CH 03 A

THE ACCOUNTING
INFORMATION
SYSTEM
3
3-1
Financial Accounting, Seventh Edition
Learning
Learning Objectives
Objectives
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.
3-2
Preview of Chapter 3
Financial Accounting
Seventh Edition
Kimmel Weygandt Kieso
3-3
The
The Accounting
Accounting Information
Information System
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.
3-4 LO 1 Analyze the effect of business transactions on the basic accounting equation.
Accounting
Accounting Transactions
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.
Accounting
Transactions
Question: Are the following events recorded in the

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

stockholders equity) of the company changed?
Record/ Dont
Record
Accounting
Transactions
Analyzing Transactions
The process of identifying the specific effects of economic
events on the accounting equation.
Basic Accounting Equation
Assets Liabilities Stockholders

= + Equity
Accounting
Transactions
Analyzing Transactions
Illustration 3-2
Expanded accounting equation
Accounting
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
Accounting
Transactions
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
Accounting
Transactions
Event (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
Accounting
Transactions
Event (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
Accounting
Transactions
Event (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
Accounting
Transactions
Event (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
Accounting
Transactions
Event (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
Accounting
Transactions
Event (8). On October 5, Sierra purchased an estimated three months of
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
Accounting
Transactions
Event (9). On October 9, Sierra hired four new employees to begin work on
October 15.
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
An accounting transaction has not occurred.
Accounting
Transactions
Event (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
Accounting
Transactions
Event (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
3-19
3-20
The
The Account
Account
Record of increases and decreases in
Account a specific asset, liability, equity,
revenue, or expense item.
Debit = Left
Credit = Right
An Account can
be illustrated in a
T-Account form.
3-21 LO 2 Explain what an account is and how it helps in the recording process.
The
The Account
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 LO 3 Define debits and credits and explain they are used to record business transactions.
Debit
Debit and
and Credit
Credit Procedures
Procedures
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
Debit
Debit and
and Credit
Credit Procedures
Procedures
If Credits are greater than Debits, the account will have
a credit balance.
Account Name
Debit / Dr. Credit / Cr.
Transaction #1 $10,000 $3,000 Transaction #2

8,000 Transaction #3
Balance $1,000
Procedures
Procedures for
for Assets
Assets and
and Liabilities
Liabilities
Assets - Debits should

exceed credits.
Liabilities Credits should

exceed debits.
Procedures
Procedures for
for Stockholders
StockholdersEquity
Equity
Investments by stockholders and
revenues increase stockholders
equity (credit).
Dividends and expenses decrease
stockholders equity (debit).
Procedures
Procedures for
for Revenue
Revenue and
and Expense
Expense
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.
Stockholders
StockholdersEquity
Equity Relationships
Relationships
Illustration 3-15
Summary
Summaryof
of Debit/Credit
Debit/Credit Rules
Rules
Normal
Normal Normal
Normal
Balance
Balance Balance
Balance
Debit
Debit Credit
Credit
Summary
Summary of
of Debit/Credit
Debit/Credit Rules
Rules
Balance Sheet Income Statement
Asset = Liability + Equity Revenue - Expense =
Debit
Credit
Summary
Summary of
of Debit/Credit
Debit/Credit Rules
Rules
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.
Summary
Summary of
of Debit/Credit
Debit/Credit Rules
Rules
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.
Summary
Summary of
of Debit/Credit
Debit/Credit Rules
Rules
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
Steps in
in the
the Recording
Recording Process
Process
Illustration 3-17
Analyze each transaction Transfer journal information to

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 LO 4 Identify the basic steps in the recording process.

Steps
Steps in
in the
the Recording
Recording Process
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 LO 5 Explain what a journal is and how it helps in the recording process.
The
The Journal
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 equipment for $5,000.
Instructions - Journalize these transactions.
Journalizing
Journalizing
Oct. 1 Sierra issued common stock in exchange for

$10,000 cash.
General Journal
Cash 10,000
Common stock 10,000
Journalizing
Journalizing
Oct. 1 Sierra borrowed $5,000 by signing a note.
General Journal
Cash 5,000
Notes payable 5,000
Journalizing
Journalizing
Oct. 2 Sierra purchased equipment for $5,000.
General Journal
Equipment 5,000
Cash 5,000
3-41
Steps
Steps in
in the
the Recording
Recording Process
Process
The Ledger is comprised of the entire group of accounts

maintained by a company.
Illustration 3-19
3-42 LO 6 Explain what a ledger is and how it helps in the recording process.
Steps
Steps in
in the
the Recording
Recording Process
Process
Chart of Accounts listing of accounts used by a

company to record transactions.
Illustration 3-20
3-43 LO 6 Explain what a ledger is and how it helps in the recording process.
Steps
Steps in
in the
the Recording
Recording Process
Process
Posting the process of transferring journal entry

