دراسات تجارية بلغة انجليزية

Suez Canal University
Faculty Of Commerce
COMMERCIAL STUDIES IN
ENGLISH LANGUAGE
BY
Prof.Dr. Huda Mohamed Mohamed Dr. Hussien Mohamed Soliman

Abdalla Suez Canal University
Suez Canal University Faculty Of Commerce
Faculty Of Commerce
Dr. Rania Hamada Abd alftah Dr. Mohamed Ibrahim Aboelela

Suez Canal University Suez Canal University
Faculty Of Commerce Faculty Of Commerce
Chapter 1
Chapter One
INTRODUCTION TO ACCOUNTING
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Chapter 1
INTRODUCTION TO ACCOUNTING
 The main elements:
1-Definition of Accounting.
2-Accounting and Bookkeeping.
3-The role of an Accountant.
4-The users of Accounting.
5-The basic forms of business (Business Organization).
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Chapter 1
1-Definition of Accounting:
Accounting is a service activity .Its function is to

provide quantitative information about economic entities.
The information is primarily financial in nature and is
intended to be useful in making decisions.
So the main concern of accounting is on the needs of

users of accounting information whether those users are
internal or external.
2-Accounting and Book-keeping
The difference between accounting and Book-keeping is:
Bookkeeping is only part of Accounting (the record-

making part).
It is a process of detailed recording of all financial

transactions of a business using the double entry system.
Accounting: is a system of recording and reporting

business financial transactions to be used by interested
parties for decision making and performance assessment.
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Chapter 1
So it uses bookkeeping records to prepare financial

statements ( income statement and statement of financial
position ) at regular intervals.
3-The role of an accountant:
Is to record, classify, and summarize economic events

in a logical manner for the purpose of providing financial
information for decision making. To do this, accountants
must have a sound understanding of the principles and
rules that provide the basis for preparing the financial
information. In addition, accountants are responsible for
developing systems to ensure that the entity’s economic
events are properly recorded on a timely basis and at a
reasonable cost.
 Accountants are employed in three main fields:

• Public Accounting:
Public Accountant is individual who offer his

professional services to the public for a fee. These
services include :
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Chapter 1
- Audits.
- Tax services.
- Management advisory services.
- Accounting services & Bookkeeping.

• Management Accounting which includes:
General Accounting. - Cost Accounting.
- budgeting. - Information Systems Design.
- Internal Auditing. - Tax Accounting.

• Governmental Accounting:
Accounting for the government:
- Does not usually involve Accounting for profit.
- Indispensable to the government which controls vast

amount of money.
- Government hire accountants to prepare reports and

carryout their administrative duties.
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Chapter 1
4-The users of accounting:
 The users of accounting can be divided into three

categories:
Management:
• Is the group of people in a business enterprise with
responsibility for achieving the company’s goals
(Owners- Board of directors- officers- managers-
Supervisors).
• Four kinds of information that the management
responsible for (status-planning-control-evaluation).
• These information must be relevant and reliable.
• To be successful management should concentrate on
two primary objectives:
- Profitability (is the ability to make profit to attract
and hold investment capital).
- Liquidity (means having enough funds on hand to
pay debts when they are due).
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Chapter 1
 Outsiders who have direct financial interest:
The main function of accounting is to measure and

report information about the business performance
which consider very important to:
- Present or Potential Investors.
- Present or Potential Creditors (Banks).

 Outsiders who have Indirect financial interest:
-Taxing Authorities.
- Employees.
- Labor Unions …
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Chapter 1
1-The basic forms of business (Business Organization):
 There are three basic forms of business:
A- Single Proprietorship.
B- Partnership.
C- Corporations
A-Single Proprietorship:
-A Single Proprietorship is a business formed and

owned by one person.
-The owner liable for all obligations of it and its not a

separate legal entity.
-The owner receives all profits or losses (the risk is

unlimited).
-The life of Proprietorship limited by desire or death

of owner or incapacity.
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Chapter 1
B- Partnership :
-It is formed and owned by two or more as a partners.
-A partnership is not a separate legal entity.
-The partners share profits & losses of the partnership

according to an agreed upon contract (the risk is
unlimited).
-The partnership must be dissolved if the ownership

