Accounting tools for business decision making 7 kieo ch03
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Accounting: Tools for Business Decision Making
Seventh Edition
Kimmel; Weygandt; Kieso
Chapter 3
The Accounting Information System
Prepared by
COBY HARMON
University of California, Santa Barbara
Westmont College
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Chapter Outline:
Learning Objectives
LO 1 Analyze the effect of business transactions on the basic accounting equation.
LO 2 Explain how accounts, debits, and credits are used to record business transactions.
LO 3 Indicate how a journal is used in the recording process.
LO 4 Explain how a ledger and posting help in the recording process.
LO 5 Prepare a trial balance.
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Learning Objective 1
Analyze the Effect of Business Transactions on the Basic
Accounting Equation
LO 1
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Using the Accounting Equation to Analyze Transactions
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Accounting Information System
•
System of
•
•
•
LO 1
Collecting transaction data
Processing transaction data
Communicating financial information to decision-makers
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Accounting Information System
Accounting information systems rely on a process referred to as the accounting cycle.
Most businesses use computerized accounting systems.
LO 1
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Accounting Transactions
Transactions
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Are economic events that require recording in the financial statements
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Not all activities require transactions
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Assets, liabilities, or stockholders’ equity items change as a result of an economic event
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Have a dual effect on the accounting equation
LO 1
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Transaction Identification Process
Are the following events recorded in the accounting records?
LO 1
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Analyzing Transactions (1 of 12)
•
LO 1
The process of identifying the specific effects of economic events on the accounting equation
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Accounting Equation Effects
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Accounting equation must always balance
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Each transaction has a dual effect on the equation
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If an asset is increased, there must be a corresponding
LO 1
•
Decrease in another asset, or
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Increase in a specific liability, or
ã
Increase in stockholders equity.
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Expanded Accounting Equation
LO 1
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Analyzing Transactions (2 of 12)
Event 1. Investment of Cash by Stockholders. On October 1, cash of $10,000 is invested in Sierra Corporation by
investors in exchange for $10,000 of common stock.
LO 1
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Analyzing Transactions (3 of 12)
Event 2. Note Issued in Exchange for Cash. On October 1, Sierra borrowed $5,000 from Castle Bank by signing a
3-month, 12%, $5,000 note payable.
LO 1
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Analyzing Transactions (4 of 12)
Event 3. Purchase of Equipment for Cash. On October 2, Sierra purchased equipment by paying $5,000 cash to
Superior Equipment Sales Co.
LO 1
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Analyzing Transactions (5 of 12)
Event 4. Receipt of Cash in Advance from Customer. On October 2, Sierra received a $1,200 cash in advance from R.
Knox, a client.
LO 1
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Analyzing Transactions (6 of 12)
Event 5. Services Performed for Cash. On October 3, Sierra received $10,000 in cash from Copa Company for
guide services performed.
LO 1
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Analyzing Transactions (7 of 12)
Event 6. Payment of Rent. On October 3, Sierra Corporation paid its office rent for the month of October in cash,
$900.
LO 1
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Analyzing Transactions (8 of 12)
Event 7. Purchase of Insurance Policy for Cash. On October 4, Sierra paid $600 for a one-year insurance policy
that will expire next year on September 30.
LO 1
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Analyzing Transactions (9 of 12)
Event 8. Purchase of Supplies on Account. On October 5, Sierra purchased an estimated three months of supplies
on account from Aero Supply for $2,500.
LO 1
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Analyzing Transactions (10 of 12)
Event 9. Hiring of New Employees. On October 9, Sierra hired four new employees to begin work on October 15.
An accounting transaction has not occurred.
LO 1
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Analyzing Transactions (11 of 12)
Event 10. Payment of Dividend. On October 20, Sierra paid a $500 dividend.
LO 1
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Analyzing Transactions (12 of 12)
Event 11. Payment of Cash for Employee Salaries. Employees have worked two weeks, earning $4,000 in salaries,
which were paid on October 26.
LO 1
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Do It! 1: Transaction Analysis
A tabular analysis of the transactions for the month of August is shown below. Describe each transaction.
1.
2.
3.
4.
LO 1
Company issued shares of stock for $25,000 cash.
Company purchased $7,000 of equipment on account.
Company received $8,000 cash in exchange for services performed.
Company paid $850 for this month’s rent.
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Learning Objective 2
Explain How Accounts, Debits, and Credits Are Used to Record
Business Transactions
LO 2
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Accounts, Debits, and Credits
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An account is an individual accounting record of increases and decreases in a specific asset, liability, stockholder's equity, revenue, or expense item
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A T-Account consists of
LO 2
1) the title of the account,
2) a left or debit side, and
3) a right or credit side
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Debits and Credits (1 of 2)
If Debits are greater than Credits, the account will have a debit balance.
LO 2
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