Accounting Information System

Slide 2-1
Accounting Information System
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2003
Slide 2-2
Financial Statements, Auditing and Users

ICAI GAAP
Financial Statements
Preparers
Audit Report
Decision makers
Auditors
ASB
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GAAS
Slide 2-3
Fundamental Principles of Accounting

Business Entity Principle Objectivity Principle Cost Principle Going-Concern Principle Monetary Unit Principle
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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.
Slide 2-4
Exh. 2.2
The Accounting Process
Transaction or event
Source documents
Analysis
Reporting Trial balance

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Recording & posting
Slide 2-5
Transactions and Events

Exchanges of economic consideration between two parties.
External Transactions occur between the organization and an outside party.

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Internal Transactions occur within the organization.

Slide Example 2-6
Is the financial position (assets, liabilities, and stockholders equity) of the company changed?
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Slide 2-7
Source Documents
Checks Purchase Orders
Bank Statement Sales Invoices

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Slide 2-8
The Account
Detailed record of increases and decreases in specific assets, liabilities, equities, revenues, or expenses.
Separate accounts are maintained for each item of importance.
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Slide 2-9
Exh. 2.4
Expanded Accounting Equation

Assets
Liabilities
+
+
Equity
+
Common Stock
+
Retained Earnings
Expenses
Revenues
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Slide 2-10
Asset Accounts
Prepaid Insurance Accounts Receivable Office Supplies Store Supplies
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Cash
Notes Receivable
Prepaid Expenses
ASSETS
Land
Equipment
Buildings
Slide 2-11
LiabilityAccounts
Accounts Payable Notes Payable
LIABILITIES
Accrued Liabilities
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Unearned Revenues
Slide 2-12
Equity Accounts
Common Stock Dividends
Equities
Revenues Retained Earnings
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Expenses
Slide 2-13
Analyzing Transactions
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.
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Slide 2-14
Transaction Analysis
Buck Johnson forms a building consulting business. It is set up as a corporation called Build-Up, Inc.. Analyze the following transactions.
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Slide 2-15
Buck Johnson invests $50,000 in the company in exchange for common stock.
Liabilities + Equity The accounts involved Accounts Notes are: Cash Supplies Equipment Equity Payable Payable (1) Cash (asset) (1) $ 50,000 $ 50,000 Assets =
(2) Owners Equity (equity)

$ 50,000 $ $ = $ $ $ 50,000
$ 50,000
$ 50,000
McGraw-Hill/Irwin
Slide 2-16
Build-Up, Inc. purchased supplies paying $4,800 cash.
Liabilities + Equity The accounts involved are: Accounts Notes Payable Payable Cash Supplies Equipment Equity (1) Cash (asset) (1) $ 50,000 $ 50,000 (2) (2) Supplies (asset) (4,800) $ 4,800 Assets =
$ 45,200 $ 4,800 $ $ 50,000
$ 50,000
$ 50,000
McGraw-Hill/Irwin
Slide 2-17
Build-Up, Inc. purchased equipment for $30,000 cash.
The accounts involved Cash Supplies Equipment (1) Cash (asset) (1) $ 50,000 (2) (4,800) $ 4,800 (2) Equipment (asset)
(3) (30,000) $ 30,000 $ 15,200 $ 4,800 $ $ 50,000 30,000 = Assets = Liabilities + are: Accounts Notes Payable Payable Equity Equity $ 50,000
$ 50,000
$ 50,000
McGraw-Hill/Irwin
Slide 2-18
Build-Up, Inc. purchased additional supplies of $9,400 on account.
The accounts involved are: (1) Supplies (asset) (2) Accounts Payable (liability)
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Slide 2-19
Build-Up, Inc. purchased additional supplies of $9,400 on account.
Assets Cash Supplies Equipment (1) $ 50,000 (2) (4,800) $ 4,800 (3) (30,000) $ 30,000 (4) 9,400 $ 15,200 $ 14,200 $ 30,000 $ 59,400 = = Liabilities + Accounts Notes Payable Payable Equity Equity $ 50,000
$ 9,400 $ 9,400 $
$ 50,000
$ 59,400
McGraw-Hill/Irwin
Slide 2-20
The balances so far appear below. Note that the Balance Sheet Equation is still in balance.
Assets Cash Supplies Equipment Bal $ 15,200 14,200 30,000
Liabilities + Equity Accounts Notes Equity Payable Payable 9,400 $ 50,000
$ 15,200 $ 14,200 $
30,000
$ 9,400 $
59,400
$ 50,000
$ 59,400 = Now lets look at transactions $ involving revenues and expenses.

