Accounting Information Systems

THE ACCOUNTING INFORMATION SYSTEM

Financial Accounting, Seventh Edition

After studying this chapter, you should be able to:

1. Analyze the effect of business transactions on the basic accounting

equation.

2. Explain what an account is and how it helps in the recording process.

3. Define debits and credits and explain how they are used to record

business transactions.

4. Identify the basic steps in the recording process.

5. Explain what a journal is and how it helps in the recording process.

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

7. Explain what posting is and how it helps in the recording process.

8. Explain the purposes of a trial balance.

9. Classify cash activities as operating, investing, or financing.

Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

Preview of Chapter 3

Financial AccountingSeventh Edition

Kimmel Weygandt Kieso

Accounting Information System

System of

► collecting and

► processing transaction data and

► communicating financial information to decision makers.

Most businesses use computerized accounting (EDP) systems.

The Accounting Information SystemThe Accounting Information SystemThe Accounting Information SystemThe Accounting Information System

LO 1 Analyze the effect of business transactions on the basic accounting equation.

Transactions are economic events that require recording

in the financial statements.

Not all activities represent transactions.

Assets, liabilities, or stockholders’ equity items change as

a result of some economic event.

Dual effect on the accounting equation.

Accounting TransactionsAccounting TransactionsAccounting TransactionsAccounting Transactions

Question: Are the following events recorded in the accounting records?

EventPurchase computer.

Criterion Is the financial position (assets, liabilities, or stockholders’ equity) of the company changed?

Pay rent.

Record/ Don’t Record

Discuss guided trip options with potential

customer.

Illustration 3-1

AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesStockholders’ Stockholders’

EquityEquityStockholders’ Stockholders’

EquityEquity= +

Analyzing Transactions

Basic Accounting Equation

The process of identifying the specific effects of economic

events on the accounting equation.

3-8 LO 1 Analyze the effect of business transactions on the basic accounting equation.

Illustration 3-2 Expanded accounting equation

Analyzing Transactions

Event (1). On October 1, cash of $10,000 is invested in Sierra Corporation by

investors in exchange for $10,000 of common stock.

1. +10,000 +10,000

Event (2). On October 1, Sierra borrowed $5,000 from Castle Bank by signing

a 3-month, 12%, $5,000 note payable.

1. +10,000 +10,000

2. +5,000 +5,000

Event (3). On October 2, Sierra purchased equipment by paying $5,000 cash

to Superior Equipment Sales Co.

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000

Event (4). On October 2, Sierra received a $1,200 cash advance from R. Knox,

a client.

4. +1,200 +1,200

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000

Event (5). On October 3, Sierra received $10,000 in cash from Copa Company

for guide services performed.

4. +1,200 +1,200

5. +10,000 +10,000

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000

Event (6). On October 3, Sierra Corporation paid its office rent for the month of

October in cash, $900.

4. +1,200 +1,200

5. +10,000 +10,000

6. -900 -900

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000

Event (7). On October 4, Sierra paid $600 for a one-year insurance policy that

will expire next year on September 30.

4. +1,200 +1,200

5. +10,000 +10,000

6. -900 -900

7. -600 +600

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000

Event (8). On October 5, Sierra purchased an estimated three months of

supplies on account from Aero Supply for $2,500.

4. +1,200 +1,200

5. +10,000 +10,000

6. -900 -900

7. -600 +600

8. +2,500 +2,500

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000

Event (9). On October 9, Sierra hired four new employees to begin work on

October 15.

4. +1,200 +1,200

5. +10,000 +10,000

6. -900 -900

7. -600 +600

8. +2,500 +2,500

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000

An accounting transaction has not occurred.

Event (10). On October 20, Sierra paid a $500 dividend.

4. +1,200 +1,200

5. +10,000 +10,000

6. -900 -900

7. -600 +600

8. +2,500 +2,500

10. -500 -500

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000

Event (11). Employees have worked two weeks, earning $4,000 in salaries,

which were paid on October 26.

