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The McGraw-Hill Companies, Inc.

, 2003
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2
Accounting Information
System
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Preparers
ASB
Auditors
Decision makers
GAAP
Financial Statements, Auditing and
Users
Financial
Statements
Audit
Report
FASB
GAAS
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International Accounting Principles
Despite our growing global economy, countries
continue to maintain their unique set of
acceptable accounting practices.
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Fundamental Principles of
Accounting
Business Entity
Principle
Objectivity
Principle
Cost Principle
Going-Concern
Principle
Monetary Unit
Principle
A business is accounted for separately
from its owner or owners.
Financial statement information is
supported by independent, unbiased
evidence.
Financial statements are based on actual
costs incurred in business transactions.
A business continues operating instead of
being closed or sold.
Express transactions and events in
monetary units.
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Source
documents
Recording &
posting
Trial balance
Reporting
Transaction
or event
Analysis
The Accounting Process
Exh.
2.2
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External Transactions
occur between the
organization and an
outside party.
Internal Transactions
occur within the
organization.
Transactions and Events
Exchanges of economic consideration between two
parties.
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Sales
Invoices
Bank
Statement
Purchase
Orders
Checks
Source Documents
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Detailed record of
increases and
decreases in
specific assets,
liabilities, equities,
revenues, or
expenses.
Separate accounts are
maintained for each
item of importance.
The Account
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Liabilities Equity Assets
= +
Common
Stock
Retained
Earnings
Revenues Expenses
Expanded Accounting Equation
+ + +
Exh.
2.4
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Land
Equipment
Buildings
Cash
Prepaid
Expenses
Office
Supplies
Store
Supplies
Prepaid
Insurance
Notes
Receivable
Accounts
Receivable
ASSETS
Asset Accounts
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Accrued
Liabilities
Unearned
Revenues
Notes
Payable
Accounts
Payable
LIABILITIES
LiabilityAccounts
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Equities
Revenues
Common
Stock
Dividends
Expenses
Equity Accounts
Retained
Earnings
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Analyze the transaction
and its source.
Identify the impact of the
transaction on account
balances.
Also identify the financial
statements that are
impacted by the
transaction.
Analyzing Transactions
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Buck Johnson forms a
building consulting
business. It is set up as
a corporation called
Build-Up, Inc..
Analyze the following
transactions.
Transaction Analysis
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The accounts involved are:
(1) Cash (asset)
(2) Owners Equity (equity)
Buck Johnson invests $50,000 in the
company in exchange for common stock.
Transaction Analysis
Assets = Liabilities + Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable Equity
(1) 50,000 $ 50,000 $
50,000 $ - $ - $ - $ - $ 50,000 $
50,000 $ = 50,000 $
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The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
Transaction Analysis
Build-Up, Inc. purchased supplies
paying $4,800 cash.
Assets = Liabilities + Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable Equity
(1) 50,000 $ 50,000 $
(2) (4,800) 4,800 $
45,200 $ 4,800 $ - $ - $ - $ 50,000 $
50,000 $ = 50,000 $
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The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
Transaction Analysis
Build-Up, Inc. purchased equipment
for $30,000 cash.
Assets = Liabilities + Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable Equity
(1) 50,000 $ 50,000 $
(2) (4,800) 4,800 $
(3) (30,000) 30,000 $
15,200 $ 4,800 $ 30,000 $ - $ - $ 50,000 $
50,000 $ = 50,000 $
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The accounts involved are:
(1) Supplies (asset)
(2) Accounts Payable (liability)
Transaction Analysis
Build-Up, Inc. purchased additional
supplies of $9,400 on account.
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Assets = Liabilities + Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable Equity
(1) 50,000 $ 50,000 $
(2) (4,800) 4,800 $
(3) (30,000) 30,000 $
(4) 9,400 9,400 $
15,200 $ 14,200 $ 30,000 $ 9,400 $ - $ 50,000 $
59,400 $ = 59,400 $
Transaction Analysis
Build-Up, Inc. purchased additional
supplies of $9,400 on account.
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Transaction Analysis
The balances so far appear below. Note that the
Balance Sheet Equation is still in balance.
