Financial Accounting:
Tools for Business Decision Making, 2nd Ed.
Kimmel, Weygandt, Kieso
1
Chapter 3
Chapter 3
The Accounting
Information System
After studying Chapter 3, you should
be able to:
Analyze the effect of business transactions on the
basic accounting equation.
Explain what an account is and how it helps in the
recording process.
Define debits and credits and explain how they are
used to record business transactions.
Identify the basic steps in the recording process.
3
Chapter 3
The Accounting
Information System
After studying Chapter 3, you should
be able to:
Explain what a journal is and how it helps in the
recording process.
Explain what a ledger is and how it helps in the
recording process.
Explain what posting is and how it helps in the
recording process.
Explain the purposes of a trial balance.
4
The Accounting
Information System
The system of:
•collecting and processing transaction
data and
•communicating financial information
to interested parties.
5
The Accounting
Information System
Analyze the effect of business
transactions on the basic accounting
equation:
Assets = Liabilities + Stockholders’ Equity
6
The Accounting
Information System
The Accounting Equation must
always balance.
7
The Accounting
Information System
Accounting transactions
are events that must be
recorded in the Financial
Statements.
8
The Accounting
Information System
Transactions are
events that must be
recorded in the
Financial Statements
Transaction Analysis
determines the impact
on the Balance Sheet.
9
Illustration 3-1
Is the financial position (assets, liabilities, and
stockholders’ equity) of the company changed?
Let’s Practice
Transaction Analysis
(a)
Cash +
95,000
Assets
Accounts
Receivable + Supplies + License + Equipment + Land
=
Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000
a) On July 1, Cash of $95,000 was invested in
the business in exchange for $95,000 worth of
common stock.
(a)
(b)
Cash +
95,000
(60,000)
Assets
Accounts
Receivable + Supplies + License + Equipment + Land
=
Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000
60,000
b) Peoples, Inc., acquired land by paying
$60,000 cash to Nashtown, Inc
(a)
(b)
(c)
Cash +
95,000
(60,000)
Assets
Accounts
Receivable + Supplies + License + Equipment + Land
=
Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000
60,000
600
600
c) Peoples, Inc., purchased an estimated three
month supply of office supplies on account. The
company will pay $600 for these supplies later.
(a)
(b)
(c)
(d)
Cash +
95,000
(60,000)
Assets
Accounts
Receivable + Supplies + License + Equipment + Land
Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000
60,000
600
800
=
600
800 Service Revenue
d) Peoples, Inc., received $800 for services
performed.
(a)
(b)
(c)
(d)
(e)
Cash +
95,000
(60,000)
Assets
Accounts
Receivable + Supplies + License + Equipment + Land
=
Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000
60,000
600
800
2,000
600
800 Service Revenue
2,000 Service Revenue
e) Peoples, Inc., performed services for $2,000.
The company will be paid later in the month.
(a)
(b)
(c)
(d)
(e)
(f)
Cash +
95,000
(60,000)
Assets
Accounts
Receivable + Supplies + License + Equipment + Land
=
Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000
60,000
600
600
800
800 Service Revenue
2,000 Service Revenue
2,000
f) Peoples, Inc., received confirmation that a major
corporation has selected their corporation to
perform major consulting work. The work will
start January 1 of next year.
NO TRANSACTION
(a)
(b)
(c)
(d)
(e)
(f)
(g)
Cash +
95,000
(60,000)
Assets
Accounts
Receivable + Supplies + License + Equipment + Land
=
Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000
60,000
600
600
800
800 Service Revenue
2,000 Service Revenue
2,000
6,000
6,000
g) Peoples, Inc., purchased office equipment for
$6,000. The Company signed a 2-year note with
ACME Office Equipment Company.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Cash +
95,000
(60,000)
Assets
Accounts
Receivable + Supplies + License + Equipment + Land
=
Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000
60,000
600
600
800
800 Service Revenue
2,000 Service Revenue
2,000
6,000
(1,800)
6,000
1,800
h) Peoples, Inc., paid $1,800 for a 1-year license
to operate as a business. The license expires
June 30th of next year.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(I)
Cash +
95,000
(60,000)
Assets
Accounts
Receivable + Supplies + License + Equipment + Land
=
Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000
60,000
600
600
800
800 Service Revenue
2,000 Service Revenue
2,000
6,000
(1,800)
800
6,000
1,800
(800)
i) Peoples, Inc., collected $800 of the money
owed from (e).
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(I)
(j)
Cash +
95,000
(60,000)
Assets
Accounts
Receivable + Supplies + License + Equipment + Land
=
Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000
60,000
600
600
800
800 Service Revenue
2,000 Service Revenue
2,000
6,000
(1,800)
800
(400)
j)
6,000
1,800
(800)
(400)
Peoples, Inc., paid $400 of the amount it owed
from (c).
