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Financial Accounting: Tools for Business Decision Making, 3rd 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 decision makers. 5 Accounting Transactions... are economic events that must be recorded in the financial statements because they affect assets, liabilities and/or stockholders’ equity. 6 Transaction Analysis Transaction Analysis determines the impact of the tranaction on the balance sheet. 7 Accounting Analysis... analyze the effect of business transactions on the basic accounting equation: Assets = Liabilities + Stockholders’ Equity 8 The Accounting Equation... Must always balance. 9 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 Accoiunts Notes Unearned = Payable + Payable + Revenue Stockholders' Equity Type of Transaction Common Retained 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 Accoiunts Notes Unearned = Payable + Payable + Revenue Stockholders' Equity Type of Transaction Common Retained 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 95,000 (500) Rent Expense (700) Dividends 1,000 107,200 This is a tabular summary. Account... an individual accounting record of increases and decreases in a specific Asset, Liability, or Stockholders’ Equity item. 27 Chart of Accounts... Is a list of a company’s accounts. ASSETS Cash Accounts Receivable Advertising Supplies Prepaid Insurance Office Equipment Accumulated Depreciation Office Equipment 28 Account Three parts : 1) the Title of the account 2) a left or Debit side 3) a right or Credit side 29 The T Account TITLE DEBIT CREDIT 30 Total the Entries to Each Side TITLE Debit Credit Total Debits Total Credits 31 Tabular Summary Account Form Balancing an Account Normal Balances Illustration 3-8 Illustration 3-6 Illustration 3-10 NEW ART 33 Normal Balances Illustration 3-11 Illustration 3-13 NEW ART 34 Illustration 3-14 Normal Balances NEW ART 35 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. 36 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. 37 Whichever side you increase is the normal balance! Debits Increase assets and expenses Decrease liabilities, common stock and revenues 39 Credits Decrease assets and expenses Increase liabilities, common stock and revenues 40 Illustration 3-16 Analyze each transaction Enter each transaction in a journal Transfer journal information to ledger accounts41 The Recording Process Analyze each transaction Enter information in a journal Transfer the information to the appropriate accounts 42 The Journal... is an accounting record where the transactions are recorded in chronological order. 43 Journals Types of Journals Cash receipts Cash disbursements Sales Purchases General 44 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. 45 GENERAL JOURNAL Date Account Titles and Explanations 2004 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) 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 47 The General Ledger 48 The Ledger The entries from the journal are posted to the ledger,usually in summary form, except for the general journal. 49 Posting Transferring information from the journals to the general ledger accounts 50 Posting Entries GENERAL JOURNAL Account Titles and Explanations 2004 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 2004 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 2004 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. 54 Sierra Corporation Trial Balance October 31, 2004 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 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 Accounts Notes Unearned Common Retained = 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. COPYRIGHT Copyright ©2004, John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.