McGraw-Hill/Irwin
Slide 2-21
Rendered consulting services receiving $9,800 cash.
The accounts involved are: (1) Cash (asset) (2) Revenues (equity)
McGraw-Hill/Irwin
Slide 2-22
Rendered consulting services receiving $9,800 cash.
Assets Cash Supplies Equipment Bal $ 15,200 14,200 30,000 (5) 9,800 = Liabilities + Equity Accounts Notes Equity Payable Payable 9,400 $ 50,000 9,800
$ 25,000 $ 14,200 $ $ 69,200
30,000 =
$ 9,400 $
$ 59,800
$ 69,200
McGraw-Hill/Irwin
Slide 2-23
Paid $2,800 rent to the landlord of the building where the business is located.
The accounts involved are: (1) Cash (asset) (2) Rent Expense (equity)
McGraw-Hill/Irwin
Slide 2-24
Paid $2,800 rent to the landlord of the building where the business is located.
Assets Cash Supplies Equipment Bal $ 15,200 14,200 30,000 (5) 9,800 (6) (2,800) $ 22,200 $ 14,200 $ $ 66,400 30,000 = = Liabilities + Equity Accounts Notes Equity Payable Payable 9,400 $ 50,000 9,800 (2,800) $ 9,400 $ $ 57,000
$ 66,400
McGraw-Hill/Irwin
Slide 2-25
Paid Salaries of $2,300.
The accounts involved are: (1) Cash (asset) (2) Salary Expense (equity)
McGraw-Hill/Irwin
Slide 2-26
Paid Salaries of $2,300.
Assets Cash Supplies Equipment Bal $ 15,200 14,200 30,000 (5) 9,800 (6) (2,800) (7) (2,300) $ 19,900 $ 14,200 $ 30,000 $ 64,100 = = Liabilities + Equity Accounts Notes Equity Payable Payable 9,400 $ 50,000 9,800 (2,800) (2,300) $ 9,400 $ $ 54,700 $ 64,100
McGraw-Hill/Irwin
Slide 2-27
Exh. 2.8
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.
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Used as a simple tool for illustrating the balance in a given account. Account Name (Left Side) (Right Side)
Debit
Credit
Slide 2-28
Learning Objective
Describe
a ledger and a chart of accounts.
Conceptual
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Slide 2-29
McGraw-Hill/Irwin
ACCT 201 ACCT 201 ACCT 201

Slide 2-30
Debits and Credits

The debit/credit convention or coding system is very simple. Do not make it difficult because you cannot accept its simplicity.
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Slide 2-31
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Lets . . .
. . . At Debits
Slide 2-32
Debits

Debit comes from Latin and merely means left, or the left-hand side of an account. Abbreviated DR.
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Slide 2-33
Account Title
Left Side
We need to stop here and change our way of thinking!
Debit Side
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Slide 2-34
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Lets . . .
. . . At Credits
Slide 2-35
Credits

Credit also comes from the Latin, and means right, or the right-hand side of an account. Abbreviated CR.
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Slide 2-36
Account Title
Right Side
Lets stop here and modify our thinking at least for this class!
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Credit Side
Slide 2-37
So, how can we use this?
Thats a good question!

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Slide 2-38
Accounts actually provide two equalities or balances . . .
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Slide 2-39
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Lets . . .
At the first equality

Slide 2-40
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ACCT 201
Assets
The algebraic relationship in the fundamental accounting model.

Liabilities Owners Equity
ACCT 201 ACCT 201
Slide 2-41
McGraw-Hill/Irwin
Account Title
Debit Credit
Always
Slide 2-42
Assets
DR CR
Liabilities
DR CR
Owners Equity
DR CR
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Slide 2-43
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The Second Equality . . .
Debits
Credits
The algebraic relationship between account increases and decreases.

