©2009 The McGraw-Hill Companies, Inc.
Chapter 2
The Accounting Information
System
2-2
Roles of Financial Accounting
o
Measure business activities of the company.
o
Communicate those measurements to external
parties for decision-making purposes.
©2009 The McGraw-Hill Companies, Inc.
Part A
Measuring Business Activities
2-4
LO1 Identify the Basic Steps in
Measuring External Transactions
o
Most business enterprises use a computerized
accounting system due to the sheer volume of
data they must process.
o
Computerized data processing is fast, accurate,
and affordable.
o
Manual accounting information system will
provide an essential understanding of the basic
model that underlies the computerized programs.
2-5
Classification of Business Activities
TRANSACTIONS
EXTERNAL
TRANSACTIONS
With a separate
economic entity
INTERNAL
TRANSACTIONS
Do not
include
With
in the
separate
company
economic entity
2-6
Measuring External Transactions
STEP 1:
STEP 2:
STEP 3:
Use source documents to
identify accounts affected by an
external transaction
Analyze the impact of the
transaction on the accounting
equation
Assess whether the transaction
results in a debit or a credit to
the account balance
Account
Debit
Debits
Credit
Credits
Ending Balance
STEP 6:
STEP 5:
STEP 4:
Prepare a
trial balance
Post the transaction to the Taccount in the general ledger
Record the
transaction
2-7
LO2 Analyze the Impact of External
Transactions on the Accounting Equation
Each transaction will have a dual effect. If an economic
event increases one side of the equation, then it also
increases the other side of the equation by the same
amount.
Assets
(RESOURCES)
=
Liabilities + Stockholders’ Equity
(CLAIMS TO RESOURCES)
2-8
Ask yourself these questions…
1. “What is one account in the accounting equation
affected by the transaction? Does that account
increase or decrease?”
2. “What is a second account in the accounting
equation affected by the transaction? Did that
account increase or decrease?”
3. ”Do assets still equal liabilities plus stockholders’
equity?”
2-9
External Transactions of Woods Golf
Academy
Transaction Date
(1)
External Transactions in January
Jan. 1 Sell shares of common stock for
$25,000 to obtain the funds necessary
to start the business.
Type of
Activity
Financing
(2)
Jan. 1 Borrow $10,000 from the local bank
and sign a note promising to repay the Financing
full amount of the debt in three years.
(3)
Jan. 1 Purchase equipment necessary for
giving golf training, $24,000.
Investing
(4)
Jan. 1 Purchase one year of rent in advance
for $6,000 ($500 per month).
Operating
(5)
Jan. 6 Purchase supplies on account, $2,300.
Operating
2-10
External Transactions of Woods Golf
Academy (Continued)
Transaction Date
Type of
External Transactions in January Activity
(6)
Jan. 12 Provide golf training to customers
for cash, $3,600.
Operating
(7)
Jan. 17 Provide golf training to customers
on account, $2,500.
Operating
(8)
Jan. 23 Receive cash in advance for ten
golf training sessions to be given in Operating
the future, $600.
(9)
Jan. 28 Pay salaries to employees, $2,800.
(10)
Jan. 30 Pay cash dividends of $200 to
shareholders.
Operating
Financing
2-11
Transaction(1): Issue Common Stock
To generate cash from external sources, Woods sells shares of
common stock for $25,000.
Woods Golf
Academy
Investors
Stock certificate
It’s time to ask the three questions we asked earlier:
1. “What is one account in the accounting equation affected by the
transaction? Does that account increase or decrease?”
Answer: Cash. Cash is a resource owned by the company, which
makes it an asset. The company receives cash from you, so cash
and total assets increase by $25,000.
2-12
Transaction(1): Issue Common Stock
2. “What is a second account in the accounting equation affected
by the transaction? Does that account increase or decrease?”
Answer: Common stock. Common stock is a stockholders’ equity
account. Issuing common stock to you in exchange for your
$25,000 increases the amount of common stock owned by
stockholders, so common stock and total stockholders’ equity
both increase.
2-13
Transaction(1): Issue Common Stock
3. “Do assets equal liabilities plus stockholders’ equity?”
Answer: Yes.
Note: The accounting equation balances. If one side of the equation
increases, so does the other side. We can use this same series of
questions to understand the effect of any business transaction.
2-14
Transaction(2): Borrow from the Bank
Seeking cash from another external source, Woods Academy borrows
$10,000 from the bank and signs a note for it.
