Financial Accounting: Tools for
Business Decision Making
Tenth Edition
Kimmel ● Weygandt ● Mitchell
Chapter 3
The Accounting Information System
Prepared by
Diane Tanner
University of North Florida
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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.
Learning Objective 1
Analyze the Effect of Business
Transactions on the Basic Accounting
Equation
LO 1
Using the Accounting Equation to
Analyze Transactions
Accounting Information System
•
•
Is a system of collecting transaction data, processing
transaction data, and communicating financial information
to decision-makers
Is affected by factors
o
o
o
o
o
•
Nature of the company’s business
Types of transactions
Size of the company
Volume of data
Information demands of management
and others
Relies on the accounting cycle
LO 1
Accounting Cycle
• Is the basis of an accounting information system
• Implemented primarily through a computerized
accounting system
o
Called electronic data processing systems (EDP)
• Contains the same concepts and principles regardless
if manual or computerized
To emphasize the underlying concepts and principles,
we focus on a manual accounting system.
LO 1
Accounting Transactions
• Are economic events that require recording in the
financial statements
o
Not all events represent transactions
• Occur when assets, liabilities, or stockholders’ equity
items change as a result of some economic event
• Have a dual effect on the accounting equation
LO 1
Transaction Identification Process
Are the following events recorded in the accounting records?
LO 1
Analyzing Transactions
•
•
•
•
•
Is the process of identifying the specific effects of economic
events on the accounting equation
Based upon the accounting equation
Assets = Liabilities + Stockholders’ Equity
Must always balance
Each transaction has a dual effect
If an individual asset is increased, there
must be a corresponding
o Decrease in another asset, or
o Increase in a specific liability, or
o Increase in stockholders’ equity
LO 1
Expanded Accounting Equation
LO 1
Tabular Analysis
• Used to demonstrate the effect that each transaction
has on particular financial statements
• Retained earnings is affected
o When the company recognizes revenue, incurs
expenses, or pays dividends
LO 1
Investment of Cash by Stockholders
Event (1) On October 1, cash of $10,000 is invested by
investors in exchange for $10,000 of common stock.
Basic Analysis: The asset Cash is increased $10,000;
stockholders’ equity (specifically Common
Stock) is increased $10,000.
LO 1
Note Issued in Exchange for Cash
Event (2) On October 1, Sierra borrowed $5,000 from Castle
Bank by signing a 3-month, 12%, $5,000 note
payable.
Basic Analysis: The asset Cash is increased $5,000; the
liability Notes Payable is increased $5,000.
LO 1
Purchase of Equipment for Cash
Event (3) On October 2, Sierra purchased equipment by
paying $5,000 cash to Superior Equipment Sales Co.
Basic Analysis: The asset Equipment is increased $5,000; the
asset Cash is decreased $5,000.
LO 1
Receipt of Cash in Advance from
Customer
Event (4) On October 2, Sierra received a $1,200 cash
advance from R. Knox, a client.
Basic Analysis: The asset Cash is increased $1,200; the
liability Unearned Service Revenue is
increased $1,200.
LO 1
Services Performed for Cash
Event (5) On October 3, Sierra received $10,000 in cash from
Copa Company for guide services performed for a
corporate event.
Basic Analysis: The asset Cash is increased $10,000; the
revenue Service Revenue is increased $10,000.
LO 1
Services Performed on Account
On account
• Means that services will be paid at a later date
• Revenue is recorded when services are performed
Record services performed on account
Record collection from the customer
LO 1
Payment of Rent
Event (6) On October 3, Sierra paid its office rent for the
month of October in cash, $900.
Basic Analysis: The expense Rent Expense is increased $900
because the payment pertains only to the
current month; the asset Cash is decreased
$900.
LO 1
Purchase of Insurance Policy for Cash
Event (7) On October 4, Sierra paid $600 for a one-year
insurance policy that will expire next year on
September 30.
Basic Analysis: The asset Cash is decreased $600; the asset
Prepaid Insurance is increased $600.
LO 1
Purchase of Supplies on Account
Event (8) On October 5, Sierra purchased an estimated three
months of supplies on account from Aero Supply for
$2,500.
Basic Analysis: The asset Supplies is increased $2,500; the
liability Accounts Payable is increased $2,500.