Now lets look at transactions
involving revenues and expenses.
Assets = Liabilities + Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable Equity
Bal 15,200 $ 14,200 30,000 9,400 50,000 $
15,200 $ 14,200 $ 30,000 $ 9,400 $ - $ 50,000 $
59,400 $ = 59,400 $
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The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
Transaction Analysis
Rendered consulting services
receiving $9,800 cash.
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Assets = Liabilities + Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable Equity
Bal 15,200 $ 14,200 30,000 9,400 50,000 $
(5) 9,800 9,800
25,000 $ 14,200 $ 30,000 $ 9,400 $ - $ 59,800 $
69,200 $ = 69,200 $
Transaction Analysis
Rendered consulting services
receiving $9,800 cash.
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The accounts involved are:
(1) Cash (asset)
(2) Rent Expense (equity)
Transaction Analysis
Paid $2,800 rent to the landlord of the
building where the business is located.
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Assets = Liabilities + Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable Equity
Bal 15,200 $ 14,200 30,000 9,400 50,000 $
(5) 9,800 9,800
(6) (2,800) (2,800)
22,200 $ 14,200 $ 30,000 $ 9,400 $ - $ 57,000 $
66,400 $ = 66,400 $
Transaction Analysis
Paid $2,800 rent to the landlord of the
building where the business is located.
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The accounts involved are:
(1) Cash (asset)
(2) Salary Expense (equity)
Transaction Analysis
Paid Salaries of $2,300.
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Assets = Liabilities + Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable Equity
Bal 15,200 $ 14,200 30,000 9,400 50,000 $
(5) 9,800 9,800
(6) (2,800) (2,800)
(7) (2,300) (2,300)
19,900 $ 14,200 $ 30,000 $ 9,400 $ - $ 54,700 $
64,100 $ = 64,100 $
Transaction Analysis
Paid Salaries of $2,300.
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Account Name
(Left Side)
Debit
(Right Side)
Credit
Used as a simple tool for
illustrating the balance in a
given account.
Chart of Accounts & the T-Account
Typically, a
company
keeps a
listing of all
the accounts
is uses. This
list is called
the Chart of
Accounts.
Exh.
2.8
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Cash T-Account for FastForward
Cash
Issuance of stock 30,000 Purchase of supplies 2,500
Consulting services revenues earned 4,200 Purchase of equipment 26,000
Collection of accounts receivable 1,900 Payment of rent 1,000
Payment of salary 700
Payment of note payable 900
Payment of dividend 600
Total increases 36,100 Total decreases 31,700
Less decreases (31,700)
Balance 4,400
Balance of an Account
An account balance is the difference between the
increases and decreases in an account.
Exh.
2.9
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Liabilities Equity Assets
= +
Debit Credit Debit Credit Debit Credit
ASSETS
+ -
LIABILITIES
- +
EQUITIES
- +
Double-Entry Accounting
Exh.
2.10
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Revenues Expenses
Retained
Earnings
Dividends
_
+
_
Debit Credit
Ret. Earnings
- +
Debit Credit
Dividends
+ -
Debit Credit
Expenses
+ -
Debit Credit
Revenues
- +
Double-Entry Accounting - Detail of
Effects on Equity
Exh.
2.11
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Step 1: Examine
source documents.
Remember these two steps?
Now lets look at some
additional steps.
Steps in Processing Transactions
Equipment
(3) 30,000
Liabilities Equity Assets
= +
Step 2: Analyze
transactions.
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ACCOUNT NAME: ACCOUNT No.
Date Description PR Debit Credit Balance
Step 4: Record the
journal information in a
ledger.
GENERAL JOURNAL Page 123
Date Description
Post.
Ref. Debit Credit
Step 3: Record
transactions in a
journal.
Step 5: Prepare a
trial balance.
Steps in Processing Transactions
Step 1: Examine
source documents.
Equipment
(3) 30,000
Liabilities Equity Assets
= +
Step 2: Analyze
transactions.