Slide 2-44
Debit-Credit Rules . . .
Account
Assets Liabilities Owners Equity Revenue Expenses
McGraw-Hill/Irwin
Inc. Debit Credit Credit Credit Debit
Dec. Credit Debit Debit Debit Credit

Slide 2-45
Debit-Credit Rules . . .
Debits Increase Assets Expenses
Liabilities Equity Revenue
Credits
Liabilities Equity Revenue
Decrease
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Assets Expenses
Slide 2-46
Basic Facts About Accounts
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Slide 2-47
McGraw-Hill/Irwin

For
every transaction there must be at least one debit and one credit;
Slide 2-48
McGraw-Hill/Irwin

Debits
must always equal credits for each transaction, and;
Slide 2-49
McGraw-Hill/Irwin

Debits
are always entered on the left side of an account and credits on the right side.
Slide 2-50
McGraw-Hill/Irwin

Slide 2-51
ncrease ebits xpenses ssets

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Slide 2-52
evenues quity iabilities ncrease redits

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Slide 2-53
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After Eating Dinner

Accounts increased with a debit: Assets Expenses Dividends
Lets Read the Comics

Accounts increased with a credit: Liabilities Revenues Capital
Slide 2-54
Account
Three parts : 1) the Title of the account 2) a left or Debit side 3) a right or Credit side
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Slide 2-55
The T Account
TITLE DEBIT CREDIT
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Slide 2-56
Total the Entries to Each Side

TITLE Debit Credit
Total Debits Total Credits
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Slide 2-57
Normal Balances
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Slide 2-58
Normal Balances
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Slide 2-59
Normal Balances
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Slide 2-60

TITLE Debit Credit
If the greater sum is on the left, the account has a Debit Balance
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Slide 2-61

TITLE Debit Credit
If the greater sum is on the right, the account has a Credit Balance
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Slide 2-62
Exh. 2.9
Balance of an Account
An account balance is the difference between the increases and decreases in an account.
Cash T-Account for FastForward
Cash
Issuance of stock Consulting services revenues earned Collection of accounts receivable 30,000 Purchase of supplies 4,200 Purchase of equipment 1,900 Payment of rent Payment of salary Payment of note payable Payment of dividend 36,100 Total decreases (31,700) 4,400 2,500 26,000 1,000 700 900 600 31,700
Total increases Less decreases Balance
McGraw-Hill/Irwin
Slide 2-63
Exh. 2.10
Double-Entry Accounting
Assets
ASSETS
Liabilities
LIABILITIES
Equity
EQUITIES
Debit
Credit
Debit
Credit
Debit
Credit
McGraw-Hill/Irwin
Slide 2-64
Exh. 2.11
Double-Entry Accounting - Detail of Effects on Equity

Retained Earnings
Ret. Earnings
Dividends
Dividends
Revenues
Revenues
Expenses
Expenses
Debit Credit
Debit Credit
Debit Credit
Debit Credit
McGraw-Hill/Irwin
Slide 2-65
Illustration 3-15
Illustration 3-16
Analyze each transaction

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Enter each transaction in a journal
Transfer journal information to ledger accounts The McGraw-Hill Companies, Inc., 2003
Slide 2-66
Steps in Processing Transactions

Assets
=
(3)
Liabilities
Equipment 30,000
Equity
Step 1: Examine source documents.
Step 2: Analyze transactions. Remember these two steps? Now lets look at some additional steps.
McGraw-Hill/Irwin
Slide 2-67
Steps in Processing Transactions

Assets
=
(3)
Liabilities
Equipment 30,000
Equity
Step 1: Examine source documents.
Step 2: Analyze transactions.

ACCOUNT NAME:
Date Description PR
ACCOUNT No.
Debit Credit Balance
Date
GENERAL JOURNAL
Description Post. Ref.
Page
Debit
123
Credit
Step 5: Prepare a trial balance.

McGraw-Hill/Irwin
Step 4: Record the journal information in a ledger.
Step 3: Record transactions in a journal.

Slide 2-68
General Journal for FastForward

Transaction Date Titles of Affected Accounts
Page 1
Debit 30,000 30,000 Credit
GENERAL JOURNAL
Date 2001 Dec. 1 Cash Description PR
Common Stock Issuance of stock Dec. 2 Supplies Cash Transaction Purchased store supplies explanation for cash
McGraw-Hill/Irwin
2,500
Dollar amount of debits and credits
2,500
Slide 2-69
Balance Column Ledger

T-accounts are useful illustrations, but balance column ledger accounts are used in practice.
CASH
Date 2001 Dec. 1 Dec. 2 Dec. 3 Dec. 10 Description PR G1 G1 G1 G1 Debit
ACCOUNT No.
Credit
101
Balance
Issuance of stock Purchased supplies Purchased equipment Collection from customer
30,000 2,500 26,000 1,900
30,000 27,500 1,500 3,400
McGraw-Hill/Irwin
Slide 2-70

Note the the t-account tool is derived from the debit and credit columns of the ledger.
CASH
ACCOUNT No.
Credit
101
Balance
30,000 2,500 26,000 1,900
30,000 27,500 1,500 3,400
McGraw-Hill/Irwin
Slide 2-71
Exh. 2.16