amounts to ledger accounts.
General Journal J1
101
General Ledger
Oct. 1 Stock issued J1 10,000 10,000
3-44 LO 7
Steps
Steps in
in the
the Recording
Recording Process
Process
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 LO 7 Explain what posting is and how it helps in the recording process.
3-46
The
The Recording
Recording Process
Process Illustrated
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
The
The Recording
Recording Process
Process Illustrated
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 3-22
The
The Recording
Recording Process
Process Illustrated
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 3-23
The
The
Recording
Recording
Process
Process
Illustrated
Illustrated
Additional
Transactions
Illustration 3-24
The
The
Recording
Recording
Process
Process
Illustrated
Illustrated
Additional
Transactions
Illustration 3-25
The
The
Recording
Recording
Process
Process
Illustrated
Illustrated
Additional
Transactions
Illustration 3-26
The
The
Recording
Recording
Process
Process
Illustrated
Illustrated
Additional
Transactions
Illustration 3-27
3-53
The
The
Recording
Recording
Process
Process
Illustrated
Illustrated
Additional
Transactions
Illustration 3-28
The
The Recording
Recording Process
Process Illustrated
Illustrated
Additional Transactions
Illustration 3-29
The
The
Recording
Recording
Process
Process
Illustrated
Illustrated
Additional
Transactions
Illustration 3-30
The
The
Recording
Recording
Process
Process
Illustrated
Illustrated
Additional
Transactions
Illustration 3-31
3-57
LO 7
Summary
Summary Illustration
Illustration of
of Journalizing
Journalizing
Illustration 3-32
3-58
LO 7
Summary
Summary Illustration
Illustration of
of Journalizing
Journalizing
Illustration 3-32
3-59
LO 7
Summary
Summary
Illustration
Illustration
of
of Posting
Posting
Illustration 3-33
Selected transactions from the journal of Faital Inc. during its first
month of operations are presented below. Post these transactions to T-accounts.
The
The Trial
Trial Balance
Balance
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.
Purpose is to prove that debits
equal credits.
May also uncover errors in
journalizing and posting.
Useful in the preparation of
financial statements.
3-62 LO 8 Explain the purposes of a trial balance.
The
The Trial
Trial Balance
Balance
Illustration 3-34
Equal
3-63 LO 8
The
The Trial
Trial Balance
Balance
Limitations of a Trial Balance

The trial balance may balance even when
1. a transaction is not journalized,
Ethics Note An error is
2. a correct journal entry is not posted, the result of an
unintentional mistake. It
3. a journal entry is posted twice, is neither ethical nor
unethical. An irregularity
4. incorrect accounts are used in is an intentional
misstatement, which
journalizing or posting, or is viewed as unethical.
5. offsetting errors are made in recording

the amount of a transaction.

The
The Trial
Trial Balance
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.

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 Corporations:
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.
3-66 LO 9 Classify cash activities as operating, investing, or financing.

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.
3-67 LO 10 Compare the procedures for the recording process under GAAP and IFRS.
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 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.
Looking to 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.
IFRS Practice
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.
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.
Copyright
Copyright
Copyright 2013 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.
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THE ACCOUNTING

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

Accounting Information System

Most businesses use computerized accounting (EDP) systems.

Assets, liabilities, or stockholders equity items change as

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

Assets Liabilities Stockholders

An accounting transaction has not occurred.

Debit and Credit Procedures

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

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

Assets - Debits should

Liabilities Credits should

The effect of debits and credits

Expenses have the opposite

The equation must be in balance after every transaction. For

a. increase both assets and liabilities.

b. decrease both assets and liabilities.

c. increase assets and decrease liabilities.

d. decrease assets and increase liabilities.

a. assets, expenses, and revenues.

b. assets, expenses, and equity.

c. assets, liabilities, and dividends.

d. assets, dividends, and expenses.

Analyze each transaction Transfer journal information to

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

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

2. Provides a chronological record of transactions.

3. Helps to prevent or locate errors because the debit

Journalizing - Entering transaction data in the journal.

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 is comprised of the entire group of accounts

Chart of Accounts listing of accounts used by a

Posting the process of transferring journal entry

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

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.

Limitations of a Trial Balance

5. offsetting errors are made in recording

3-64 LO 8 Explain the purposes of a trial balance.

a. a correct journal entry is posted twice.

b. the purchase of supplies on account is debited to

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

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

3-65 LO 8 Explain the purposes of a trial balance.

3-66 LO 9 Classify cash activities as operating, investing, or financing.

Whether IFRS is sufficiently developed and consistent in

Whether the IASB is sufficiently independent.

Whether IFRS is established for the benefit of investors.

The issues involved in educating investors about IFRS.

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

The impact on companies including changes to their

The issues involved in educating accountants, so they can

b) IFRS uses the same process for recording transactions as