1. Accounting, Fifth Edition3
THE ACCOUNTING INFORMATION SYSTEM
Accounting, Fifth Edition

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.

16. 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.

17. 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.

18. 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.

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

20. 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.

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

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

23. 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

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

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

26. 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

27. 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.

28. 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.

29. 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.

30. 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

31. 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.

32. 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

33. 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

34. 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

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

36. 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

37. 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

38. The Trial Balance
Illustration 3-34
Equal
LO 8