CHAPTER 7
THE ACCOUNTING
INFORMATION SYSTEM
1
THE FOUR STEPS IN THE
ACCOUNTING CYCLE
1 Analyze transactions
2 Record the effect of transactions in a
journal entry
3 Summarize the effects of
transactions
a Post journal entries to the ledger
b Prepare a trial balance
2
THE FOUR STEPS IN THE
ACCOUNTING CYCLE
4 Prepare reports
a Make adjusting entries
b Prepare financial statements
c Close the books
3
TRANSACTION ANALYSIS
USING DEBITS AND CREDITS
Recall the accounting equation:
Assets = Liabilities + Owners’
Owners’ Equity
4
DEBITS AND CREDITS FOR
BALANCE SHEET ACCOUNTS
• All increases in
• All increases in
assets are
liabilities and
represented as
equities are
debits (left side of
represented as
the account)
credits (right side
of the account)
5
DEBITS AND CREDITS FOR
REVENUES, EXPENSES,
AND DIVIDENDS
• Revenues increase with credits
• Expenses increase with debits
• The dividends account is
increased with a debit
6
DEBITS AND CREDITS
FOR ALL ACCOUNTS
Assets
Dr.
Cr.
+
-
= Liabilities +
Dr.
-
Owners’
Owners’
Equity
Dr.
-
Cr.
+
PaidPaid-in
Capital
Dr.
-
Cr.
+
Retained
Earnings
Dr.
-
Cr.
+
Expenses
Dr.
+
Cr.
+
Revenues
Dr.
-
Cr.
-
Cr.
+
Dividends
Dr.
+
Cr.
-
7
RECORDING THE EFFECTS
OF TRANSACTIONS
• The journal is a
book in which all
transactions are
recorded in
chronological
order
• Each journal
entry has its debit
amounts equal to
its credit amounts
to ensure that the
accounting
equation remains
in balance
8
RECORDING THE EFFECTS
OF TRANSACTIONS
• A journal entry involves a threestep process:
1 Identify which accounts are involved
2 For each account, determine if it is
increased or decreased
3 For each account, determine by how
much it changed
9
RECORDING THE EFFECTS
OF TRANSACTIONS
• The account debited is always
listed first, followed by the account
credited
• Also, the credit entry is indented
• Some selected transactions from
Veda Landscape Solutions are
presented next as examples…
10
Transaction 1
• Investment of $700,000 cash into
the business for 10,000 shares of
stock.
Cash
?
700,000
700,000
11
Transaction 2
• Borrowed $300,000 cash from the
bank.
Cash
300,000
Bank Loan Payable
300,000
12
Transaction 3
• Purchased land costing $50,000 and
buildings costing $400,000. Paid
$100,000 in cash and signed a
mortgage for the balance.
Land
50,000
Buildings
400,000
Cash
Mortgage Payable
100,000
350,000
13
Transaction 4
• Purchased equipment for $650,000
in cash.
Equipment
Cash
650,000
650,000
14
Transaction 7
• Purchased inventory costing
$90,000 for $10,000 in cash and the
remaining $80,000 on account.
Inventory
90,000
Cash
Accounts Payable
10,000
80,000
15
Transaction 8
• Paid $15,000 cash for an insurance
policy.
Prepaid Insurance
Cash
15,000
15,000
16
Transaction 10
• Sold inventory costing $800,000 to
customers for $1,100,000. the
customers paid $200,000 in cash and
the remaining $900,000 was put on the
customers’ accounts.
Cash
200,000
Accounts Receivable 900,000
Sales
Cost of Goods Sold
Inventory
1,100,000
800,000
800,000
17
Transaction 11
• Performed landscaping consulting
services and billed clients
$200,000 for these services.
Accounts Receivable 200,000
Consulting Revenue
200,000
18
Transaction 14
• Collected $820,000 cash from
customers as payment on their
accounts.
Cash
820,000
Accounts Receivable
820,000
19
Transaction 15
• Paid $1,200,000 in cash to
suppliers as payment on account.
Accounts Payable 1,200,000
Cash
1,200,000
20
Transaction 18
• Paid cash of $150,000 for
advertising, utilities, and office
supplies.
Selling, General, and
Administrative Expense
Cash
150,000
150,000
21
Transaction 23
• Paid cash dividends of $5,000.
Dividends
Cash
5,000
5,000
22