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

3. Learning Objectives
After studying this chapter, you should be able to:
Define transactions and analyze their effects on the basic accounting equation
Explain how accounts, debits and credits are used to record business transactions
Explain how a journal is used in the recording process
Explain how a ledger and posting help in the recording process
Explain the purposes of a trial balance

4. 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.
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5. The Accounting Information System
Accounting Information Systems rely on a process
Analyze business transactions
Journalize
Post
Trial Balance
Adjusting Entries
Adjusted Trial Balance
Financial Statements
Closing Entries
Post-Closing Trial Balance
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6. Accounting Transactions
Transactions are economic events (activities) that change assets, liabilities, or stockholders’ equity items.
Not all events (activities) represent transactions.
Transactions have Dual effect on the accounting equation.
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7. Accounting Transactions
Question: Are the following events (activities) 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
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8. Accounting Transactions
Analyzing Transactions
The process of identifying the effects of economic events on the accounting equation.
Basic Accounting Equation
Assets
Liabilities
Stockholders’ Equity = +
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9. Accounting Transactions
Analyzing Transactions
Illustration 3-2
Expanded accounting equation
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10. Accounting 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. Accounting 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. Accounting 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. Accounting 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. Accounting 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. Accounting 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. Accounting 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. Accounting 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. Accounting 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. Accounting 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. Accounting 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

21. 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.
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22. Debit and Credit Procedures
Assets – Increases are debited; decreases credited.
Liabilities – Increases are credited; decreases debited.
▼ HELPFUL HINT
The normal balance is the side where increases in the account are recorded.
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23. Debit and Credit Procedures
Investments by stockholders/Common stock – Increases are credited; decreases debited.
Retained earnings is part of stockholders’ equity; Dividends decrease stockholder’s equity.
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24. Debit and Credit Procedures
Revenue accounts – same as stockholders’ equity; revenues increase stockholders’ equity.
Expense accounts – opposite of stockholders’ equity; expenses decrease stockholders’ equity.
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25. Stockholders’ Equity Relationships
Illustration 3-15
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26. Summary of Debit/Credit Rules
Normal Balance Debit
Normal Balance Credit
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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.
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28. 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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29. Steps in the Recording Process
Analyze each transaction in terms of its effect on the balance sheet equation.
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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30. Steps in the Recording Process
Journalize the transaction
Post to ledger accounts
Analyze business transactions
Illustration 3-17
Source documents, such as a sales slip, a cash register tape, an invoice from a vendor, or a bill, provide evidence of a transaction.
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31. 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.
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32. 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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33. Journalizing
Oct. 1
Sierra issued common stock in exchange for $10,000 cash.
General Journal
Cash
10,000
Common stock
10,000
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34. Journalizing Oct. 1 Sierra borrowed $5,000 by signing a note. Cash
General Journal
Cash
5,000
Notes payable
5,000
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35. Journalizing Oct. 2 Sierra purchased equipment for $5,000. Equipment
General Journal
Equipment
5,000
Cash
5,000
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36. Steps in the Recording Process
The Ledger is comprised of the entire group of accounts maintained by a company.
Illustration 3-19
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37. Steps in the Recording Process
Chart of Accounts – listing of accounts used by a company to record transactions.
Illustration 3-20
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38. Steps in the Recording Process
Posting – the process of transferring journal entry amounts to ledger accounts.
General Journal J1
101
General Ledger
Oct. 1
Stock issued J1
10,000
10,000
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39. Steps in the Recording Process
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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40. 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
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41. 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
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42. 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
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43. The Recording Process Illustrated
Additional Transactions
Illustration 3-24
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44. The Recording Process Illustrated
Additional Transactions
Illustration 3-25
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45. The Recording Process Illustrated
Additional Transactions
Illustration 3-26
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46. The Recording Process Illustrated
Additional Transactions
Illustration 3-27

47. The Recording Process Illustrated
Additional Transactions
Illustration 3-28
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48. The Recording Process Illustrated
Additional Transactions
Illustration 3-29
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49. The Recording Process Illustrated
Additional Transactions
Illustration 3-30
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50. The Recording Process Illustrated
Additional Transactions
Illustration 3-31
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51. Summary Illustration of Journalizing
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52. Summary Illustration of Journalizing
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53. Summary Illustration of Posting
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54. 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.
▼ HELPFUL HINT
Note that the order of
presentation in the trial balance is:
Assets
Liabilities
Stockholders’ equity
Revenues
Expenses
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55. The Trial Balance
Illustration 3-34
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56. 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.
Ethics Note An error is the result of an unintentional mistake. It is neither ethical nor unethical. An irregularity (A fraud) is an intentional misstatement, which
is viewed as unethical.
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57. The 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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58. Looking to the Future
The basic recording process shown in this textbook is followed by companies across the globe. It is unlikely to change in the future. The definitional structure of assets, liabilities, equity, revenues, and expenses may change over time as the IASB and FASB evaluate their overall conceptual framework for establishing accounting standards.
Compare the procedures for the recording process under GAAP and IFRS.

59. IFRS Practice Which statement is correct regarding IFRS?
IFRS reverses the rules of debits and credits, that is, debits are on the right and credits are on the left.
IFRS uses the same process for recording transactions as GAAP.
The chart of accounts under IFRS is different because revenues follow assets.
None of the above statements are correct.
Compare the procedures for the recording process under GAAP and IFRS.

60. IFRS Practice A trial balance: is the same under IFRS and GAAP.
proves that transactions are recorded correctly.
proves that all transactions have been recorded.
will not balance if a correct journal entry is posted twice.
Compare the procedures for the recording process under GAAP and IFRS.

61. Takeaways
Accounting information system is the system that collects and processes data about the events that affect assets, liabilities, or stockholders’ equity; and communicates financial information to decision makers.
Transactions are first analyzed in terms of their effect on the balance sheet equation; then recorded in a book of original entry called a General Journal in chronological order; and finally posted to accounts that comprise a General Ledger.
Transactions are recorded using the debit and credit rules to allow checking for accuracy of recording and processing.

62. Takeaways
To ensure that debits always equal credits, increases (decreases) in assets, expenses, and dividends are debited (credited); and increases (decreases) in liabilities, stockholders’ equity, and revenues are credited (debited).
A trial balance, which is a list of accounts and their balances, is prepared at the end of each accounting period to ensure that debits equal credits.
The trial balance may balance even when there are errors in recording or processing of transactions.
The accounting information processing is essentially the same under IFRS.

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Note: presentation somewhat modified by Reza Espahbodi