4. +1,200 +1,200

5. +10,000 +10,000

6. -900 -900

7. -600 +600

8. +2,500 +2,500

10. -500 -500

11. -4,000 -4,000

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000

Account Name

Debit / Dr. Credit / Cr.

Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item.

Debit = “Left”

Credit = “Right”

AccountAccount

An Account can An Account can be illustrated in a be illustrated in a T-Account form.T-Account form.

LO 2 Explain what an account is and how it helps in the recording process.

The AccountThe AccountThe AccountThe Account

Double-entry Double-entry system

Each transaction must affect two or more accounts to

keep the basic accounting equation in balance.

Recording done by debiting at least one account and

crediting another.

DEBITS must equalmust equal CREDITS.

LO 3 Define debits and credits and explain they are used to record business transactions.

Debit and Credit Procedures

The AccountThe AccountThe AccountThe Account

Account Name

If Debits are greater thangreater than Credits, the account will have

a debit balance.

$10,000 Transaction #2$3,000

$15,000$15,000

8,000Transaction #3

Balance

Transaction #1

Debit and Credit ProceduresDebit and Credit ProceduresDebit and Credit ProceduresDebit and Credit Procedures

Account Name

$10,000 Transaction #2$3,000

Balance

Transaction #1

$1,000$1,000

8,000 Transaction #3

Debit and Credit ProceduresDebit and Credit ProceduresDebit and Credit ProceduresDebit and Credit Procedures

If Credits are greater than Debits, the account will have

a credit balance.

Assets - Debits should exceed credits.

Liabilities – Credits should exceed debits.

Procedures for Assets and LiabilitiesProcedures for Assets and LiabilitiesProcedures for Assets and LiabilitiesProcedures for Assets and Liabilities

Chapter 3-23

AssetsAssets

Normal BalanceNormal Balance

Chapter 3-24

LiabilitiesLiabilities

Investments by stockholders and revenues increase stockholders’ equity (credit).

Dividends and expenses decrease stockholder’s equity (debit).

Procedures for Stockholders’ EquityProcedures for Stockholders’ EquityProcedures for Stockholders’ EquityProcedures for Stockholders’ Equity

Chapter 3-25

Common StockCommon Stock

Chapter 3-23

DividendsDividends

Chapter 3-25

StockholdersStockholders’’ EquityEquity

Chapter 3-25

Retained EarningsRetained Earnings

The purpose of earning revenues is to benefit the stockholders.

The effect of debits and credits on revenue accounts is the same as their effect on stockholders’ equity.

Expenses have the opposite effect: expenses decrease stockholders’ equity.

Chapter 3-27

ExpenseExpense

Chapter 3-26

RevenueRevenue

Procedures for Revenue and ExpenseProcedures for Revenue and ExpenseProcedures for Revenue and ExpenseProcedures for Revenue and Expense

Stockholders’ Equity RelationshipsStockholders’ Equity RelationshipsStockholders’ Equity RelationshipsStockholders’ Equity Relationships

Illustration 3-15

Chapter 3-23

AssetsAssets

Chapter 3-27

ExpenseExpense

Chapter 3-24

LiabilitiesLiabilities

Chapter 3-25

StockholdersStockholders’’ EquityEquity

Chapter 3-26

RevenueRevenue

Normal Balance Credit

Normal Balance

Summary of Debit/Credit RulesSummary of Debit/Credit RulesSummary of Debit/Credit RulesSummary of Debit/Credit Rules

Balance Sheet Income Statement

= + =-Asset Liability Equity Revenue Expense

Credit

Relationship among the assets, liabilities and stockholders’ equity of a business:

The equation must be in balance after every transaction. For every Debit there must be a Credit.

Illustration 3-16

Assets Liabilities= Stockholders’ EquityBasic Equation

Expanded Basic Equation

Debits:

a. increase both assets and liabilities.

b. decrease both assets and liabilities.

c. increase assets and decrease liabilities.

d. decrease assets and increase liabilities.