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(I)
(j)
(k)
Cash +
95,000
(60,000)
Assets
Accounts
Receivable + Supplies + License + Equipment + Land
=
Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000
60,000
600
600
800
800 Service Revenue
2,000 Service Revenue
2,000
6,000
(1,800)
800
(400)
(600)
6,000
1,800
(800)
(400)
(600) Salaries Expense
k) An employee has worked and earned $600
which was paid during the month.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(I)
(j)
(k)
(l)
Cash +
95,000
(60,000)
Assets
Accounts
Receivable + Supplies + License + Equipment + Land
=
Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000
60,000
600
600
800
800 Service Revenue
2,000 Service Revenue
2,000
6,000
(1,800)
800
(400)
(600)
5,000
6,000
1,800
(800)
(400)
(600) Salaries Expense
5,000
l) Peoples, Inc., received a $5,000 retainer to
handle a tax audit that the company will start
next month.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(I)
(j)
(k)
(l)
(m)
Cash +
95,000
(60,000)
Assets
Accounts
Receivable + Supplies + License + Equipment + Land
=
Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000
60,000
600
600
800
800 Service Revenue
2,000 Service Revenue
2,000
6,000
(1,800)
800
(400)
(600)
5,000
(500)
6,000
1,800
(800)
(400)
(600) Salaries Expense
5,000
(500) Rent Expense
m) Peoples, Inc., paid $500 for rent during the
month.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(I)
(j)
(k)
(l)
(m)
(n)
Cash +
95,000
(60,000)
Assets
Accounts
Receivable + Supplies + License + Equipment + Land
=
Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000
60,000
600
600
800
800 Service Revenue
2,000 Service Revenue
2,000
6,000
(1,800)
800
(400)
(600)
5,000
(500)
(700)
6,000
1,800
(800)
(400)
(600) Salaries Expense
5,000
(500) Rent Expense
(700) Dividends
n) Dividends of $700 were paid during the month.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(I)
(j)
(k)
(l)
(m)
(n)
Total
Cash +
95,000
(60,000)
Assets
Accounts
Receivable + Supplies + License + Equipment + Land
=
Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000
60,000
600
600
800
800 Service Revenue
2,000 Service Revenue
2,000
6,000
(1,800)
800
(400)
(600)
5,000
(500)
(700)
37,600
6,000
1,800
(800)
(400)
(600) Salaries Expense
5,000
1,200
600
1,800
107,200
6,000
60,000
200
6,000
5,000
107,200
95,000
(500) Rent Expense
(700) Dividends
1,000
Account...
an individual accounting record of
increases and decreases in a
specific Asset, Liability, or
Stockholders’ Equity item.
27
Account
Three parts :
1) the Title of the account
2) a left or Debit side
3) a right or Credit side
28
The T Account
TITLE
DEBIT CREDIT
29
Total the Entries to
Each Side
TITLE
Debit
Credit
Total Debits Total Credits
30
Tabular Summary
Account Form
Illustration 3-4
Balancing an Account
Normal Balances
32
Normal Balances
33
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
34
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
35
Whichever side
you increase is
the normal side!
Debits
Increase assets
and expenses
Decrease
liabilities,
common stock
and revenues
37
Credits
Decrease assets
and expenses
Increase liabilities,
common stock and
revenues
38
Illustration 3-15
Illustration 3-16
Analyze each
transaction
Enter each
transaction in a
journal
Transfer journal
information to
ledger accounts39
The Recording Process
Analyze each transaction
Enter information in a journal
Transfer the information to the
appropriate accounts
40
The Journal...
is an accounting record where the
transactions are recorded in chronological
order.
41
Journals
Types of Journals
Cash receipts
Cash disbursements
Sales
Purchases
General
42
Journals
Journals aid the recording process by:
Disclosing in one place the complete
effect of a transaction;
Providing a chronological record of
transactions;
Helping prevent or locate errors because
debit and credit amounts can be easily
compared.
43
GENERAL JOURNAL
Date
Account Titles and Explanations
2001
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)
Illustration 3-17
Debit Credit
10,000
10,000
5,000
5,000
5,000
5,000
The General Ledger
•the entire group of accounts maintained
by a company
•contains all the asset, liability, and
stockholders’ equity accounts
45
Illustration 3-18
The General Ledger
46
The Ledger
The entries from the journal are posted
to the ledger,usually in summary form,
except for the general journal.
47
Posting
Transferring information from
the journals to the general ledger
accounts
48
Posting Entries
GENERAL JOURNAL
Account Titles and Explanations
2001
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
1998
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
1998
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
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.
52
Sierra Corporation
Illustration 3-33
Trial Balance
October 31, 2001
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
COPYRIGHT
Copyright ©2000, John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
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Request for further information should be addressed to the
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programs or from the use of the information contained herein.
Assets
Cash +
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
Total
Accounts
Receivable + Supplies +
Prepaid Office
License + Equipment + Land
=
Liabilities +
Stockholders' Equity
Unearned Common Retained
Accounts Notes
= Payable + Payable + Revenue Stock + Earnings
Type of Transaction
Chapter 3
Transactions
(a)
On July 1, Cash of $95,000 was invested in the business in exchange for $95,000 worth of
common stock.
(b)
Peoples, Inc. acquired land by paying $60,000 cash to Nashtown, Inc.
(c)
Peoples, Inc. purchased an estimated three-month supply of office supplies on account.
The company will pay $600 for these supplies later.
(d)
Peoples, Inc. received $800 for accounting services performed.
(e)
Peoples, Inc. performed consulting services for $2,000. The company will be paid later in
the month.
(f)
Peoples, Inc. received confirmation that a major corporation has selected their corporation
to perform major consulting work. The work will start January 1st of next year.
(g)
Peoples, Inc. purchased office equipment for $6000. The company signed a 2-year note
with ACME Office Equipment Company.
(h)
Peoples, Inc. paid $1800 for a 1-year license to operate as a business. The license
expires June 30th of next year.
(i)
Peoples, Inc. collected $800 of the money owed from (e).
(j)
Peoples, Inc. paid $400 of the amount it owed from (c).
(k)
An employee has worked and earned $600 which was paid during the month.
(l)
Peoples, Inc. received a $5000 retainer to handle a tax audit that the company will start to
work on next month.
(m)
Peoples, Inc. paid $500 for rent during the month.
(n)
Dividends of $700 were paid during the month.