3-1 3-2 THE ACCOUNTING INFORMATION SYSTEM Accounting, Fourth Edition 3 3-3 1. Analyze the effect of business transactions on the basic accounting equation. 2. Explain what an account is and how it helps in the recording process. 3. Define debits and credits and explain how they are used to record business transactions. 4. Identify the basic steps in the recording process. 5. Explain what a journal is and how it helps in the recording process. 6. Explain what a ledger is and how it helps in the recording process. 7. Explain what posting is and how it helps in the recording process. 8. Explain the purposes of a trial balance. 9. Classify cash activities as operating, investing, or financing. Study Objectives Study Objectives Study Objectives Study Objectives 3-4 Debits and Debits and credits credits Debit and Debit and credit credit procedures procedures Stockholders’ Stockholders’ equity equity relationships relationships Summary of Summary of debit/credit debit/credit rules rules Accounting Accounting Transactions Transactions Accounting Accounting Transactions Transactions The Account The Account The Account The Account Steps in the Steps in the Recording Recording Process Process Steps in the Steps in the Recording Recording Process Process The The Recording Recording Process Process Illustrated Illustrated The The Recording Recording Process Process Illustrated Illustrated The Trial The Trial Balance Balance The Trial The Trial Balance Balance Analyzing Analyzing transactions transactions Summary of Summary of transactions transactions The journal The journal The ledger The ledger Chart of Chart of accounts accounts Posting Posting Summary Summary illustration of illustration of journalizing and journalizing and posting posting Limitations of Limitations of a trial balance a trial balance The Accounting Information System The Accounting Information System The Accounting Information System The Accounting Information System 3-5 The Accounting Information System The Accounting Information System The Accounting Information System The Accounting Information System Accounting Information System System of ► collecting and ► processing transaction data and ► communicating financial information to decision makers. Most businesses use computerized accounting (EDP) systems. 3-6 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. Accounting Transactions Accounting Transactions Accounting Transactions Accounting Transactions 3-7 Question: Question: Are the following events recorded in the accounting records? Event Purchase computer. Criterion Is the financial position (assets, liabilities, or stockholders’ equity) of the company changed? Pay rent. Record/ Don’t Record Accounting Transactions Accounting Transactions Accounting Transactions Accounting Transactions Discuss guided trip options with potential customer. Illustration 3-1 3-8 Assets AssetsAssets Assets Liabilities LiabilitiesLiabilities Liabilities Stockholders’ Stockholders’ Equity Equity Stockholders’ Stockholders’ Equity Equity = + Analyzing Transactions SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation. Basic Accounting Equation Accounting Transactions Accounting Transactions Accounting Transactions Accounting Transactions The process of identifying the specific effects of economic events on the accounting equation. 3-9 Analyzing Transactions SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation. Accounting Transactions Accounting Transactions Accounting Transactions Accounting Transactions Illustration 3-2 Expanded accounting equation 3-10 Illustration: Illustration: 1. On October 1, cash of $10,000 is invested in Sierra Corporation by investors in exchange for $10,000 of common stock. Accounting Transactions Accounting Transactions Accounting Transactions Accounting Transactions 1. +10,000 +10,000 SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation. [...]... +5,000 SO 1 Analyze the effect of business transactions on the basic accounting equation Accounting Transactions Accounting Transactions 4 On October 2, Sierra received a $1,200 cash advance from R Knox, a client 1 +10,000 2 3 +5,000 -5,000 4 +1,200 3-13 +10,000 +5,000 +5,000 +1,200 SO 1 Analyze the effect of business transactions on the basic accounting equation Accounting Transactions Accounting Transactions... Analyze the effect of business transactions on the basic accounting equation Accounting Transactions Accounting Transactions 6 On October 3, Sierra Corporation paid its office rent for the month of October in cash, $900 1 +10,000 2 3 +5,000 -5,000 4 +1,200 5 +10,000 6 -900 3-15 +10,000 +5,000 +5,000 +1,200 +10,000 -900 SO 1 Analyze the effect of business transactions on the basic accounting equation Accounting. .. Analyze the effect of business transactions on the basic accounting equation Accounting Transactions Accounting Transactions 10 On October 20, Sierra paid a $500 dividend 1 +10,000 2 3 +5,000 -5,000 4 +1,200 5 +10,000 6 -900 7 -600 8 10 500 3-18 +10,000 +5,000 +5,000 +1,200 +10,000 -900 +600 +2,500 -500 +2,500 - SO 1 Analyze the effect of business transactions on the basic accounting equation Accounting. .. account is and how it helps in the recording process The Account The Account Debit and Credit Procedures Double-entry system ► ► Recording done by debiting at least one account and crediting another ► 3-22 Each transaction must affect two or more accounts to keep the basic accounting equation in balance DEBITS must equal CREDITS SO 3 Define debits and credits and explain their use in recording business... in the Recording Process Steps in the Recording Process Illustration 3-17 Analyze each transaction Enter transaction in a journal Transfer journal information to ledger accounts Source documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction 3-35 SO 4 Identify the basic steps in the recording process Steps in the Recording Process Steps in the. . .Accounting Transactions 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 3-11 +10,000 +5,000 SO 1 Analyze the effect of business transactions on the basic accounting equation Accounting Transactions Accounting Transactions 3 On October 2, Sierra purchased... transactions Dr./Cr Procedures for Revenue and Expense 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  Debit / Dr   Revenue Expenses have the opposite effect: expenses decrease stockholders’ equity Credit / Cr Normal Balance Chapter 3-26... Accounting Transactions 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 3 +5,000 -5,000 4 +1,200 5 +10,000 6 -900 7 -600 3-16 +10,000 +5,000 +5,000 +1,200 +10,000 -900 +600 SO 1 Analyze the effect of business transactions on the basic accounting equation Accounting Transactions Accounting Transactions 8... Recording Process The Journal  Book of original entry  Transactions recorded in chronological order  Contributions to the recording process: 1 Discloses the complete effects of a transaction 2 Provides a chronological record of transactions 3 Helps to prevent or locate errors because the debit and credit amounts can be easily compared 3-36 SO 5 Explain what a journal is and how it helps in the recording... the basic accounting equation Accounting Transactions Accounting Transactions 11 Employees have worked two weeks, earning $4,000 in salaries, which were paid on October 26 1 +10,000 2 3 +5,000 -5,000 4 +1,200 5 +10,000 6 -900 7 -600 8 10 500 11 3-19 +10,000 +5,000 +5,000 +1,200 +10,000 -900 +600 +2,500 -500 -4,000 +2,500 -4,000 3-20 The Account The Account Record of increases and decreases in a specific