Review Question

Accounts that normally have debit balances are:

a. assets, expenses, and revenues.

b. assets, expenses, and equity.

c. assets, liabilities, and dividends.

d. assets, dividends, and expenses.

Review Question

Source documents, such as a sales slip, a check, a bill, or a

cash register tape, provide evidence of the transaction.

Steps in the Recording ProcessSteps in the Recording ProcessSteps in the Recording ProcessSteps in the Recording Process

LO 4 Identify the basic steps in the recording process.

Illustration 3-17

Analyze each transaction Enter transaction in a journalTransfer journal information to

ledger accounts

Book of original entry.

Transactions recorded in chronological order.

Contributions to the recording process:

1. Discloses the complete effects of a transaction.

2. Provides a chronological record of transactions.

3. Helps to prevent or locate errors because the debit

and credit amounts can be easily compared.

LO 5 Explain what a journal is and how it helps in the recording process.

The Journal

Journalizing - Entering transaction data in the journal.

Illustration: Presented below is information related to Sierra Corporation.

Sierra issued common stock in exchange for $10,000 cash.

Oct. 1

Sierra borrowed $5,000 by signing a note.1

Sierra purchased equipment for $5,000.2

Instructions - Journalize these transactions.

The JournalThe JournalThe JournalThe Journal

Account Title Ref. Debit Credit

Oct. 1

JournalizingJournalizingJournalizingJournalizing

General Journal

Common stock

10,000

Sierra issued common stock in exchange for $10,000 cash.

Oct. 1

General Journal

Sierra borrowed $5,000 by signing a note.Oct. 1

Notes payable

Oct. 2

General Journal

Sierra purchased equipment for $5,000.Oct. 2

Equipment

The Ledger is comprised of the entire group of accounts maintained by a company.

LO 6 Explain what a ledger is and how it helps in the recording process.

Illustration 3-19

LO 6 Explain what a ledger is and how it helps in the recording process.

Chart of Accounts – listing of accounts used by a company to record transactions.

Illustration 3-20

Cash Acct. No. 101

Explanation Ref. Debit Credit BalanceDate

General Ledger

Date Account Title Ref. Debit Credit

Oct. 1 Cash 10,000

Common stock 10,000

General Journal

Oct. 1 Stock issued J1 10,000 10,000

Posting – the process of transferring journal entry amounts to ledger accounts.

Posting:

a. normally occurs before journalizing.

b. transfers ledger transaction data to the journal.

c. is an optional step in the recording process.

d. transfers journal entries to ledger accounts.

Review Question

LO 7 Explain what posting is and how it helps in the recording process.

The Recording Process IllustratedThe Recording Process IllustratedThe Recording Process IllustratedThe Recording Process Illustrated

Follow these steps:

1. Determine what type of account is involved.

2. Determine what items increased or decreased and by how much.

3. Translate the increases and decreases into debits and credits.

Illustration 3-21

Follow these steps:

Illustration 3-22

Follow these steps:

Illustration 3-23

3-50 LO 7 Explain what posting is and how it helps in the recording process.

Additional Transactions

The The Recording Recording Process Process IllustratedIllustrated

Illustration 3-24

Illustration 3-25

Illustration 3-26

Illustration 3-27

Illustration 3-28

Additional TransactionsIllustration 3-29

Illustration 3-30

3-57 LO 7

Illustration 3-31

Summary Illustration of JournalizingSummary Illustration of JournalizingSummary Illustration of JournalizingSummary Illustration of Journalizing

Illustration 3-32

Summary Illustration of JournalizingSummary Illustration of JournalizingSummary Illustration of JournalizingSummary Illustration of Journalizing

Illustration 3-32

Summary Summary Illustration Illustration of Postingof Posting

Illustration 3-33

Selected transactions from the journal of Faital Inc. during its firstmonth of operations are presented below. Post these transactions to T-accounts.

Trial Balance

A list of accounts and their balances at a given time.

Accounts are listed in the order in which they appear

in the ledger.

The Trial BalanceThe Trial BalanceThe Trial BalanceThe Trial Balance

LO 8 Explain the purposes of a trial balance.

