Financial Accounting:
Tools for Business Decision Making, 4th Ed.
Kimmel, Weygandt, Kieso
CHAPTER 3
Prepared by
Ellen L. Sweatt
Georgia Perimeter College
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Chapter 3
THE ACCOUNTING
INFORMATION
SYSTEM
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Transaction Analysis


Transaction Analysis: the process of
identifying the specific effects of economic
events on the accounting equation.
Each transaction has a dual (double-sided)
effect on the accounting equation.
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The Accounting Information
System
The system of:
•collecting and processing
transaction data and
•communicating financial
information to decision makers.
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Accounting Transactions...

are economic events that
must be recorded in the
financial statements
because they affect
assets,
 liabilities
 and/or stockholders’
equity.

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Accounting Transactions...
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Transaction Analysis
•
•
•
Transaction Analysis
determines the
impact of the
transaction on the
accounting equation.
Assets
Liabilities
Stockholders’ Equity
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Accounting Analysis...
Analyze the effect of business
transactions on the basic
accounting equation:
Assets = Liabilities + Stockholders’ Equity
Must always balance.
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Transaction Analysis


Two or more items can be affected
Example: purchase computer for
$10,000 by paying $6,000 in cash
and signing a note for $4,000
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Let’s Practice!
Let’s practice transaction analysis
with Sierra Corporation. . .
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Event 1 – Investment of Cash
by Stockholders
Oct. 1 - Owner invested $10,000 Cash in
business in exchange for $10,000 of
Sierra Corporation Common Stock
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Event 2 – Note Issued in
Exchange for Cash
Oct. 1 – Sierra issued a 3-month, 12%,
$5,000 Note Payable to Castle Bank in
exchange for cash.
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Event 3 – Purchase of Office
Equipment for Cash
Oct. 2 – Sierra acquired office equipment by
paying $5,000 cash to Superior Sales Co.
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Event 4 – Receipt of Cash in
Advance from Customer
Oct. 2 – Sierra received a $1,200
cash advance from R. Knox, a client.
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Event 5 – Services Rendered
for Cash
Oct. 3 – Sierra received $10,000 in cash
from Copa Co. for advertising services
performed
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Event 5 – Services Rendered, WHAT
IF these were performed “on
account”?
Later, when $10,000 is collected from customer…
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Event 6 – Payment of Rent
Oct. 3 – Sierra paid its office rent for
the month of October in cash, $900.
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Event 7 – Purchase of
Insurance Policy with Cash
Oct. 4 – Sierra paid $600 for a one-year
insurance policy that will expire next year
on Sept. 30.
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Event 8 – Purchase of Supplies
on Credit
Oct. 5 – Sierra purchases a three-month
supply of advertising materials on account
from Aero Supply for $2,500.
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Event 9 – Hiring of New
Employees
Oct. 9 – Sierra hired four new
employees to begin work on Oct. 15.
Accounting transaction has
NOT occurred!
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Event 10 – Payment of Dividend
Oct. 20 – Sierra paid a $500 dividend.
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Event 11 – Payment of Cash for
Employee Salaries
Oct. 26 – Paid employees working two
weeks, who have earned $4,000 in salaries.
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Summary of Transactions
Assets =
Liabilities + Equity
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2
11
The Account...
An individual accounting record of
increases and decreases in a specific
Asset, Liability, or Stockholders’
Equity item.
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The Account
Three parts :
1) the Title of the account
2) a left or Debit side
3) a right or Credit side
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3
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Debits and Credits
•Debit means left
• thus, entry on left side is debiting
• Credit means right
• thus, entry on right side is crediting
•Normal balance is the side the increase
happens on.
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Examples
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Total the Entries to Each Side
TITLE
Debit
Credit
Total Debits Total Credits
If the greater sum is on the left,
the account has a Debit Balance
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Total the Entries to Each Side
TITLE
Debit
Credit
Total Debits Total Credits
If the greater sum is on the right,
the account has a Credit Balance
