Financial Accounting: Tools for Business Decision Making

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Financial Accounting: Tools for Business Decision Making
Kimmel, Weygandt, Kieso, Trenholm KIMMEL Prepared by: Barbara Trenholm University of New Brunswick

Chapter 3 The Accounting Information System
After studying Chapter 3, you should be able to: Analyse 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.

Chapter 3 The Accounting Information System
After studying Chapter 3, you should be able to: 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.

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

Accounting Equation Assets = Liabilities + Shareholders’ Equity
The accounting equation must always balance

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

Illustration 3-1 Is the financial position (assets, liabilities, and shareholders’ equity) of the company changed?

Account An individual accounting record of increases and decreases in a specific Asset, Liability, or Shareholders’ Equity item

Account Three parts 1) the title of the account
2) a left or debit side 3) a right or credit side

The T-Account TITLE DEBIT CREDIT

Total the Entries to Each Side
Total Debits Total Credits TITLE Debit Credit If the greater sum is on the left, the account has a debit balance

Total the Entries to Each Side
Total Debits Total Credits TITLE Debit Credit If the greater sum is on the right, the account has a credit balance

Whichever side you increase is the normal side!

Normal Balances Shares

Normal Balances

Expanded Accounting Equation
Illustration 3-15 Expanded Accounting Equation Page 109 in book

Recording Process Analyse each transaction
Enter each transaction in a journal Transfer journal information to ledger accounts

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

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

Account Titles and Explanations
GENERAL JOURNAL Account Titles and Explanations Oct. 1 Cash , Common Shares , (Invested cash in business) Illustration 3-17 Date Debit Credit 1 Cash , Notes Payable , (Issued 3-month, 12% note payable for cash) 2 Office Equipment , Cash , (Purchased office equipment for cash)

General Ledger Entire group of accounts maintained by a company
Contains all the asset, liability, and shareholders’ equity accounts

The General Ledger Illustration 3-18

Posting Transferring information from the journals to the general ledger accounts

Account Titles and Explanations
Posting Entries GENERAL JOURNAL Account Titles and Explanations Oct. 1 Cash , Common Shares ,000 Acct 1010 Account CASH Date Balance ref debit credit debit credit Oct 1 gj 1 10,000 10,000 Account COMMON SHARES Acct 3010 Date Balance ref debit credit debit credit Oct 1 gj 1 10,000 10,000

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

SIERRA CORPORATION Trial Balance October 31, 2001 Debit Credit
Illustration 3-33 Debit Credit Cash \$15,200 Advertising Supplies ,500 Prepaid Insurance Office Equipment ,000 Notes Payable \$ 5,000 Accounts Payable ,500 Unearned Service Revenue ,200 Common Shares ,000 Dividends Service Revenue ,000 Salaries Expense ,000 Rent Expense \$28,700 \$28,700

Decision Checkpoints Has an accounting transaction occurred?
How do you determine that debits equal credits?

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