1. The Accounting Information System CHAPTER 3

2. The Accounting Information System The system of:The system of: –Collecting and processing transaction data –Communicating financial information to interested parties

3. Accounting Equation Assets = Liabilities + Shareholders’ EquityAssets = Liabilities + Shareholders’ Equity The accounting equation must always balanceThe accounting equation must always balance

4. Accounting Transactions Transactions are events that must be recorded in the financial statements Transaction analysis determines impact on the accounting equation

5. Transaction Identification Process Illustration 3-1

6. Account An individual accounting record of increases and decreases in a specific Asset, Liability, or Shareholders’ Equity itemAn individual accounting record of increases and decreases in a specific Asset, Liability, or Shareholders’ Equity item Three parts:Three parts: 1) the title of the account 2) a left or debit side 3) a right or credit side

7. TITLEDEBITCREDIT The T Account

8. Total the entries to each side If the greater sum is on the left, the account has adebit balance If the greater sum is on the left, the account has a debit balance Total Debits TITLE TITLEDebitCredit The T Account

9. Total the entries to each side If the greater sum is on the right, the account has acredit balance If the greater sum is on the right, the account has a credit balance Total Credits TITLEDebitCredit The T Account

10. Normal Balances Shares

11. Normal Balances

12. Expanded Accounting Equation Illustration 3-10

13. Recording Process Illustration 3-11

14. Journal Accounting record where the transactions are recorded in chronological orderAccounting record where the transactions are recorded in chronological order Types of journalsTypes of journals –Cash receipts –Cash disbursements –Sales –Purchases –General

15. Journals Journals aid in the recording process by:Journals aid in the recording process by: –Disclosing in one place the complete effect of a transaction –Providing a chronological record of transactions –Helping to prevent or locate errors as debit and credit amounts can be easily compared

16. General Ledger Entire group of accounts maintained by a companyEntire group of accounts maintained by a company Contains all the asset, liability, and shareholders’ equity accountsContains all the asset, liability, and shareholders’ equity accounts Posting is the process of transferring information from the journals to the general ledger accountsPosting is the process of transferring information from the journals to the general ledger accounts

17. Chart of Accounts A listing of the company’s accountsA listing of the company’s accounts The number of accounts in a company’s chart of accounts depends on the size, complexity, and type of business.The number of accounts in a company’s chart of accounts depends on the size, complexity, and type of business. New accounts can be created at any time during the life of the companyNew accounts can be created at any time during the life of the company See sample chart of accounts on the Toolkit CDSee sample chart of accounts on the Toolkit CD

18. Posting The process of transferring journal entries to ledger accountsThe process of transferring journal entries to ledger accounts Posting should be done on a timely basisPosting should be done on a timely basis This phase of the recording process accumulates the effects of journalized transactions in the individual accountsThis phase of the recording process accumulates the effects of journalized transactions in the individual accounts

19. Trial Balance List of all the accounts and their balances at a given timeList of all the accounts and their balances at a given time Serves to prove the mathematical equality of debits and credits after postingServes to prove the mathematical equality of debits and credits after posting Aids in the preparation of financial statementsAids in the preparation of financial statements

20. SIERRA CORPORATION Trial Balance October 31, 2004 DebitsCredits Cash Advertising Supplies Prepaid Insurance Office Equipment Notes Payable Accounts Payable Unearned Service Revenue Common Shares Dividends Service Revenue Salaries Expense Rent Expense $15,2002,5006005,0005004,000900$28,700 $ 5,000 2,5001,20010,00010,000$28,700