ch03 The Accounting Information Sysytem

3-1
3
THE ACCOUNTING
INFORMATION SYSTEM
Financial Accounting, Sixth Edition

3-2
Study Objectives
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.
3-3
The Accounting Information System
The
Steps in the
Accounting Recording The Trial
The Account Recording
Transactions Process Balance
Process
Illustrated
Analyzing Debits and The journal Summary Limitations of

transactions credits The ledger illustration of a trial balance
Summary of Debit and journalizing and
Chart of
transactions credit posting
accounts
procedures
Posting
Stockholders’
equity
relationships
Summary of
debit/credit
rules
3-4
The Accounting Information System
Accounting Information System

System of
► collecting and
► processing transaction data and
► communicating financial information to decision
makers.
Most businesses use computerized accounting (EDP)

systems.
3-5
Accounting Transactions
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.
3-6
Question: Are the following events recorded in the

accounting records?
Discuss Illustration 3-1
guided trip
Purchase
Event options with Pay rent.
computer.
potential
customer.
Criterion Is the financial position (assets, liabilities, or

stockholders’ equity) of the company changed?
Record/ Don’t
Record
3-7
Analyzing Transactions
The process of identifying the specific effects of economic
events on the accounting equation.
Basic Accounting Equation
Stockholders’
Assets = Liabilities + Equity
3-8 SO 1 Analyze the effect of business transactions on the basic accounting equation.
Analyzing Transactions
Illustration 3-2
Expanded accounting equation
Illustration: 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
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
3. On October 2, Sierra purchased equipment by paying $5,000 cash
to Superior Equipment Sales Co.
1. +10,000 +10,000
2. +5,000 +5,000
3. -5,000 +5,000
4. On October 2, Sierra received a $1,200 cash advance from R.
Knox, a client.
1. +10,000 +10,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
5. On October 3, Sierra received $10,000 in cash from Copa Company
for guide services performed.
1. +10,000 +10,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
5. +10,000 +10,000
6. On October 3, Sierra Corporation paid its office rent for the month
of October in cash, $900.
1. +10,000 +10,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
5. +10,000 +10,000
6. -900 -900
7. On October 4, Sierra paid $600 for a one-year insurance policy that
will expire next year on September 30.
1. +10,000 +10,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
5. +10,000 +10,000
6. -900 -900
7. -600 +600
8. On October 5, Sierra purchased supplies on account from Aero
Supply for $2,500.
1. +10,000 +10,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
5. +10,000 +10,000
6. -900 -900
7. -600 +600
8. +2,500 +2,500
10. On October 20, Sierra paid a $500 dividend.
1. +10,000 +10,000
2. +5,000 +5,000
3. -5,000 +5,000
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. Employees have worked two weeks, earning $4,000 in salaries,
which were paid on October 26.
1. +10,000 +10,000
2. +5,000 +5,000
3. -5,000 +5,000
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
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3-20
The Account
Record of increases and decreases in

Account a specific asset, liability, equity,
revenue, or expense item.
Debit = “Left”
Credit = “Right”
An Account can Account Name

be illustrated in a Debit / Dr. Credit / Cr.
T-Account form.
3-21 SO 2 Explain what an account is and how it helps in the recording process.
The Account
Debit and Credit Procedures

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 equal CREDITS.
3-22 SO 3 Define debits and credits and explain their use in recording business transactions.
If Debits are greater than Credits, the account will

have a debit balance.
Account Name
Debit / Dr. Credit / Cr.
Transaction #1 $10,000 $3,000 Transaction #2

