The Accounting Information System

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The AccountingInformation System
ACCOUTING 101

• Chapter 3

Professor Walsh Providence College
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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.
• 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.

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Accounting Information System AIS
The system of collecting and processing
transaction data and communicating financial
information to interested parties.
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Chapter Overview
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Analyze the Effect of Business Transactions on
the Basic Accounting Equation.
Assets Liabilities Stockholders Equity
Recall must always balance!
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Accounting Transactions

• Accounting Transactions economic events that
  must be recorded in the financial statements.
• Event must affect assets, liabilities or
  stockholders equity

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Accounting Transactions?
Buy a computer
Is the financial position (assets, liabilities or
stockholders equity) changed?
YES!
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Accounting Transactions?
A manager Discusses product design with customer
Is the financial position (assets, liabilities or
stockholders equity) changed?
NO!
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Accounting Transactions?
Pay rent
Is the financial position (assets, liabilities or
stockholders equity) changed?
YES!
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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

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Transaction Analysis

• If an individual asset is increased, there must
  be a corresponding
• Decrease in another asset, or
• Increase in a specific liability, or
• Increase in stockholders equity

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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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Lets Practice!
Lets 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.
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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 Explain what an account is and how it helps in
the recording process.

• Account individual accounting record of
  increases and decreases in a specific Asset,
  Liability, or Stockholders Equity item.

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Account

• Consists of three parts
• Title of the account
• Left side, the debit side, Dr.
• Right side, the credit side, Cr.
• We call this the T - account

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The T Account
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3 Define debits and credits and explain how they
are used to record business transactions.

• Recall Debit means left
• thus, entry on left side is debiting
• Recall Credit means right
• thus, entry on right side is crediting

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Examples
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Total the Balances on T-Account
Title of Account
Debit
Credit
Total Debits gt Credits, then you have a Debit
Balance!
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Total the Balances on T-Account
Title of Account
Debit
Credit
Total Credits gt Debits, then you have a Credit
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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Debits
Increase assets and expenses Decrease
liabilities, common stock, revenues
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Credits
Decrease assets and expenses Increase
liabilities, common stock, revenues
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Expansion of Basic Equation
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Lets 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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Lets Review
What is the normal balance for the following
accounts?
Dividends?
Debit
Debit
Building?
Taxes Payable?
Credit
Service Revenue?
Credit
Prepaid Insurance?
Debit
Rent Expense?
Debit
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Lets Review Using Sierras Transactions
Cash
Common Stock
10,000
10,000
Oct. 1 - Owner invested 10,000 Cash in business
in exchange for 10,000 of Sierra Corporation
Common Stock
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Lets Review Using Sierras Transactions
Cash
Note Payable
5,000
5,000
Oct. 1 Sierra issued a 3-month, 12, 5,000
Note Payable to Castle Bank.
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Lets Review Using Sierras Transactions
Office Equipment
Cash
5,000
5,000
10,000
5,000
Oct. 2 Sierra acquired office equipment by
paying 5,000 cash to Superior Sales Co.
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Identify the Basic Steps in the Recording Process.

• Analyze
• Journalize
• Post

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Recording Process Step 1
Analyze each transaction and effect on accounts
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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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Explain what a journal is how it helps in the
recording process.

• An accounting record where the transactions are
  initially recorded in chronological order.
• For each transaction journal shows the debit and
  credit

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Journals Help Recording Process

• Discloses in one place the complete effect of a
  transaction
• Provides a chronological record of transactions
• Helps prevent or locate errors because debit and
  credit amounts can be readily compared

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Computerized Systems

• Journals are kept as data files
• Accounts are recorded in computer database

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Journalizing

• Complete entry consists of
• Date of transaction
• Accounts titles and dollar amounts to be debited
  and credited
• Brief explanation
• Lets use the first three Sierra transactions . .
  .

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Date
Debit Credit
1 Cash

5,000
Notes Payable

5,000 (Issued
3-month, 12 note payable for cash)



2 Office Equipment

5,000
Cash

5,000 (Purchased
office equipment for cash)



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Explain what a ledger is how it helps in the
recording process.

• Ledger is the entire group of accounts
  maintained by a company

• Ledger contains all the asset, liability,
  stockholders equity accounts

• Keeps all the information about current account
  balances and changes in specific account balances

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General Ledger
Most businesses computerize these files!
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Chart of Accounts

• List of company accounts
• Number and type used depends upon size and
  complexity of business
• Small business might use 20 to 30 accounts
• Large business could use thousands worldwide
• Computerized systems assign number sequence to
  each unique account and group

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Chart of Accounts
Note In the Sierra examples we used the red
accounts, in future chapters we will cover others
in black
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Explain what posting is how it helps in the
recording process.

• Procedure of transferring journal entries to
  ledger is called posting

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Recall Basic Steps in the Recording Process.

• Analyze the transaction, identify the type of
  accounts involved?
• Journalize, debit or credit what?
• Post

Lets use some of Sierras data to demonstrate
the recording process . . .
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Posting in Data File or Paper Files
Balance
debit
credit
debit
credit
ref
Oct 1
GJ 1
10,000
10,000
Account COMMON STOCK
Acct 3010
Date
Balance
debit
credit
debit
credit
ref
GJ 1
Oct 1
10,000
10,000
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Explain the purposes of a trial balance.

• Lists all the accounts and their balances at a
  given time.

• Proves mathematical equality of debits and
  credits after posting.
• Useful in the preparation of financial
  statements.
• Does not tell you ledger is correct!

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Sierra Corporation Trial Balance October 31, 2005
Debit Credit
Cash
15,200 Advertising
Supplies
2,500 Prepaid Insurance

600 Office Equipment
5,000 Notes Payable

5,000 Accounts
Payable
2,500 Unearned
Service Revenue
1,200 Common Stock

10,000 Dividends

500 Service Revenue

10,000 Salaries Expense
4,000 Rent
Expense
900

28,700 28,700