The last line in the balance column shows the current balance in the account.
CASH
ACCOUNT No.
Credit
101
Balance
30,000 2,500 26,000 1,900
30,000 27,500 1,500 3,400
McGraw-Hill/Irwin
Slide 2-72
Posting Journal Entries - Example

GENERAL JOURNAL
Date 2001 Dec. 1 Cash Description PR Debit 30,000 30,000
Page 1
Credit
Common Stock Issuance of stock
1 Dec. 2 Identify the account. Supplies Cash CASH Purchased store supplies for cash Date Description
2001
2,500
ACCOUNT No.
PR Debit Credit
2,500
101
Balance
McGraw-Hill/Irwin Purchased Dec. 3
equipment
G1
20,000.00
########
Slide 2-73

GENERAL JOURNAL
Page 1
Credit
Dec. 2 Supplies Enter the date. Cash CASH Purchased store supplies for cash Date Description
2,500
ACCOUNT No.
PR Debit Credit
2,500
101
Balance
2001 Dec. 1
Purchased Dec. 3 McGraw-Hill/Irwin
equipment
G1
20,000.00
########
Slide 2-74

GENERAL JOURNAL
Page 1
Credit
3 Dec. 2 Supplies 2,500 Enter the amount. Cash CASH Purchased store supplies ACCOUNT No. for cash Date Description PR Debit Credit
2001 Dec. 1
2,500
101
Balance
Issuance of stock equipment

G1
30,000
Dec. 3 Purchased McGraw-Hill/Irwin
20,000
(20,000)
Slide 2-75

GENERAL JOURNAL
Page 1
Credit
Common Stock Issuance of stock Dec. 2 Supplies Enter the journal reference. Cash CASH Purchased store supplies for cash Date Description PR Debit
4 2,500
ACCOUNT No.
Credit
2,500
101
Balance
2001 Dec. 1
G1 G1
30,000
20,000
(20,000)
Slide 2-76

GENERAL JOURNAL
Page 1
Credit
Common Stock Issuance of stock Dec. 2 Supplies Compute Cash CASH Purchased store supplies for cash Date Description
the balance.
2,500
ACCOUNT No.
PR G1 G1 Debit Credit
2,500
101
Balance
2001 Dec. 1
30,000 20,000
30,000 (20,000)
Slide 2-77

GENERAL JOURNAL
Date 2001 Dec. 1 Cash Description PR 101 Debit 30,000 30,000
Page 1
Credit
Common Stock Issuance of stock Dec. 2 Supplies Enter the Cash CASH Purchased store supplies for cash Date Description PR
ledger
2,500 reference.
6
2,500
ACCOUNT No.
Debit Credit
101
Balance
2001 Dec. 1
G1 G1
30,000 20,000
30,000
(20,000)
Slide 2-78
FastForward Trial Balance December 31, 2001 Cash Accounts receivable Supplies Prepaid Insurance Equipment Accounts payable Unearned consulting revenue Common Stock Dividends Consulting revenue Rental revenue Salaries expense Rent expense Utilities expense Total Debits $ 3,950 9,720 2,400 26,000 Credits
6,200 3,000 30,000 5,800 300
600
1,400 1,000 230 $ 45,300
A Trial Balance is a listing of all accounts and their balances at a point in time.
$ 45,300
McGraw-Hill/Irwin
Slide 2-79
Exh. 2.19
Income Statement
Inflows of assets in exchange for products and services provided to customers.
FastForward Income Statement For Month Ended December 31, 2001 Revenues: Consulting revenue$ 5,800 Rental revenue 300 Total revenues Expenses: Rent expense 1,000 Salaries expense 1,400 Utilities expense 230 Total expenses Net income
$ 6,100
Outflows or the using up of assets that result from providing products and services to customers.
McGraw-Hill/Irwin
2,630 $ 3,470
Slide 2-80
Exh. 2.19
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.
FastForward Statement of Retained Earnings For Month Ended December 31, 2001 Retained Earnings, 12/1/01 Add: Net Income Total Less: Dividends Retained Earnings, 12/31/01 $ $ $ 3,470 3,470 (600) 2,870
McGraw-Hill/Irwin
Slide 2-81
Exh. 2.19
Balance Sheet
Assets are economic resources owned by a business. They are expected to provide future benefits to the business.
FastForward Balance Sheet December 31, 2001 Assets
Cash Supplies Prepaid Ins. Equipment $ 3,950 9,720 2,400 26,000
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.
Liabilities
Accounts payable Unearned Revenue Total liabilities $ $ 6,200 3,000 9,200
Equity
Common Stock Retained Earnings Total liabilities and owners' equity $ 30,000 2,870 $ 42,070
Total assets
42,070
McGraw-Hill/Irwin
Slide 2-82
Exh. 2.19
FastForward Statement of Cash Flows For Month Ended December 31, 2001
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 Cash flows from investing activities: Purchase of equipment $ (26,000) Net cash used by investing activities Cash flows from financing activities: Investment by owner $ 30,000 Withdrawal by owner (600) Net cash provided by financing activities Net increase in cash Cash balance, December 1, 2001 Cash balance, December 31, 2001
McGraw-Hill/Irwin
550
Describes the sources and uses of cash for a reporting period.
(26,000)
29,400 $ 3,950 $ 3,950