Purpose is to prove that debits

equal credits.

May also uncover errors in

journalizing and posting.

Useful in the preparation of

financial statements.

Illustration 3-34

EqualLO 8

The trial balance may balance even when

1. a transaction is not journalized,

2. a correct journal entry is not posted,

3. a journal entry is posted twice,

4. incorrect accounts are used in

journalizing or posting, or

5. offsetting errors are made in recording

the amount of a transaction.

Limitations of a Trial Balance

Ethics Note An error is the result of an

unintentional mistake. It is neither ethical nor

unethical. An irregularity is an intentional

misstatement, whichis viewed as unethical.

A trial balance will not balance if:

a. a correct journal entry is posted twice.

b. the purchase of supplies on account is debited to

Supplies and credited to Cash.

c. a $100 cash dividends is debited to the Dividends

account for $1,000 and credited to Cash for $100.

d. a $450 payment on account is debited to Accounts

Payable for $45 and credited to Cash for $45.

Review Question

The Cash account and the related cash

transactions indicate why cash changed during October. To make this

information useful for analysis it is summarized in a statement of cash

flows. The statement of cash flows classifies each transaction as an

operating activity, an investing activity, or a financing activity.

Sierra Corporation’s:

Operating activities involve providing guide services.

Investing activities include the purchase or sale of long-lived

assets used in operating the business, or the purchase or sale

of investment securities.

Financing activities are borrowing money, issuing shares of

stock, and paying dividends.

LO 9 Classify cash activities as operating, investing, or financing.

Transaction analysis is the same under IFRS and GAAP

however different standards sometimes impact how transactions

are recorded.

European companies rely less on historical cost and more on fair

value than U.S. companies. The double-entry system is the

basis of accounting systems worldwide.

Both the IASB and FASB go beyond the basic definitions

provided in this textbook for the key elements of financial

statements, that is, assets, liabilities, equity, revenues, and

expenses.

Key Points

LO 10 Compare the procedures for the recording process under GAAP and IFRS.

A trial balance under IFRS follows the same format as shown in

the textbook.

As shown in the textbook, dollars signs are typically used only in

the trial balance and the financial statements. The same practice

is followed under IFRS, using the currency of the country in which

the reporting company is headquartered.

Key Points

In deciding whether the United States should adopt IFRS, some of

the issues the SEC said should be considered are:

► Whether IFRS is sufficiently developed and consistent in

application.

► Whether the IASB is sufficiently independent.

► Whether IFRS is established for the benefit of investors.

Key Points

Some of the issues the SEC said should be considered are:

► The issues involved in educating investors about IFRS.

► The impact of a switch to IFRS on U.S. laws and

regulations.

► The impact on companies including changes to their

accounting systems, contractual arrangements, corporate

governance, and litigation.

► The issues involved in educating accountants, so they can

prepare statements under IFRS.

Key Points

The basic recording process shown in this textbook is followed by

companies across the globe. It is unlikely to change in the future. The

definitional structure of assets, liabilities, equity, revenues, and

expenses may change over time as the IASB and FASB evaluate their

overall conceptual framework for establishing accounting standards.

Looking to the Future

Which statement is correct regarding IFRS?

a) IFRS reverses the rules of debits and credits, that is, debits

are on the right and credits are on the left.

b) IFRS uses the same process for recording transactions as

c) The chart of accounts under IFRS is different because

revenues follow assets.

d) None of the above statements are correct.

IFRS Practice

A trial balance:

a) is the same under IFRS and GAAP.

b) proves that transactions are recorded correctly.

c) proves that all transactions have been recorded.

d) will not balance if a correct journal entry is posted twice.

IFRS Practice

One difference between IFRS and GAAP is that:

a) GAAP uses accrual-accounting concepts and IFRS uses

primarily the cash basis of accounting.

b) IFRS uses a different posting process than GAAP.

c) IFRS uses more fair value measurements than GAAP.

d) the limitations of a trial balance are different between IFRS

and GAAP.

IFRS Practice

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