changes.
Advantage of partnership:
- Partners share skills, ideas and experience.
- Ability to raise more capital.
- Partners can help each other in decision making.
- Losses are shared.
Disadvantages of partnership:
- Unlimited liability.
- Profits are shared.
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Chapter 1
- Disagreements could happen.
- Lake of continuity of existence.
C- Corporations:
- It is a separate legal entity from its owners.
- The owners are called stockholders or shareholders.
- The ownership is presented by shares or stock.
-Shares or Stock may be sold and transferred.
-A board of director runs the Corporation for the

benefit of stockholders.
- The life of the Corporation is unlimited because

ownership can be transferred without dissolving the
Corporation.
- The risk of ownership is limited to the
investment in Corporation.
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Chapter 1
A- Multiple Choice
1- The accounting process does not include:

a- Identification. c-Verification.
b- Recording. d- Communication.
2- One of the following statements about users of
accounting information is incorrect. The
statement is:
a- Management is considered an internal user.
b- Taxing authorities are considered external users.
c- Present creditors are considered external users.
d- Regulatory authorities are considered external
users.
3- What is the purpose of accounting?
a- To ensure the cash book balance agrees with the
bank statement.
b- To know how long trade receivables take to pay.
c- To prepare the financial statements of the
business.
d- To write up all the ledger accounts.
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Chapter 1
4- What is the purpose of book –keeping?

a- To identify trends over a number of years.
b- To prepare the financial statements of the business.
c- To present parties with relevant information.
d- To record the financial transactions of the business.
B- Complete the following statements by filling in the

appropriate word or sentences:
1- Accounting is _________________ activity.
2-__________________ is individual who offer his

professional services to the public for a fee.
3 - _______________________ is a business formed and
owned by one person.
c- What is the difference between accounting and

Book-keeping?
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D- What is the role of an accountant ?
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Chapter 2
Chapter Two
Accounting Theory & Practice
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Chapter 2
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Chapter 2
Accounting Theory & Practice
 Accounting Theory : a set of foundations that must

underline the practice of accountants & provides the
rational for the procedural aspects of accounting.
 Accounting Practice : consists of the procedures
used to carry out the following functions (measuring,
processing and communicating information).
The main elements:

Part one:
- Accounting Assumption & Principals.
Part two:
- Business Transaction.
- Source Documents.
- The Accounting Cycle Definition.
- Financial Statements.
- Limitations of accounting Statements.
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Chapter 2
1- Accounting Assumption :
 The four fundamental accounting assumptions are:

 Economic Entity Assumption:
every business is conceived to be and treated

as a separate economic entity (separate and distinct
from its owner or owners or every other Economic
Entities, so we keep a business books and not the
owner’s personal books.
 Going-Concern Assumption:
The business will continue to operate for an

indefinite period.
 Monetary Unit Assumption:

- We only record in the books items that can be
measured in money terms.
- Accounting should employ the same unit of measure

as is employed by the business community, that is,
the monetary unit.
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Chapter 2
- Money is the only factor common to all business

transactions & the only practical unit for measure
that can produce homogeneity of the financial
information.
 Periodicity Assumption:
- This assumption result in a division of the life of a

business into time period of equal length, called
accounting period.
- These time periods vary however, the year is the

most common interval.
Accounting Principals:
 The basic accounting principals are:

A- Duality principal:
- Accounting is represented by two aspects, one is the
assets and the other is the claims against these
assets … both are always equal.
- Assets = Capital + Liabilities.
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Chapter 2
- The double entry applies this concept;

( Double entry : the system used to record business
transactions )
Debit (Dr): the left hand side of accounts in the
double entry.
Credit ( Cr) : the right hand side of accounts in the
double entry.
The advantages of maintaining accounting

records using the double entry system are:
- less risk of errors.

- Easier to refer to previous transactions.
- Easier to calculate accounting ratios.
- facilitates decision making.
- Facilitates preparation of financial statements.
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Chapter 2
B -Historical cost principal:
Non-current assets must be recorded at their historical

cost in the balance sheet regardless of their current
market value.
C -Revenue Recognition principal:
- Profit should not be recorded until they are earned.
- Revenue is recorded when the service is performed

or when the ownership of goods passes to the
customers.
d-Matching principle:
The Matching principle requires that revenues and

expenses be matched for the purpose of determining net
income or net loss.
Revenue must be assigned to the accounting period

in which the goods were sold or the services performed,
and expenses must be assigned to the accounting period
in which they are used to produce revenue.
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Chapter 2
e- Prudence concept:
We should expect, estimate and record any possible

future losses in order not to overstate the net profit.
Like: valuing inventory at the lowest possible value.
f- Consistency principle:
We should use only one method for treating an item.
Like:
- When using a certain method to calculate

depreciation or valuing inventory, we should apply the
same method in the subsequent year.
G-Full Disclosure principle:
An accounting principle that requires management to

report all relevant information about the company's
operations to creditors and investors in the financial
statements and footnotes.
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Chapter 2
A- Multiple Choice
1- What is meant by the business entity principle?

