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Financial Accounting: Tools for Business Decision Making, 2nd Ed.

ELS. Prepared by:. Ellen L. Sweatt. Georgia Perimeter College. Financial Accounting: Tools for Business Decision Making, 2nd Ed. Kimmel, Weygandt, Kieso. The Accounting. Information System. Chapter 3. Chapter 3 The Accounting Information System.

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Financial Accounting: Tools for Business Decision Making, 2nd Ed.

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  1. ELS Prepared by: Ellen L. Sweatt Georgia Perimeter College Financial Accounting:Tools for Business Decision Making, 2nd Ed. Kimmel, Weygandt, Kieso

  2. The Accounting Information System Chapter 3

  3. Chapter 3The AccountingInformation 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.

  4. Chapter 3The AccountingInformation 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.

  5. The Accounting Information System • The system of: • collecting and processing transaction data and • communicating financial information to interested parties.

  6. The Accounting Information System Analyze the effect of business transactions on the basic accounting equation: Assets = Liabilities + Stockholders’ Equity

  7. The Accounting Information System The Accounting Equation must always balance.

  8. The Accounting Information System • Accounting transactions are events that must be recorded in the Financial Statements.

  9. The Accounting Information System • Transactions are events that must be recorded in the Financial Statements • Transaction Analysis determines the impact on the Balance Sheet.

  10. Illustration 3-1 Is the financial position (assets, liabilities, and stockholders’ equity) of the company changed?

  11. Let’s Practice Transaction Analysis

  12. a) On July 1, Cash of $95,000 was invested in the business in exchange for $95,000 worth of common stock.

  13. b) Peoples, Inc., acquired land by paying $60,000 cash to Nashtown, Inc

  14. c) Peoples, Inc., purchased an estimated three month supply of office supplies on account. The company will pay $600 for these supplies later.

  15. d) Peoples, Inc., received $800 for services performed.

  16. e) Peoples, Inc., performed services for $2,000. The company will be paid later in the month.

  17. 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

  18. g) Peoples, Inc., purchased office equipment for $6,000. The Company signed a 2-year note with ACME Office Equipment Company.

  19. h) Peoples, Inc., paid $1,800 for a 1-year license to operate as a business. The license expires June 30th of next year.

  20. i) Peoples, Inc., collected $800 of the money owed from (e).

  21. j) Peoples, Inc., paid $400 of the amount it owed from (c).

  22. k) An employee has worked and earned $600 which was paid during the month.

  23. l) Peoples, Inc., received a $5,000 retainer to handle a tax audit that the company will start next month.

  24. m) Peoples, Inc., paid $500 for rent during the month.

  25. n) Dividends of $700 were paid during the month.

  26. 107,200 107,200

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

  28. Account Three parts : 1) the Title of the account 2) a left or Debit side 3) a right or Credit side

  29. TITLE DEBIT CREDIT The T Account

  30. TITLE Debit Credit Total Debits Total Credits Total the Entries to Each Side

  31. Tabular Summary Account Form Balancing an Account Illustration 3-4

  32. Normal Balances

  33. Normal Balances

  34. TITLE Debit Credit Total Debits Total Credits Total the Entries to Each Side If the greater sum is on the left, the account has a Debit Balance

  35. TITLE Debit Credit Total Debits Total Credits Total the Entries to Each Side If the greater sum is on the right, the account has a Credit Balance

  36. Whichever side you increase is the normal side!

  37. Debits Increase assets and expenses Decrease liabilities, common stock and revenues

  38. Credits Decrease assets and expenses Increase liabilities, common stock and revenues

  39. Illustration 3-15 Illustration 3-16 Analyze each transaction Enter each transaction in a journal Transfer journal information to ledger accounts Page 109 in book

  40. The Recording Process • Analyze each transaction • Enter information in a journal • Transfer the information to the appropriate accounts

  41. The Journal... is an accounting record where the transactions are recorded in chronological order.

  42. Journals • Cash receipts • Cash disbursements • Sales • Purchases • General Types of Journals

  43. 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.

  44. GENERAL JOURNAL Account Titles and Explanations 2001 Oct. 1 Cash 10,000 Common Stock 10,000(Invested cash in business) Illustration 3-17 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)

  45. The General Ledger • the entire group of accounts maintained by a company • contains all the asset, liability, and stockholders’ equity accounts

  46. The General Ledger Illustration 3-18

  47. The Ledger The entries from the journal are posted to the ledger,usually in summary form, except for the general journal.

  48. Posting Transferring information from the journals to the general ledger accounts

  49. GENERAL JOURNAL Account Titles and Explanations 2001 Oct. 1 Cash 10,000 Common Stock 10,000 AccountCASH Acct 1010 Date Posting Entries Balance ref debit credit debit credit AccountCOMMON STOCK Acct 3010 Date Balance ref debit credit debit credit

  50. GENERAL JOURNAL Account Titles and Explanations 1998 Oct. 1 Cash 10,000 Common Stock 10,000 AccountCASH Acct 1010 Date Posting Entries Balance ref debit credit debit credit gj 1 Oct 1 10,000 10,000 AccountCOMMON STOCK Acct 3010 Date Balance ref debit credit debit credit Oct 1 gj 1 10,000 10,000

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