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GENERAL JOURNAL Page 1
Date Description PR Debit Credit
2001
Dec. 1 Cash 30,000
Common Stock 30,000
Issuance of stock
Dec. 2 Supplies 2,500
Cash 2,500
Purchased store supplies
for cash
Transaction
Date
Titles of Affected
Accounts
Dollar amount of
debits and credits
Transaction
explanation
General Journal for FastForward
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CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance
2001
Dec. 1 Issuance of stock G1 30,000 30,000
Dec. 2 Purchased supplies G1 2,500 27,500
Dec. 3 Purchased equipment G1 26,000 1,500
Dec. 10 Collection from customer G1 1,900 3,400
T-accounts are useful illustrations, but balance
column ledger accounts are used in practice.
Balance Column Ledger
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CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance
2001
Dec. 1 Issuance of stock G1 30,000 30,000
Dec. 2 Purchased supplies G1 2,500 27,500
Dec. 3 Purchased equipment G1 26,000 1,500
Dec. 10 Collection from customer G1 1,900 3,400
Balance Column Ledger
Note the the t-account tool is derived from the
debit and credit columns of the ledger.
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The last line in the balance column shows the
current balance in the account.
Exh.
2.16
CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance
2001
Dec. 1 Issuance of stock G1 30,000 30,000
Dec. 2 Purchased supplies G1 2,500 27,500
Dec. 3 Purchased equipment G1 26,000 1,500
Dec. 10 Collection from customer G1 1,900 3,400
Balance Column Ledger
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GENERAL JOURNAL Page 1
Date Description PR Debit Credit
2001
Dec. 1 Cash 30,000
Common Stock 30,000
Issuance of stock
Dec. 2 Supplies 2,500
Cash 2,500
Purchased store supplies
for cash
CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance
2001
Dec. 3 Purchased equipment G1 20,000.00 ########
Dec. 10 Collection from customer G1 2,200.00 ########
1
Identify the account.
Posting Journal Entries - Example
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GENERAL JOURNAL Page 1
Date Description PR Debit Credit
2001
Dec. 1 Cash 30,000
Common Stock 30,000
Issuance of stock
Dec. 2 Supplies 2,500
Cash 2,500
Purchased store supplies
for cash
CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance
2001
Dec. 1
Dec. 3 Purchased equipment G1 20,000.00 ########
Dec. 10 Collection from customer G1 2,200.00 ########
2
Enter the date.
Posting Journal Entries - Example
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GENERAL JOURNAL Page 1
Date Description PR Debit Credit
2001
Dec. 1 Cash 30,000
Common Stock 30,000
Issuance of stock
Dec. 2 Supplies 2,500
Cash 2,500
Purchased store supplies
for cash
CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance
2001
Dec. 1 Issuance of stock 30,000
Dec. 3 Purchased equipment G1 20,000 (20,000)
Dec. 10 Collection from customer G1 2,200 (17,800)
3
Enter the amount.
Posting Journal Entries - Example
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GENERAL JOURNAL Page 1
Date Description PR Debit Credit
2001
Dec. 1 Cash 30,000
Common Stock 30,000
Issuance of stock
Dec. 2 Supplies 2,500
Cash 2,500
Purchased store supplies
for cash
CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance
2001
Dec. 1 Issuance of stock G1 30,000
Dec. 3 Purchased equipment G1 20,000 (20,000)
Dec. 10 Collection from customer G1 2,200 (17,800)
4
Enter the journal reference.
Posting Journal Entries - Example
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CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance
2001
Dec. 1 Issuance of stock G1 30,000 30,000
Dec. 3 Purchased equipment G1 20,000 (20,000)
Dec. 10 Collection from customer G1 2,200 (17,800)
5
Compute the balance.
GENERAL JOURNAL Page 1
Date Description PR Debit Credit
2001
Dec. 1 Cash 30,000
Common Stock 30,000
Issuance of stock
Dec. 2 Supplies 2,500
Cash 2,500
Purchased store supplies
for cash
Posting Journal Entries - Example
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GENERAL JOURNAL Page 1
Date Description PR Debit Credit
2001
Dec. 1 Cash 101 30,000
Common Stock 30,000
Issuance of stock
Dec. 2 Supplies 2,500
Cash 2,500
Purchased store supplies
for cash
CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance
2001
Dec. 1 Issuance of stock G1 30,000 30,000
Dec. 3 Purchased equipment G1 20,000 (20,000)
Dec. 10 Collection from customer G1 2,200 (17,800)
Enter the ledger reference.