Transaction #3 8,000
Balance $15,000
If Credits are greater than Debits, the account will

have a credit balance.
Account Name
Transaction #1 $10,000 $3,000 Transaction #2

8,000 Transaction #3
Balance $1,000
Dr./Cr. Procedures for Assets and Liabilities
Assets
 Assets - Debits should
exceed credits.
Normal Balance
Chapter
 Liabilities – Credits should
3-23
exceed debits.
Liabilities
Debit / Dr. Credit / Cr.  The normal balance is on
the increase side.
Normal Balance
Chapter
3-24
Dr./Cr. Procedures for Stockholders’ Equity
Stockholders’ Equity  Owner’s investments and

revenues increase stockholders’
equity (credit).
Normal Balance  Dividends and expenses decrease
Chapter
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stockholder’s equity (debit).
Common Stock Retained Earnings Dividends

Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.
Normal Balance Normal Balance Normal Balance
Chapter Chapter Chapter

3-25 3-25 3-23
Dr./Cr. Procedures for Revenue and Expense
Revenue  The purpose of earning

revenues is to benefit the
stockholders.
Normal Balance
 The effect of debits and credits

Chapter
3-26
on revenue accounts is the

same as their effect on
Expense
Debit / Dr. Credit / Cr. stockholders’ equity.
 Expenses have the opposite

Normal Balance
effect: expenses decrease
Chapter
3-27 stockholders’ equity.
Stockholders’ Equity Relationships
Illustration 3-15
3-28
SO 3 Define debits and credits and explain their use in recording business transactions.
Summary of Debit/Credit Rules
Liabilities
Normal Normal
Balance Balance
Debit Credit Normal Balance
Assets Chapter
Stockholders’ Equity
3-24

Normal Balance
Normal Balance
Chapter
Expense
3-23
Revenue
Chapter
3-25

Normal Balance
Normal Balance
Chapter
3-27 Chapter
3-26
Balance Sheet Income Statement

Asset = Liability + Equity Revenue - Expense =
Debit
Credit
Relationship among the assets, liabilities and

stockholders’ equity of a business:
Illustration 3-16
Basic
Assets = Liabilities + Stockholders’ Equity
Equation
Expanded
Basic
Equation
The equation must be in balance after every transaction. For

every Debit there must be a Credit.
Review Question
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.
3-34
Steps in the Recording Process
Illustration 3-17
Transfer journal information to

Analyze each transaction Enter transaction in a journal ledger accounts
Source documents, such as a sales slip, a check, a bill,

or a cash register tape, provide evidence of the
transaction.
3-35 SO 4 Identify the basic steps in the recording process.

The Journal
 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.
3-36 SO 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.
Oct. 1 Sierra issued common stock in exchange for $10,000

cash.
1 Sierra borrowed $5,000 by signing a note.
2 Sierra purchased office equipment for $5,000.
Instructions - Journalize these transactions.
Journalizing
Oct. 1 Sierra issued common stock in exchange for

$10,000 cash.
General Journal
Date Account Title Ref. Debit Credit
Oct. 1 Cash 10,000
Common stock 10,000
Journalizing
Oct. 1 Sierra borrowed $5,000 by signing a note.
General Journal
Oct. 1 Cash 5,000
Notes payable 5,000
Journalizing
Oct. 2 Sierra purchased equipment for $5,000.
General Journal
Oct. 2 Equipment 5,000
Cash 5,000
3-41
The Ledger contains the entire group of accounts

maintained by a company.
Illustration 3-19
3-42 SO 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.
3-43 SO 6 Explain what a ledger is and how it helps in the recording process.
Posting – the process of transferring amounts from the
journal to the ledger accounts.
General Journal J1
Oct. 1 Cash 101 10,000
Common stock 10,000
General Ledger
Cash Acct. No. 101
Date Explanation Ref. Debit Credit Balance
Oct. 1 Owner investment J1 10,000 10,000
3-44 SO 7
Review Question
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.
3-45 SO 7 Explain what posting is and how it helps in the recording process.
The 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:

