1. Financial Accounting, Sixth Edition3
THE ACCOUNTING INFORMATION SYSTEM
Financial Accounting, Sixth Edition

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

3. The 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. 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. Accounting Transactions
Question: Are the following events recorded in the accounting records?
Discuss guided trip options with potential customer.
Illustration 3-1
Purchase computer.
Event
Pay rent.
Is the financial position (assets, liabilities, or stockholders’ equity) of the company changed?
Criterion
Record/ Don’t Record

6. 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 = +
SO 1 Analyze the effect of business transactions on the basic accounting equation.

7. Accounting Transactions
Analyzing Transactions
Illustration 3-2
Expanded accounting equation
SO 1 Analyze the effect of business transactions on the basic accounting equation.

8. Accounting Transactions
Illustration: 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
SO 1 Analyze the effect of business transactions on the basic accounting equation.

9. Accounting Transactions
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
SO 1 Analyze the effect of business transactions on the basic accounting equation.

10. Accounting Transactions
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
SO 1 Analyze the effect of business transactions on the basic accounting equation.

11. Accounting Transactions
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
SO 1 Analyze the effect of business transactions on the basic accounting equation.

12. Accounting Transactions
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
SO 1 Analyze the effect of business transactions on the basic accounting equation.

13. Accounting Transactions
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
SO 1 Analyze the effect of business transactions on the basic accounting equation.

14. Accounting Transactions
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
SO 1 Analyze the effect of business transactions on the basic accounting equation.

15. Accounting Transactions
8. On October 5, Sierra purchased 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
SO 1 Analyze the effect of business transactions on the basic accounting equation.

16. Accounting Transactions
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
SO 1 Analyze the effect of business transactions on the basic accounting equation.

17. Accounting Transactions
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

18. An Account can be illustrated in a T-Account form.
The Account
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.

19. 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.
SO 3 Define debits and credits and explain their use in recording business transactions.

20. 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
SO 3 Define debits and credits and explain their use in recording business transactions.

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

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

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

24. Dr./Cr. Procedures for Revenue and Expense
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.

25. Summary of Debit/Credit Rules
Normal Balance Debit
Normal Balance Credit
SO 3 Define debits and credits and explain their use in recording business transactions.

26. Summary of Debit/Credit Rules
Balance Sheet Income Statement
Asset =
Liability +
Equity
Revenue -
Expense =
Debit
Credit
SO 3 Define debits and credits and explain their use in recording business transactions.

27. 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.
SO 3 Define debits and credits and explain their use in recording business transactions.

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

29. Steps in the Recording Process
The Journal
Book of original entry.
Transactions recorded in chronological order.
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.
SO 5 Explain what a journal is and how it helps in the recording process.

30. 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 office equipment for $5,000.
Instructions - Journalize these transactions.
SO 5 Explain what a journal is and how it helps in the recording process.

31. Journalizing
Oct. 1
Sierra issued common stock in exchange for $10,000 cash.
General Journal
Cash
10,000
Common stock
10,000
SO 5 Explain what a journal is and how it helps in the recording process.

32. Journalizing Oct. 1 Sierra borrowed $5,000 by signing a note. Cash
General Journal
Cash
5,000
Notes payable
5,000
SO 5 Explain what a journal is and how it helps in the recording process.

33. Journalizing Oct. 2 Sierra purchased equipment for $5,000. Equipment
General Journal
Equipment
5,000
Cash
5,000
SO 5 Explain what a journal is and how it helps in the recording process.

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

35. Steps in the Recording Process
Chart of Accounts – listing of accounts used by a company to record transactions.
SO 6 Explain what a ledger is and how it helps in the recording process.

36. Steps in the Recording Process
Posting – the process of transferring amounts from the journal to the ledger accounts.
General Journal J1
101
General Ledger
Oct. 1
Owner investment J1
10,000
10,000
SO 7

37. 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
SO 7 Explain what posting is and how it helps in the recording process.

38. 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
SO 7 Explain what posting is and how it helps in the recording process.

39. 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
SO 7 Explain what posting is and how it helps in the recording process.

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

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

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

43. The Recording Process Illustrated
Additional Transactions
Illustration 3-27

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

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

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

47. The Recording Process Illustrated
Additional Transactions
Illustration 3-31
SO 7

48. Summary Illustration of Journalizing
SO 7 Explain what posting is and how it helps in the recording process.

49. Summary Illustration of Journalizing
SO 7 Explain what posting is and how it helps in the recording process.

50. Summary Illustration of Posting
SO 7 Explain what posting is and how it helps in the recording process.

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

52. The Trial Balance 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.
SO 8 Explain the purposes of a trial balance.