LO 1
Hiring New Employees
Event (9) On October 9, Sierra hired four new employees
to begin work on October 15. Each employee
will receive a weekly salary of $500 for a fiveday work week, payable every two weeks.
Employees will receive their first paychecks on
October 26.
Basic Analysis: An accounting transaction has not
occurred. There is only an agreement that
the employees will begin work on
October 15.
LO 1
Payment of Dividends
Event (10) On October 20, Sierra paid a $500 cash dividend.
Basic Analysis: Dividends is increased $500; the asset Cash is
decreased $500.
LO 1
Payment of Cash for Employee Salaries
Event (11) Employees have worked two weeks, earning
$4,000 in salaries, which were paid on October 26.
Basic Analysis: The asset Cash is decreased $4,000; the
expense Salaries and Wages Expense is
increased $4,000.
LO 1
Summary of Transactions
• Summarizes the transactions to show their cumulative
effect on the basic accounting equation
• Includes the transaction number in the first column on
the left
• The right-most column shows the specific effect of any
transaction that affects revenues or expenses
• Demonstrates three points
① Each transaction is analyzed in terms of its effect on
assets, liabilities, and stockholders’ equity.
② The two sides of the equation must always be equal.
③ The cause of each change in revenues or
expenses must be indicated.
LO 1
Illustration of Summary of Transactions
LO 1
Knowledge Check: Transaction Analysis
Record each of Ace’s transactions in a tabular analysis of
transactions for the month of June.
1. Ace issued shares of stock to stockholders for
$9,000 cash.
2. Ace purchased $4,200 of equipment on account.
3. Ace received cash for $2,100 of services performed.
+$9,000
+$9,000
+4,200
+2,100
+4,200
+2,100
Service
Revenue
LO 1
Learning Objective 2
Explain How Accounts, Debits, and
Credits Are Used to Record Business
Transactions
LO 2
Accounts, Debits, and Credits
Account
• Is an individual accounting record of increases and
decreases in a specific asset, liability, stockholders’
equity, revenue, or expense item
• Consists of three parts
o
o
o
A title
A left or debit side
A right or credit side
LO 2
Debits and Credits
Debit = Left
Dr.
Credit = Right
Cr.
• Use of debits and credits
o Describes where entries are made in accounts
• Debiting
o Entering an amount on the left side of an account
• Crediting
o Entering an amount on the right side of an
account
LO 2
Tabular Summary and Account Form
Sierra Corporation’s Cash account
LO 2
Benefits of Using the T-Account Form
•
•
Reduces recording errors by having increases on one
side and decreases on the other
Helps in determining the totals of each side of the
account as well as the account balance
o
Determining the balance
•
Net the two sides by subtracting one amount from the
other
LO 2
Understanding Debits and Credits
Animation Video: Understanding Debits and Credits
LO 2
Knowledge Check: Debits and Credits
Identify each statement as true or false.
1. The tabular summary form of an account is used
primarily to record transactions by businesses.
2. Debits indicate increases and credits indicate
decreases.
3. An account is an individual accounting record of
increases and decreases in a specific asset,
liability, stockholders’ equity, revenue, or expense
item.
4. In its simplest form, an account has three parts, a
title, a left or credit side, and a right or debit side.
False
False
True
False
LO 2
Debit and Credit Procedures
• Debits must equal credits
o
Provides equality as the basis for the double-entry
accounting system
• Double-entry system
o
o
o
o
Requires a two-sided effect of each transaction
recorded in appropriate accounts
Provides a logical method for recording transactions
Helps to ensure the accuracy of the recorded amounts
Helps detect errors
LO 2
Dr./Cr. Procedures for Assets and
Liabilities
• Have opposite effects as they are on opposite sides
of the accounting equation
Debits
Increase assets
Decrease liabilities
Credits
Decrease assets
Increase liabilities
• Normal balances
o
The side where increases are recorded
LO 2
Dr./Cr. Procedures for Stockholders’
Equity
Common Stock
• Same effects as liabilities
Debits
Credits
Decrease Common Stock Increase Common Stock
• Normal balances
o
The credit side where increases are recorded
LO 2
Dr./Cr. Procedures for Stockholders’
Equity
Retained Earnings
• Is net income that is retained in the business
• Increases stockholders’ equity
Debits
Credits
Decrease Retained Earnings Increase Retained Earnings
• Normal balances
o
The credit side where increases are recorded
LO 2
Dr./Cr. Procedures for Stockholders’
Equity
Dividends
• Represents a distribution by a corporation to its
stockholders, usually cash
• Decreases stockholders’ equity
Debits
Credits
Increase dividends Decrease dividends
• Normal balances
o
The debit side where increases are recorded
LO 2
Dr./Cr. Procedures for Stockholders’
Equity
Revenues and Expenses
• Revenues increase stockholders’ equity
• Expenses decrease stockholders’ equity
Debits
Decrease revenue
Increase expenses
Credits
Increase revenue
Decrease expenses
• Normal balances
LO 2
Knowledge Check: Debit and Credit
Procedures
Identify the normal balance and debit effect of each account
type.
