Accounting, Fifth Edition 3 THE ACCOUNTING INFORMATION SYSTEM Accounting, Fifth Edition

Learning Objectives After studying this chapter, you should be able to: 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.

Tell a story 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. Tell a story LO 1 Analyze the effect of business transactions on the basic accounting equation.

The Accounting Information System Why does it matter??? If it is wrong, your financial statements could be wrong If financial statements are wrong, external and internal users cannot rely on them Detection risk – will an auditor find it? SOX was an effort to help ensure the accuracy of the AIS . LO 1 Analyze the effect of business transactions on the basic accounting equation.

Accounting Transactions Transactions are economic events/exchanges that require recording in the financial statements. Not all activities represent transactions. Hiring an employee vs. paying an employee for work preformed. Assets, liabilities, or stockholders’ equity items change as a result of some economic event. Dual effect on the accounting equation. LO 1 Analyze the effect of business transactions on the basic accounting equation.

Accounting Transactions Question: Are the following events recorded in the accounting records? Illustration 3-1 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 LO 1 Analyze the effect of business transactions on the basic accounting equation.

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

Accounting Equation & Fin’l Statements Analyzing Transactions Illustration 3-2 Expanded accounting equation LO 1 Analyze the effect of business transactions on the basic accounting equation.

Analyzing & Recording Business Transactions Analyze each transaction and event from source documents Record relevant transactions & events in a general journal Post journal information to the general ledger (t-accounts) Prepare and analyze the trial balance 2-9

Steps in the Recording Process The General Journal (sub-ledger) Chronological list of all business transactions. It is the book of original entry. It records the increase or decrease in a specific asset, liability, equity, revenue, or expense account. Helps to prevent or locate errors because the debit and credit amounts can be easily compared. Lots & lots of data Sales by line item Detail, detail, detail!!!! LO 5 Explain what a journal is and how it helps in the recording process.

Steps in the Recording Process Chart of Accounts – listing of accounts used by a company to record transactions in the journal and general ledger. Illustration 3-20 LO 6 Explain what a ledger is and how it helps in the recording process.

Steps in the Recording Process The General Ledger is comprised of the entire group of accounts maintained by a company (like sorting coins). Illustration 3-19 LO 6 Explain what a ledger is and how it helps in the recording process.

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

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. LO 3 Define debits and credits and explain they are used to record business transactions.

DO NOT OVERTHINK THIS Debits & Credits JUST MEANS LEFT OR RIGHT NORMAL BALNCES DO NOT OVERTHINK THIS STAY WITH ME… LO 3 Define debits and credits and explain they are used to record business transactions.

Procedures for Assets and Liabilities Assets - Debits should exceed credits. Liabilities – Credits should exceed debits. LO 3 Define debits and credits and explain they are used to record business transactions.

Procedures for Stockholders’ Equity Investments by stockholders and revenues increase stockholders’ equity (credit). Dividends and expenses decrease stockholder’s equity (debit). LO 3 Define debits and credits and explain they are used to record business transactions.

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. LO 3 Define debits and credits and explain they are used to record business transactions.

NORMAL BALANCE SUMMARY Normal Balance Debit Normal Balance Credit LO 3 Define debits and credits and explain they are used to record business transactions.

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.

Double-Entry Accounting Debit and Credit Procedures Liabilities Equity Assets = + Debit Credit ASSETS + - LIABILITIES - + EQUITIES 2-21

Equity _ + - + + - Debit and Credit Procedures Revenues Expenses Common Stock Dividends _ + Debit Credit Stock - + Dividends + - Expenses Revenues 2-22

Assets = Liabilities + Owners’ Equity Advantage of T Accounts (aka Posting) “T” accounts provide a better visual trail for an individual account. They are often useful in helping one find where an “Out of Balance” exists. Assets = Liabilities + Owners’ Equity

A T-account represents a general ledger account. Recording Transactions using T Accts A T-account represents a general ledger account. 2-24