6
Posting Journal Entries - Example
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Debits Credits
Cash 3,950 $
Accounts receivable -
Supplies 9,720
Prepaid Insurance 2,400
Equipment 26,000
Accounts payable 6,200 $
Unearned consulting revenue 3,000
Common Stock 30,000
Dividends 600
Consulting revenue 5,800
Rental revenue 300
Salaries expense 1,400
Rent expense 1,000
Utilities expense 230
Total 45,300 $ 45,300 $
FastForward
Trial Balance
December 31, 2001
A Trial
Balance is a
listing of all
accounts
and their
balances at
a point in
time.
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Revenues:
Consulting revenue 5,800 $
Rental revenue 300
Total revenues 6,100 $
Expenses:
Rent expense 1,000
Salaries expense 1,400
Utilities expense 230
Total expenses 2,630
Net income 3,470 $
FastForward
Income Statement
For Month Ended December 31, 2001
Income Statement
Inflows of assets in
exchange for
products and
services provided
to customers.
Outflows or the
using up of assets
that result from
providing
products and
services to
customers.
Exh.
2.19
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Retained Earnings, 12/1/01 - $
Add: Net Income 3,470
Total 3,470 $
Less: Dividends (600)
Retained Earnings, 12/31/01 2,870 $
FastForward
Statement of Retained Earnings
For Month Ended December 31, 2001
Statement of Retained Earnings
Beginning of period Retained Earnings is adjusted for
dividends paid and net income (or loss) as reported on
the Income Statement.
Exh.
2.19
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Cash 3,950 $ Accounts payable 6,200 $
Supplies 9,720 Unearned Revenue 3,000
Prepaid Ins. 2,400 Total liabilities 9,200 $
Equipment 26,000
Common Stock 30,000 $
Retained Earnings 2,870
Total assets 42,070 $
Total liabilities and
owners' equity
42,070 $
Assets
Equity
Liabilities
FastForward
Balance Sheet
December 31, 2001
Exh.
2.19
Balance Sheet
Assets are economic resources owned by a
business. They are expected to provide
future benefits to the business.
Liabilities are
obligations of the
business. They
are claims
against the
assets of the
business.
Equity is the
owners claim on
the assets of the
business. It is the
residual interest in
the assets after
deducting
liabilities.
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Describes
the
sources
and uses
of cash
for a
reporting
period.
Cash flows from operating activities:
Cash received from clients 9,100 $
Cash paid for supplies (3,520)
Cash paid for insurance (2,400)
Cash paid for rent & utilities (1,230)
Cash paid to employee (1,400)
Net cash provided by operating acitivities 550 $
Cash flows from investing activities:
Purchase of equipment (26,000) $
Net cash used by investing activities (26,000)
Cash flows from financing activities:
Investment by owner 30,000 $
Withdrawal by owner (600)
Net cash provided by financing activities 29,400
Net increase in cash 3,950 $
Cash balance, December 1, 2001 -
Cash balance, December 31, 2001 3,950 $
FastForward
Statement of Cash Flows
For Month Ended December 31, 2001
Exh.
2.19
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GENERAL JOURNAL Page 123
Date Description
Post.
Ref. Debit Credit
Generally, dollar signs ($)
are not used in the journals or
ledgers.
Rounding
Round numbers in financial
statements to the nearest
dollar.
ACCOUNT NAME: ACCOUNT No.
Date Description PR Debit Credit Balance
Formatting Conventions
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Describes the relationship between net income
for the period and average equity.




Helps an owner judge the compnays profitability
compared to other business or personal
opportunities.
Return on Equity =
Net Income
Average Equity
Using the Information - Return on
Equity
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End of Chapter 2
Now, was that debits
to the left or credits
to the left?
I sure wish I had paid
more attention in
class!