Normal Balance
Debit Effect
Liability
Credit
Decrease
Expense
Debit
Increase
Revenue
Credit
Decrease
Asset
Debit
Increase
Common Stock
Credit
Decrease
Retained Earnings
Credit
Decrease
LO 2
Stockholders’ Equity Relationships
LO 2
Knowledge Check: Stockholders’ Equity
Relationships
Identify in which financial statement each subdivision of stockholders’
equity is reported. (One subdivision is reported in more than one
statement.)
Accounts
Common stock
Stockholders’ equity section of the
balance sheet
Revenues
Income statement
Dividends
Retained earnings statement
Retained earnings
Stockholders’ equity section of the
balance sheet and retained earnings
statement
Income statement
Expenses
LO 2
Summary of Debit/Credit Rules
Relationship among the assets, liabilities and stockholders’
equity of a business
•
Equation must be in balance after every transaction
•
Total debits must equal total credits
LO 2
Knowledge Check: Debit/Credit Rules
Identify the normal balance and debit effect of each
account.
Normal Balance
Debit Effect
Decrease
Accounts Payable
Credit
Salaries Expense
Debit
Increase
Service Revenue
Credit
Decrease
Equipment
Debit
Increase
Common Stock
Credit
Decrease
Accounts Receivable
Debit
Increase
LO 2
Learning Objective 3
Indicate How a Journal is Used in the
Recording Process
LO 3
Using a Journal
The Recording Process
• Consists of three steps
Analyze business
transactions
Journalize the
transaction
Post to ledger
accounts
• Evidenced by a
source document
o Such as a sales
slip, check,
bill, or cash
register
document
LO 3
Illustration of the Recording Process
LO 3
The Journal
• Is an accounting record in which transactions recorded
in chronological order
• Shows the debit and credit effects on specific accounts
• Contributions to the recording process
o
o
o
Discloses the complete effect of a transaction
Provides a chronological record of transactions
Helps to prevent or locate errors
• Journalizing
o
Is the process of entering transaction data in the
journal
LO 3
Features of Journal Entries
•
•
•
•
•
•
Date is entered in the Date column
Account to be debited is entered first at the left
Account to be credited is entered on the next line,
indented
Amounts for the debits are recorded in the Debit column
Amounts for the credits are recorded in the Credit column
Brief explanation of the transaction is given
LO 3
Journalizing the Issuance of Stock
October 1, Sierra issued common stock in exchange for $10,000 cash.
Assets
= Liabilities +
Stockholders’ Equity
Cash
=
Common Stock
+$10,000
=
+$10,000
Issued stock
LO 3
Journalizing a Borrowing by Signing a
Note
October 1, Sierra borrowed $5,000 by signing a note.
Assets
= Liabilities +
Cash
=
Notes
Payable
+$5,000
=
+$5,000
Stockholders’ Equity
LO 3
Journalizing the Purchase of Equipment
October 2, Sierra purchased equipment for $5,000.
Assets
Cash
−$5,000
+
= Liabilities + Stockholders’ Equity
Equipment =
+$5,000
=
LO 3
Knowledge Check: Journal Entries –
Part A
Record two entries for Handy Help.
Handy Help paid May’s office rent of $850 on May 2.
Handy Help performed services and billed the customer $3,100
on May 11.
GENERAL JOURNAL
Date
May 2
11
Account Titles and Explanations
Rent Expense
Cash
(Paid office rent for May)
Accounts Receivable
Service Revenue
(Performed services and billed customer)
Debit
850
3,100
Credit
850
3,100
LO 3
Knowledge Check: Journal Entries –
Part B
Record two entries for Handy Help.