T-Account Summary – Normal Balances Debit Credit Assets Dividends Expenses Liabilities Capital/Equity Revenue

Assets = Liabilities + Owners’ Equity Journalizing Transactions Read the transaction. Decide which accounts are involved. Look first to see if cash is involved. Classify the accounts involved (asset, liability, capital, revenue or expense). Decide if the accounts increase or decrease in value. Properly allocate the transaction as debit(s) and credit(s). Check to see the debits for that transaction equal the credits and that the fundamental equation still works: Assets = Liabilities + Owners’ Equity

Journalizing & Posting Sierra issued common stock in exchange for $10,000 cash. Oct. 1 General Journal Cash 10,000 Common stock 10,000 10,000 A - Cash E – Common Stock Posting: Dr. Cr. Dr. Cr. LO 5 Explain what a journal is and how it helps in the recording process.

Journalizing & Posting Sierra borrowed $5,000 by signing a note. Oct. 1 General Journal Cash Notes payable 5,000 Dr. (Cr) (Cr.) A - Cash L – Notes Payable Posting: 10,000 5,000 LO 5 Explain what a journal is and how it helps in the recording process.

Journalizing & Posting Sierra purchased equipment for $5,000. Oct. 2 General Journal Equipment Cash 5,000 Dr. (Cr.) A - Cash 5,000 A - Equipment Posting: Dr. (Cr.) 10,000 5,000 5,000 LO 5 Explain what a journal is and how it helps in the recording process.

Journalizing & Posting On October 2, Sierra received a $1,200 cash advance from a client. Oct. 2 General Journal Cash Unearned Service Revenue 1,200 L – Unearned Service Revenue Dr. (Cr) A - Cash Posting: Dr. (Cr) 10,000 5,000 1,200 5,000 1,200

Journalizing & Posting On October 3, Sierra received $10,000 in cash from Copa Company for services performed. Oct. 3 General Journal Cash Service Revenue 10,000 R – Service Revenue Dr. (Cr) A - Cash Posting: Dr. (Cr) 10,000 5,000 1,200 5,000 10,000 LO 5 Explain what a journal is and how it helps in the recording process.

Journalizing & Posting On October 3, Sierra Corporation paid its office rent for the month of October in cash, $900. Oct. 3 General Journal Rent Expense Cash 900 Dr. (Cr) A-Cash Posting: E – Rent Expense Dr. (Cr) 10,000 5,000 1,200 5,000 900 900

Journalizing & Posting On October 4, Sierra paid $600 for a one-year insurance policy that will expire next year on September 30. Oct. 4 General Journal Prepaid Insurance Cash 600 Dr. (Cr) A – Cash A – Prepaid Insurance Posting: Dr. (Cr) 10,000 5,000 1,200 5,000 900 600 600

Journalizing & Posting On October 5, Sierra purchased an estimated three months of supplies on account from Aero Supply for $2,500. Oct. 5 General Journal Supplies Accounts Payable 2,500 Dr. (Cr) A – Supplies 2,500 Dr. (Cr) L – Accounts Payable Posting: 2,500

Journalizing & Posting On October 9, Sierra hired four new employees to begin work on October 15. Oct. 9 An accounting transaction has not occurred.

Journalizing & Posting On October 20, Sierra paid a $500 dividend Oct. 20 General Journal Dividends Cash 500 Dr. (Cr) A – Cash SE - Dividends Posting: Dr. (Cr) 10,000 5,000 1,200 5,000 900 600 500 500

Journalizing & Posting Employees have worked two weeks, earning $4,000 in salaries, which were paid on October 26. Oct. 26 General Journal Salaries & Wage Expense Cash 4,000 E – Salaries & Wage Expense Dr. (Cr) A – Cash Posting: Dr. (Cr) 10,000 5,000 1,200 5,000 900 600 500 4,000 4,000

The Trial Balance Illustration 3-34 Equal LO 8