3

THE ACCOUNTING
INFORMATION SYSTEM

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 The Accounting Information System

The
Steps in the
Accounting Recording The Trial
The Account Recording
Transactions Process Balance
Process
Illustrated

Analyzing Debits and The General Summary Limitations of

transactions credits Journal illustration of a trial balance
Summary of Debit and The Ledger journalizing and
transactions credit posting
Chart of
procedures accounts
Stockholders’ Posting
equity
relationships
Summary of
debit/credit
rules

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 The Accounting Information System
Accounting Information System is a system of:
► collecting and
► processing transaction data and
► communicating financial information to decision
makers.

Most businesses use computerized accounting information

systems, which rely on the accounting cycle:

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 Accounting Transactions

Transactions are economic events that require

recording in the financial statements.
u Not all activities represent transactions.

u For a transaction to be recordable, assets, liabilities,

or stockholders’ equity items must change as a result
of some economic event (e.g., purchasing a
computer, paying rent, sale of a product).

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 Accounting Transactions

Analyzing Transactions
The process of identifying the specific effects of economic
events on the accounting equation.

Basic Accounting Equation

Stockholders’
Assets = Liabilities + Equity

The equation must always balance. That is, each transaction

will have a dual effect on the accounting equation.
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 Accounting Transactions

Analyzing Transactions

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 Accounting Transactions
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

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 Accounting Transactions
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

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 Accounting Transactions
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

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 Accounting Transactions
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

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 Accounting Transactions
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

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 Accounting Transactions
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

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 Accounting Transactions
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

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 Accounting Transactions
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

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 Accounting Transactions
9. 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
9. -500 -500

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 Accounting Transactions
10. 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
9. -500 -500
10. -4,000 -4,000

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 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.

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 The Account

Debit and Credit Procedures

Double-entry system (basis of accounting systems
worldwide – invented by Luca Pacioli)
► 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.

► FOR EACH TRANSACTION:

► DEBITS must equal CREDITS.

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 Debit and Credit 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

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 Debit and Credit 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

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 Dr./Cr. Procedures for Assets and Liabilities

Assets
Debit / Dr. Credit / Cr.
u Assets - Debits should
exceed credits.
Normal Balance

Chapter
u Liabilities – Credits should
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exceed debits.
Liabilities
Debit / Dr. Credit / Cr. u The normal balance is on
the increase side.
Normal Balance

Chapter
3-24

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 Dr./Cr. Procedures for Stockholders’ Equity

Stockholders’ Equity u Owner’s investments and

Debit / Dr. Credit / Cr.
revenues (through inc. in NI & RE)
increase stockholders’ equity (credit).
Normal Balance u Dividends and expenses (through
Chapter
3-25
dec. in NI & RE) decrease
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

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 Dr./Cr. Procedures for Revenue and Expense

Revenue u The purpose of earning

Debit / Dr. Credit / Cr.
revenues is to benefit the
stockholders.
Normal Balance

u The effect of debits and credits

Chapter

on revenue accounts is the

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same as their effect on

Expense
Debit / Dr. Credit / Cr. stockholders’ equity.

u Expenses have the opposite

Normal Balance
effect: expenses decrease
Chapter
3-27 stockholders’ equity.

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 Summary of Debit/Credit Rules
Liabilities
Debit / Dr. Credit / Cr.
Normal Normal
Balance Balance
Debit Credit Normal Balance

Assets Chapter

Stockholders’ Equity
3-24

Debit / Dr. Credit / Cr.

Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter

Expense
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Revenue
Chapter
3-25

Debit / Dr. Credit / Cr.

Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-27 Chapter
3-26

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 Summary of Debit/Credit Rules

Balance Sheet Income Statement

Asset = Liability + Equity Revenue - Expense =

Debit

Credit

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 Summary of Debit/Credit Rules

Relationship among the assets, liabilities and

stockholders’ equity of a business:

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.

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 Summary of Debit/Credit 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.

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 Summary of Debit/Credit 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.

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 Steps in the Recording Process
Analyzing, Journalizing, and Posting

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.
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 Steps in the Recording Process

The General Journal

u Book of original entry.
u Transactions recorded in chronological order.
u 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.

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 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.

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 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

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 Journalizing

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

General Journal
Date Account Title Ref. Debit Credit
Oct. 1 Cash 5,000
Notes payable 5,000

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 Journalizing

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

General Journal
Date Account Title Ref. Debit Credit
Oct. 2 Equipment 5,000
Cash 5,000

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 Steps in the Recording Process
Chart of Accounts – listing of accounts used by a
company to record transactions.

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 Steps in the Recording Process

The Ledger contains all of the accounts used by a company.

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 Steps in the Recording Process

Posting – the process of transferring amounts from the

general journal to the ledger accounts.

General Journal J1
Date Account Title Ref. Debit Credit
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

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 Steps in the Recording 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.

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 The Recording Process Illustrated

It helps to 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.

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 The Recording Process Illustrated

It helps to 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.

3-40
 The Recording Process Illustrated

It helps to 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.

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The
Recording
Process
Illustrated

Additional
Transactions

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The
Recording
Process
Illustrated

Additional
Transactions

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The
Recording
Process
Illustrated

Additional
Transactions

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The
Recording
Process
Illustrated

Additional
Transactions

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The
Recording
Process
Illustrated

Additional
Transactions

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 The Recording Process Illustrated

Additional Transactions

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The
Recording
Process
Illustrated

Additional
Transactions

3-48
The
Recording
Process
Illustrated

Additional
Transactions

3-49
 Summary Illustration of Journalizing

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 Summary Illustration of Journalizing

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 Summary
Illustration
of Posting

3-52
 The Trial Balance

u A list of accounts and their balances at a given time (usually @ the

end of a period).

u Purpose is to prove that Debits = Credits. May also help uncover

errors. Very useful in preparing financial statements.

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 The Trial Balance
u A list of accounts and their balances at a given time (usually @ the
end of a period).
u Purpose is to prove that Debits = Credits. May also help uncover
errors. Very useful in preparing financial statements.

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 The Trial Balance

Limitations of a Trial Balance

The trial balance does NOT prove that all transactions have
been recorded or that the ledger is correct. Therefore, 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.
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 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.

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