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 3-22
3-47
SO 7 Explain what posting is and how it helps in the recording process.
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 3-23
3-48
SO 7 Explain what posting is and how it helps in the recording process.
The
Recording
Process
Illustrated
Additional
Transactions
Illustration 3-24
The
Recording
Process
Illustrated
Additional
Transactions
Illustration 3-25
The
Recording
Process
Illustrated
Additional
Transactions
Illustration 3-26
The
Recording
Process
Illustrated
Additional
Transactions
Illustration 3-27
3-52
The
Recording
Process
Illustrated
Additional
Transactions
Illustration 3-28
Additional Transactions
Illustration 3-29
The
Recording
Process
Illustrated
Additional
Transactions
Illustration 3-30
The
Recording
Process
Illustrated
Additional
Transactions
Illustration 3-31
3-56
SO 7
Summary Illustration of Journalizing
Illustration 3-32
Summary Illustration of Journalizing
Illustration 3-32
Summary
Illustration
of Posting
Illustration 3-33
The Trial Balance
 A list of accounts and their balances at a given time.
 Purpose is to prove that debits equal credits.
Illustration 3-34
3-60
The Trial Balance
Limitations of a Trial Balance

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.
3-61 SO 8 Explain the purposes of a trial balance.

The Trial Balance
Review Question
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.
3-62 SO 8 Explain the purposes of a trial balance.

Key Points
 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.
3-63
Key Points
 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 that the reporting company is
headquartered.
3-64
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.
3-65
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.
3-66
Looking into the Future
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.
3-67
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 GAAP.
c) The chart of accounts under IFRS is different because

revenues follow assets.
d) None of the above statements are correct.
3-68
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.
3-69
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.
3-70
Copyright
Copyright © 2011 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.
3-71

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3-1

Financial Accounting, Sixth Edition

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

Analyzing Debits and The journal Summary Limitations of

Accounting Information System

Most businesses use computerized accounting (EDP)

Transactions are economic events that require

 Assets, liabilities, or stockholders’ equity items

 Dual effect on the accounting equation.

Question: Are the following events recorded in the

Criterion Is the financial position (assets, liabilities, or

Basic Accounting Equation

Record of increases and decreases in

An Account can Account Name

Debit and Credit Procedures

► Recording done by debiting at least one account and

► DEBITS must equal CREDITS.

If Debits are greater than Credits, the account will

Transaction #1 $10,000 $3,000 Transaction #2

If Credits are greater than Debits, the account will

Transaction #1 $10,000 $3,000 Transaction #2

Stockholders’ Equity  Owner’s investments and

Common Stock Retained Earnings Dividends

Normal Balance Normal Balance Normal Balance

Chapter Chapter Chapter

Revenue  The purpose of earning

 The effect of debits and credits

on revenue accounts is the

 Expenses have the opposite

Debit / Dr. Credit / Cr.

Debit / Dr. Credit / Cr.

Balance Sheet Income Statement

Relationship among the assets, liabilities and

The equation must be in balance after every transaction. For

b. decrease both assets and liabilities.

c. increase assets and decrease liabilities.

d. decrease assets and increase liabilities.

b. assets, expenses, and equity.

c. assets, liabilities, and dividends.

d. assets, dividends, and expenses.

Transfer journal information to

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

3-35 SO 4 Identify the basic steps in the recording process.

Journalizing - Entering transaction data in the journal.

Illustration: Presented below is information related to Sierra

Oct. 1 Sierra issued common stock in exchange for $10,000

Instructions - Journalize these transactions.

Oct. 1 Sierra issued common stock in exchange for

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

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

The Ledger contains the entire group of accounts

Chart of Accounts – listing of accounts used by a

b. transfers ledger transaction data to the journal.

c. is an optional step in the recording process.

d. transfers journal entries to ledger accounts.

Follow these steps:

Follow these steps:

Follow these steps:

Limitations of a Trial Balance

3-61 SO 8 Explain the purposes of a trial balance.

3-62 SO 8 Explain the purposes of a trial balance.

 European companies rely less on historical cost and more

 Both the IASB and FASB go beyond the basic definitions