3

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

Transaction Identification Process
Illustration 3-1

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

The T Account
TITLE
Debit Credit
Total Debits
Total the entries to each side
If the greater sum is on the left, the account has a debit balance

The T Account
TITLE
Debit Credit
Total Credits
Total the entries to each side
If the greater sum is on the right, the account has a credit balance

Normal Balances
Shares

Normal Balances

Expanded Accounting Equation
Illustration 3-10

Recording Process
Illustration 3-11

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 to prevent or locate errors as debit and credit amounts can be easily compared

General Ledger
• Entire group of accounts maintained by a company
• Contains all the asset, liability, and shareholders’ equity accounts
• Posting is the process of transferring information from the journals to the general ledger accounts

Chart of Accounts
• A listing of the company’s accounts
• The number of accounts in a company’s chart of accounts depends on the size, complexity, and type of business.
• New accounts can be created at any time during the life of the company
• See sample chart of accounts on the Toolkit
CD

Posting
• The process of transferring journal entries to ledger accounts
• Posting should be done on a timely basis
• This phase of the recording process accumulates the effects of journalized transactions in the individual accounts

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, 2004
Debits Credits
Service Revenue
10,000
Rent Expense
900
$28,700 $28,700