Common stock 10,000

39. Chapter 3-39 JournalizingJournalizing General Journal SO 4 Explain what a journal is and how it helps in the recording process. Sierra borrowed $5,000 by signing a note. Oct. 1 Cash Notes payable 5,000

40. Chapter 3-40 JournalizingJournalizing General Journal SO 4 Explain what a journal is and how it helps in the recording process. Sierra purchased office equipment for $5,000. Oct. 2 Office equipment Cash 5,000

41. Chapter 3-41

42. Chapter 3-42 Ledger contains the entire group of accounts maintained by a company. The Ledger SO 6 Explain what a ledger is and how it helps in the recording process. Illustration 3-19

43. Chapter 3-43 Accounts arranged in sequence in which they are presented in the financial statements. Chart of Accounts SO 6 Explain what a ledger is and how it helps in the recording process.

44. Chapter 3-44 Posting Posting – the process of transferring amounts from the journal to the ledger accounts. General Ledger General Journal Oct. 1Owner investmentJ110,000 101 J1 PostingPosting SO 7 Explain what posting is and how it helps in the recording process.

45. Chapter 3-45 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 PostingPosting SO 7 Explain what posting is and how it helps in the recording process.

46. Chapter 3-46 The Recording Process Illustrated SO 7 Explain what posting is and how it helps in the recording process. 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

47. Chapter 3-47 The Recording Process Illustrated SO 7 Explain what posting is and how it helps in the recording process. 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

48. Chapter 3-48 The Recording Process Illustrated SO 7 Explain what posting is and how it helps in the recording process. 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

49. Chapter 3-49 SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-24 Additional Transactions The Recording Process Illustrated

50. Chapter 3-50 SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-25 Additional Transactions The Recording Process Illustrated

51. Chapter 3-51 SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-26 Additional Transactions The Recording Process Illustrated

52. Chapter 3-52 SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-27 Additional Transactions The Recording Process Illustrated,

53. Chapter 3-53 SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-28 Additional Transactions The Recording Process Illustrated

54. Chapter 3-54 SO 7 Explain what posting is and how it helps in the recording process. The Recording Process Illustrated Additional Transactions Illustration 3-29

55. Chapter 3-55 SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-30 Additional Transactions The Recording Process Illustrated

56. Chapter 3-56 SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-31 Additional Transactions The Recording Process Illustrated

57. Chapter 3-57 Summary Illustration of Journalizing SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-32

58. Chapter 3-58 Summary Illustration of Journalizing SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-32

59. Chapter 3-59 Summary Illustration of Posting Illustration 3-33

60. Chapter 3-60 A list of accounts and their balances at a given time. Purpose is to prove that debits equal credits. The Trial Balance Illustration 3-34

61. Chapter 3-61 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 a transaction. The Trial Balance SO 8 Explain the purposes of a trial balance. Limitations of a Trial Balance

62. Chapter 3-62 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. Review Question The Trial Balance SO 8 Explain the purposes of a trial balance.

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