Handy Help purchased equipment on account on May 14 for
$3,800.
Handy Help paid dividends of $1,100 on May 21.
GENERAL JOURNAL
Date
May 14
21
Account Titles and Explanations
Equipment
Accounts Payable
(Purchased equipment on account)
Dividends
Cash
(Paid dividends)
Debit
3,800
Credit
3,800
1,100
1,100
LO 3
Learning Objective 4
Explain How a Ledger and Posting Help
in the Recording Process
LO 4
The Ledger and Posting
Posting to Ledger Accounts
• Occurs after entries are recorded in the journal
• Ledger
o
o
Consists of a record of all accounts maintained by a
company and their amounts
Provides the balance in each of the accounts as well as
keeps track of changes in these balances
Analyze business
transactions
Journalize the
transaction
Post to ledger
accounts
LO 4
The Ledger
•
•
•
Is a record of all accounts maintained by a company and their amounts
Proves the balance in each account and tracks changes in the balances
Most common ledger is general ledger
o
Contains all the asset, liability, stockholders’ equity, revenue, and
expense accounts
LO 4
Chart of Accounts
Assets
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Equipment
Accumulated Depreciation—Equipment
Liabilities
Notes Payable
Accounts Payable
Interest Payable
Unearned Service Revenue
Salaries and Wages Payable
Accounts in Red are used in this chapter.
Stockholder's Equity
Common Stock
Retained Earnings
Dividends
Income Summary
Revenues
Service Revenue
Expenses
Salaries and Wages Expense
Supplies Expense
Rent Expense
Insurance Expense
Interest Expense
Depreciation Expense
LO 4
Posting
Is the procedure of transferring journal entry amounts to
ledger accounts
• Accumulates the effects of journalized transactions in the
individual accounts
Two steps
1. Enter in the appropriate columns of the debited
account(s) the date and the debit amount shown in the
journal.
2. In the ledger, enter in the appropriate columns of the
credited account(s) the date and the credit amount shown
in the journal.
•
LO 4
Knowledge Check: The Ledger and Posting
Identify each statement as true or false.
1. The general ledger tracks changes in each
account balance.
True
2. Regardless of size, all companies use the same
accounts in their chart of accounts.
False
3. A chart of accounts is a list of the names of a
company’s accounts and their balances.
False
4. The procedure of transferring journal entry
amounts to ledger accounts is called posting.
True
LO 4
The Recording Process Illustrated
Purpose of transaction analysis
To identify the type of account
involved and determine whether a
debit or credit to the account is
required
Basic steps
LO 4
Knowledge Check: Posting
Posting
a.
b.
c.
d.
normally occurs before journalizing.
transfers ledger transaction data to the journal.
is an optional step in the recording process.
transfers journal entries to ledger accounts.
LO 4
Knowledge Check: Posting
Answer
Posting
a.
b.
c.
d.
normally occurs before journalizing.
transfers ledger transaction data to the journal.
is an optional step in the recording process.
Answer: transfers journal entries to ledger accounts.
LO 4
Recording Process: Investment of Cash
by Stockholders
On October 1, stockholders invest $10,000 cash in an outdoor
guide service company to be known as Sierra Corporation.
•
•
Debits increase assets: debit Cash $10,000
Credits increase stockholders’ equity: credit Common Stock
$10,000
LO 4
Recording Process: Issue of Note
Payable
On October 1, Sierra borrows cash of $5,000 by signing a 3month, 12%, $5,000 note payable.
•
•
Debits increase assets: debit Cash $5,000
Credits increase liabilities: credit Notes Payable $5,000
LO 4
Recording Process: Purchase of
Equipment
On October 2, Sierra used $5,000 cash to purchase equipment.
•
•
Debits increase assets: debit Equipment $5,000
Credits decrease assets: credit Cash $5,000
LO 4
Recording Process: Receipt of Cash in
Advance From Customer
On October 2, Sierra received a $1,200 cash advance from R. Knox,
a client, for guide services to be completed in the future.
•
•
Debits increase assets: debit Cash $1,200
Credits increase liabilities: credit Unearned Service Revenue
$1,200
LO 4
Recording Process: Services Performed
for Cash
On October 3, Sierra received $10,000 in cash from Copa
Company for guide services performed in October.