Woods Golf
Academy
Bank
2-15
Summary of Initial Financing
Transactions Woods Gold Academy
The effects of the two financing activities we’ve analyzed are
summarized below
2-16
Transaction(3): Purchase Equipment
Purchase equipment with cash, $24,000.
Woods Golf Academy
Supplier
2-17
Summary of Initial Financing and Investing
Transactions of Woods Golf Academy
2-18
Transactions(4) and(5): Incur Costs
for Rent and Supplies
Purchasing one year of rent in advance, $6,000.
Rental space
Woods Golf Academy
Landlord
2-19
Transactions(4) and(5): Incur Costs
for Rent and Supplies
Purchase of supplies on account, $2,300.
Woods Golf Academy
Supplier
2-20
Transations(6) and (7): Provide
Services to Customers
Providing service to customers for cash causes both assets and
stockholders’ equity to increase.
+
Training
Woods Golf Academy
Customers
2-21
Transations(6) and (7): Provide
Services to Customers
Similarly, providing service to customers on account causes both
assets and stockholders’ equity to increase
+
Training
Woods Golf Academy
Customers
2-22
Expanded Accounting Equation
2-23
Transaction(8): Receive Cash in
Advance from Customer
Receive cash in advance from customers, $600.
+
Training
Woods Golf Academy
Revenue
Customers
Net
Income
Retained
Earnings
Stockholders’
Equity
2-24
Transaction(9): Incur Cost for
Salaries
Pay salaries to workers, $2,800
Labor
Woods Golf Academy
Expense
Net
Income
Employee
Retained
Earnings
Stockholders’ Equity
2-25
Transaction (10): Pay Dividends
Pay dividends to stockholders, $200
reduced claims to
company resources
Woods Golf
Academy
Dividends
Investors
Retained
Earnings
Stockholders’
Equity
2-26
Summary of All Ten External
Transactions of Woods Golf Academy
©2009 The McGraw-Hill Companies, Inc.
PART B
Debits and Credits
LO3 Assess Whether the Impact of
External Transactions Results in a
Debit or Credit to an Account Balance
Debit and Credit Effects on Accounts in the Accounting
Equation
2-28
2-29
Ask yourself these questions…
1. “Is there an increase or decrease in the first
account involved in the transaction? Should I
record that increase or decrease with a debit or a
credit?”
2. “Is there an increase or decrease in the second
account involved in the transaction? Should I
record that increase or decrease with a debit or a
credit?”
3. “Do total debits equal total credits?”
2-30
Recall Our Example
Woods issues common stock for cash of $25,000
in transaction (1).
2-31
Recall Our Example
The bank borrowing of $10,000 in transaction (2) has the
following effects:
2-32
Debits and Credits with the
Expanded Accounting Equation
Assets
Debit
Credit
Liabilities
Debit
Credit
=
Common stock
Debit
Credit
Revenues
Debit
Credit
-
Expenses
Debit
Credit
Stockholders’ equity
Debit
Credit
+
+
Retained earnings
Debit
Credit
-
Dividends
Debit
Credit
2-33
LO4 Record Transactions Using
Debits and Credits
o
A journal provides a chronological record of all
transactions affecting a firm.
2-34
LO5 Post Transactions to T-accounts
in the General Ledger.
o
The process of transferring the debit and credit
information from the journal to individual accounts
in the general ledger is called posting.
o
A T-account is a simplified form of a general
ledger account with space at the top for the
account title and two sides for recording debits
and credits.
ACCOUNT TITLE
DEBIT
CREDIT
2-35
Post Transactions to T-accounts in
the General Ledger.
2-36
Summary of the Measurement
Process
2-37
Summary of External Transactions
Recorded for Woods Golf Academy
Summary of External Transactions
Recorded for Woods Golf Academy
(Continued)
2-38
2-39
Posting External Transactions of Woods
Golf Academy to General Ledger Accounts
2-40
LO6 Prepare a Trial Balance
o
A trial balance is a list of all accounts and their
balances at a particular date, showing that total
debits equal total credits.
o
Another purpose of the trial balance is to assist us in
preparing adjusting entries (for internal transactions).
o
It is not a published financial statement to be used by
external parties, there is no required order for listing
accounts in the trial balance.
o
The trial balance is used for internal purposes only
and provides a check on the equality of the debits
and credits.
2-41
Trial Balance of Woods Golf
Academy
©2009 The McGraw-Hill Companies, Inc.
End of chapter 2