Slide 2-83
Formatting Conventions
GENERAL JOURNAL
Date Description Post. Ref.
Page
Debit
123
Credit
ACCOUNT NAME:
Date Description PR
ACCOUNT No.
Debit Credit Balance
Generally, dollar signs ($) are not used in the journals or ledgers. Round numbers in financial statements to the nearest dollar.
Rounding
McGraw-Hill/Irwin
Slide 2-84
Using the Information - Return on Equity

Describes the relationship between net income for the period and average equity.
Net Income Return on Equity = Average Equity

Helps an owner judge the compnays profitability compared to other business or personal opportunities.
McGraw-Hill/Irwin
Slide 2-85
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!
McGraw-Hill/Irwin

Accounting Information System

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Slide 2-1

Accounting Information System

The McGraw-Hill Companies, Inc., 2003

Financial Statements, Auditing and Users

Fundamental Principles of Accounting

The Accounting Process

Reporting Trial balance

Recording & posting

The McGraw-Hill Companies, Inc., 2003

Transactions and Events

External Transactions occur between the organization and an outside party.

Internal Transactions occur within the organization.

Slide Example 2-6

The McGraw-Hill Companies, Inc., 2003

Bank Statement Sales Invoices

Expanded Accounting Equation

The McGraw-Hill Companies, Inc., 2003

The McGraw-Hill Companies, Inc., 2003

The McGraw-Hill Companies, Inc., 2003

(2) Owners Equity (equity)

The McGraw-Hill Companies, Inc., 2003

$ 45,200 $ 4,800 $ $ 50,000

The McGraw-Hill Companies, Inc., 2003

The McGraw-Hill Companies, Inc., 2003

The McGraw-Hill Companies, Inc., 2003

The McGraw-Hill Companies, Inc., 2003

Assets Cash Supplies Equipment Bal $ 15,200 14,200 30,000

Liabilities + Equity Accounts Notes Equity Payable Payable 9,400 $ 50,000

$ 59,400 = Now lets look at transactions $ involving revenues and expenses.

The McGraw-Hill Companies, Inc., 2003

The McGraw-Hill Companies, Inc., 2003

$ 25,000 $ 14,200 $ $ 69,200

The McGraw-Hill Companies, Inc., 2003

The McGraw-Hill Companies, Inc., 2003

The McGraw-Hill Companies, Inc., 2003

The McGraw-Hill Companies, Inc., 2003

The McGraw-Hill Companies, Inc., 2003

Chart of Accounts & the T-Account

The McGraw-Hill Companies, Inc., 2003

a ledger and a chart of accounts.

ACCT 201 ACCT 201 ACCT 201

Debits and Credits

The McGraw-Hill Companies, Inc., 2003

ACCT 201 ACCT 201 ACCT 201

The McGraw-Hill Companies, Inc., 2003

The McGraw-Hill Companies, Inc., 2003

ACCT 201 ACCT 201 ACCT 201

The McGraw-Hill Companies, Inc., 2003

So, how can we use this?

Thats a good question!

Accounts actually provide two equalities or balances . . .

The McGraw-Hill Companies, Inc., 2003

ACCT 201 ACCT 201 ACCT 201

At the first equality

The algebraic relationship in the fundamental accounting model.

ACCT 201 ACCT 201

ACCT 201 ACCT 201 ACCT 201

The McGraw-Hill Companies, Inc., 2003

ACCT 201 ACCT 201 ACCT 201

The Second Equality . . .

The algebraic relationship between account increases and decreases.

Inc. Debit Credit Credit Credit Debit

Dec. Credit Debit Debit Debit Credit