•
•
Debits increase assets: debit Cash $10,000
Credits increase revenues: credit Service Revenue $10,000
LO 4
Recording Process: Payment of Rent
With Cash
On October 3, Sierra paid office rent for October in cash,
$900.
•
•
Debits increase expenses: debit Rent Expense $900
Credits decrease assets: credit Cash $900
LO 4
Recording Process: Purchase of
Insurance Policy with Cash
On October 3, Sierra paid $600 for a 1-year insurance policy
that will expire next year on September 30.
•
•
Debits increase assets: debit Prepaid Insurance $600
Credits decrease assets: credit Cash $600
LO 4
Recording Process: Purchase of
Supplies on Account
On October 5, Sierra purchased an estimated 3 months of
supplies on account from Aero Supply for $2,500.
•
•
Debits increase assets: debit Supplies $2,500
Credits increase liabilities: credit Accounts Payable $2,500
LO 4
Recording Process: Hiring of New
Employee
On October 9, On October 9, Sierra hired four employees
to begin work on October 15. Each employee will receive
a weekly salary of $500 for a 5-day work week, payable
every 2 weeks—first payment made on October 26.
An accounting transaction has not occurred.
LO 4
Recording Process: Payment of
Dividend
On October 20, Sierra paid a $500 cash dividend to stockholders.
• Debits increase dividends: debit Dividends $500
• Credits decrease assets: credit Cash $500
LO 4
Recording Process: Payment of Cash for
Employee Salaries
On October 26, Sierra paid employee salaries of $4,000 in cash.
•
•
Debits increase expenses: debit Salaries and Wages
Expense $4,000
Credits decrease assets: credit Cash $4,000
LO 4
General Ledger for Sierra Corporation
LO 4
Knowledge Check: Posting Entries
Post Surf Shack’s transactions from its first month of operations.
June 1
8
19
Cash
Service Revenue
6,500
Accounts Receivable
Service Revenue
4,000
Equipment
Cash
4,100
6,500
4,000
4,100
LO 4
Learning Objective 5
Prepare a Trial Balance
LO 5
The Trial Balance
Analyze
business
transactions
Journalize the
transaction
Post to ledger
accounts
Prepare a trial
balance
• Prepared at the end of an accounting period
• Purpose is to prove that debits equal credits after
posting
• Useful in the preparation of financial statements
• May also uncover errors in journalizing and posting
LO 5
Nature of the Trial Balance
• Consists of a list of accounts and their balances at a
given time
• Procedures for preparing a trial balance
1. List account titles and their balances
•
In the order in which they appear in the ledger
2. Total the debit column and the credit column
3. Verify the equality of the two columns
LO 5
Illustration of a Trial Balance
LO 5
Knowledge Check: Preparing a Trial Balance
The ledger accounts for Sun Toys at May 31 are presented here.
Salaries and Wages Expense
14,000 Equipment
25,600
Accounts Receivable
3,100 Dividends
1,200
Salaries and Wages Payable
1,500 Accounts Payable
2,500
Notes Payable (due in 2 years) 15,000 Service Revenue
33,900
Prepaid Insurance
1,100 Common Stock
10,000
Utilities Expense
5,600 Cash
12,300
List the first six accounts in the order in which they will be listed in a
trial balance.
Cash
Accounts Receivable
Prepaid Insurance
Equipment
Accounts Payable
Salaries and Wages Payable
LO 5
Limitations of a Trial Balance
• Does not prove that all transactions have been
recorded or that the ledger is correct
• May balance even when
o
o
o
o
o
A transaction is not journalized
A correct journal entry is not posted
A journal entry is posted twice
Incorrect accounts are used in journalizing or posting
Offsetting errors are made in recording the amount of
a transaction
LO 5
Knowledge Check: Limitations of a Trial
Balance
Which of the following will cause a trial balance to be out
of balance?
a. A correct journal entry is not posted.
b. A journal entry is posted twice.
c. Incorrect accounts are used in journalizing or posting.
d. A debit posting for an entry is omitted.
LO 5
Knowledge Check: Limitations of a Trial
Balance
Answer
Which of the following will cause a trial balance to be out
of balance?
a. A correct journal entry is not posted.
b. A journal entry is posted twice.
c. Incorrect accounts are used in journalizing or posting.
d. Answer: A debit posting for an entry is omitted.
LO 5
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