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Whichever side you
increase is the normal
balance!
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Normal Balances
for Assets and Liabilities
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Normal Balances
for Stockholders’ Equity
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Normal Balances
for Expenses and Revenues
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Expansion of Basic Equation
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Review
What is the normal balance for the
following accounts?
Cash
Debit
Credit
Accounts Payable
Accounts Receivable
Debit
Service Revenue
Credit
Common Stock
Credit
Salaries Expense
Debit
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Review
What is the normal balance for the
following accounts?
Dividends
Debit
Debit
Building
Taxes Payable
Credit
Unearned Revenus
Credit
Prepaid Insurance
Debit
Rent Expense
Debit
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4
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Basic Steps in the
Recording Process.
1.Analyze
2.Journalize
3.Post
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5
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Recording Process Step 1
Analyze each transaction
and effect on accounts
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The Journal...
is an accounting record where the
transactions are recorded in
chronological order.
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Recording Process Step 2
Enter transaction information in a
journal, a process called journalizing
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Recording Process Step 3
Transfer (post) the journal information to
the appropriate accounts in the ledger
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GENERAL JOURNAL
Date
Account Titles and Explanations
2007
Oct. 1 Cash
Common Stock
(Invested cash in business)
1 Cash
Notes Payable
(Issued 3-month, 12% note payable for cash)
2 Office Equipment
Cash
(Purchased office equipment for cash)
Debit Credit
10,000
10,000
5,000
5,000
5,000
5,000
Let’s Review Using
Sierra’s Transactions
Cash
Common Stock
10,000
10,000
What is the normal balance for the following accounts?
Oct. 1 - Owner invested $10,000 Cash in
business in exchange for $10,000 of
Sierra Corporation Common Stock
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Let’s Review Using
Sierra’s Transactions
Cash
5,000
Note Payable
5,000
Oct. 1 – Sierra issued a 3-month, 12%,
$5,000 Note Payable to Castle Bank.
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Let’s Review Using
Sierra’s Transactions
Office Equipment
5,000
Cash
10,000 5,000
5,000
Oct. 2 – Sierra acquired office equipment by
paying $5,000 cash to Superior Sales Co.
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The General Ledger
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•the entire group of accounts
maintained by a company
•contains all the asset, liability, and
stockholders’ equity accounts
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Chart of Accounts...
is a list of a company’s accounts.
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The General Ledger
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The General Ledger
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The Ledger
The entries from the journal are
posted to the ledger,usually in
summary form, except for the
general journal.
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Posting
Transferring information
from the journals to the
general ledger accounts
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Posting Entries
GENERAL JOURNAL
Account Titles and Explanations
2007
Oct. 1 Cash
Common Stock
10,000
10,000
Account CASH
Date
ref
debit
Account COMMON STOCK
Date
ref
debit
credit
Acct 1010
Balance
debit
credit
credit
Acct 3010
Balance
debit
credit
Posting Entries
GENERAL JOURNAL
Account Titles and Explanations
2007
Oct. 1 Cash
Common Stock
10,000
10,000
Account CASH
Date
Oct 1
ref
gj 1
debit credit
10,000
Account COMMON STOCK
Date
ref
debit
Oct 1
gj 1
Acct 1010
Balance
debit
credit
10,000
Acct 3010
Balance
credit debit
credit
10,000
10,000
Posting Entries
GENERAL JOURNAL
Account Titles and Explanations
2007
Oct. 1 Cash
Common Stock
10,000
10,000
Account CASH
Date
Oct 1
ref
gj 1
debit credit
10,000
Account COMMON STOCK
Date
ref
debit
Oct 1
gj 1
Acct 1010
Balance
debit
credit
10,000
Acct 3010
Balance
credit debit
credit
10,000
10,000
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Trial Balance
A list of all the accounts and their balances
at a given time.
It serves to prove the
mathematical equality of
debits and credits after
posting.
It aids in the preparation
of financial statements.
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Sierra Corporation
Trial Balance
October 31, 2007
Cash
Advertising Supplies
Prepaid Insurance
Office Equipment
Notes Payable
Accounts Payable
Unearned Service Revenue
Common Stock
Dividends
Service Revenue
Salaries Expense
Rent Expense
Debit
Credit
$15,200
2,500
600
5,000
$ 5,000
2,500
1,200
10,000
500
10,000
4,000
900
$28,700 $28,700
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