Financial Accounting Tools for Business Decision Making chapter 03 the accounting information system

3-1


THE ACCOUNTING
INFORMATION
SYSTEM

3-2

Financial Accounting, Seventh Edition

3


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

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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.


Preview of Chapter 3

Financial Accounting
Seventh Edition
Kimmel Weygandt Kieso
3-4


The
The Accounting
Accounting Information
Information System
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.

3-5

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


Accounting
Accounting Transactions
Transactions
Transactions are economic events that require recording
in the financial statements.

3-6



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.

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


Accounting
Accounting Transactions
Transactions

Question: Are the following events recorded in the
accounting records?
Event

Criterion

Purchase
computer.

Discuss guided trip
options with potential
customer.

Illustration 3-1

Pay rent.

Is the financial position (assets, liabilities, or
stockholders’ equity) of the company changed?

Record/ Don’t
Record

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


Accounting
Accounting Transactions

Transactions
Analyzing Transactions
The process of identifying the specific effects of economic
events on the accounting equation.

Basic Accounting Equation
Assets

3-8

=

Liabilities

+

Stockholders’
Equity

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


Accounting
Accounting Transactions
Transactions
Analyzing Transactions
Illustration 3-2
Expanded accounting equation

3-9

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


Accounting
Accounting Transactions
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.

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+10,000

+10,000

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


Accounting
Accounting Transactions
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

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+10,000
+5,000

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


Accounting
Accounting Transactions
Transactions
Event (3). On October 2, Sierra purchased equipment by paying $5,000 cash
to Superior Equipment Sales Co.

1.

+10,000

2.
3.

+5,000
-5,000

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+10,000
+5,000
+5,000

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


Accounting
Accounting Transactions
Transactions
Event (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

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


Accounting
Accounting Transactions
Transactions
Event (5). On October 3, Sierra received $10,000 in cash from Copa
Company for guide services performed.

1.

+10,000

2.
3.

+5,000
-5,000

4.

+1,200

5.

+10,000

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+10,000
+5,000
+5,000
+1,200
+10,000

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


Accounting
Accounting Transactions
Transactions
Event (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

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+10,000
+5,000
+5,000
+1,200
+10,000
-900

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


Accounting
Accounting Transactions
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.
3.

+5,000
-5,000

4.

+1,200

5.

+10,000

6.

-900

7.

-600

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+10,000
+5,000
+5,000

+1,200
+10,000
-900
+600

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


Accounting
Accounting Transactions
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.
3.

+5,000
-5,000

4.

+1,200

5.

+10,000

6.

-900

7.

-600

8.

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+10,000
+5,000
+5,000
+1,200
+10,000
-900
+600
+2,500

+2,500

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


Accounting
Accounting Transactions

Transactions
Event (9). On October 9, Sierra hired four new employees to begin work on
October 15.

1.

+10,000

2.
3.

+5,000
-5,000

4.

+1,200

5.

+10,000

6.

-900

7.

-600

8.

+10,000
+5,000
+5,000
+1,200
+10,000
-900
+600
+2,500

+2,500

An accounting transaction has not occurred.
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LO 1 Analyze the effect of business transactions on the basic accounting equation.


Accounting
Accounting Transactions
Transactions
Event (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

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+10,000
+5,000
+5,000
+1,200

+10,000
-900
+600
+2,500

-500

+2,500
-

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


Accounting
Accounting Transactions
Transactions
Event (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.

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+10,000
+5,000
+5,000
+1,200
+10,000
-900
+600
+2,500

-500
-4,000

+2,500
-4,000


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The
The Account
Account
Account



Record of increases and decreases in
a specific asset, liability, equity,
revenue, or expense item.



Debit = “Left”



Credit = “Right”

An Account can
be illustrated in a
T-Account form.

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LO 2 Explain what an account is and how it helps in the recording process.


The
The Account
Account
Debit and Credit Procedures
Double-entry system

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

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.


Debit
Debit and
and Credit
Credit Procedures
Procedures
If Debits are greater than Credits, the account will have
a debit balance.
Account Name
Debit / Dr.

Credit / Cr.

Transaction #1

$10,000

$3,000

Transaction #3

8,000

Transaction #2

Balance
$15,000

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


Debit
Debit and
and Credit
Credit Procedures
Procedures
If Credits are greater than Debits, the account will have
a credit balance.
Account Name
Transaction #1

Debit / Dr.

Credit / Cr.

$10,000

$3,000

Transaction #2

8,000

Transaction #3

Balance
$1,000

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