a- All businesses must account for items in the same
manner.
b- All businesses must maintain accounting records.
c- The business is expected to be able continue
operating.
d- The financial affairs of a business and its owner
are kept separate.
2- A business records a transaction in its accounting

records as follows:
$
Debit Purchases 100
credit Bank account 100
Which accounting principle is being applied?

a- Duality.
b- Matching.
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Chapter 2
c- Prudence.
d- Realization.
3- A business applies the money measurement
principle. Which would be recorded in its
accounting records?
a- The benefits of staff training.
b- The cost of property owned.
c- The effect of new laws.
d- The value of the manager's skills.
4- What is an application of the consistency principle?
a- Comparing income received with expenses paid
for a financial year .
b- Providing for all foreseeable losses in the annual
accounts.
c- Recording income received when goods are
delivered to the customer.
d- Using the same method of stock valuation each
year.
5- Which accounting principle requires the financial
transactions of a business to be treated separately
from those of the owner?
a- Business entity.
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Chapter 2
b- Duality.
c- Going concern. D- Matching.
6- A business trains its staff to use computers. The
only aspect recorded in the accounting records is
the costs of the training courses and the computers.
The value to business of the new skills is not
recorded.
a- Consistency.
b- Money measurement.
c- Prudence.
d- Realization.
7- The final accounts of a business are prepared on the
basis that the business has no intention of
significantly reducing the size of its operation in the
foreseeable future.
a- Business entity.
b- Consistency.
c- Going concern.
d- Realization.
8- Each financial transaction has two opposite
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Chapter 2
accounting entries.

a- Business entity.
b- Duality.
c- Going concern
d- Money measurement.
9- The skill and knowledge of the workforce is not

shown as an asset in the balance sheet of a business .
a- Business entity.
b- Consistency.
c- Money measurement.
d- Prudence.
10- Tarek always depreciate his fixed assets using the
straight line method.
Which accounting principle is he applying?
a- Consistency.
b- Duality.
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Chapter 2
c- Going concern.
d- Realization.
11- Which of the following should not be recorded in
the books of account?
a- Canteen costs.
b- Maintenance of the buildings.
c- Wages of staff.
d- Workers’ skills.
12- At which point is revenue considered to be earned
by a business?
a- When an invoice is sent to the customer.
b- When ownership of the goods passes to the
customer.
c- When the customer orders the goods.
d- When the customer pays for the goods.
13- What is meant by duality?
a- For every entry in the cash book there must be a
corresponding entry in the bank statement.
b- For every debtor there must be a creditor.
c- There are two aspects to every transaction.
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Chapter 2
d- There are two sides to every balance sheet.
14- What is meant by the money measurement

principle?
a- Accounts are kept on double entry basis.
b- Accounts contain only items which have a
monetary value.
c- Non- current assets are shown at cost less
depreciation.
d- Profits are calculated by deducting cash paid from
cash received.
15- Which accounting principle is applied when non-
current assets are depreciated?
a- Matching.
b- Consistency.
c- Duality.
d- Realization.
16- What will not be found in the financial statements
of a business?
a- The amount the business owes to suppliers.
b- The income and running costs of the business.
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Chapter 2
c- The skill and experience of the employees.

d- The value of the assets owned by the business.
B-Answer the following questions:
1- Which accounting principle states that business
transactions must be expressed in monetary terms?
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2- What accounting principle states that a business will
continue indefinitely?
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3- Which accounting principle states that the same
accounting treatment should be applied to similar
items at all times?
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4- Explain what is meant by the accounting principle of
going concern?
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Chapter 2
Part two:
The main elements:
- Business Transaction.
- Source Documents.
- The Accounting Cycle Definition.
- Financial Statements.
- Limitations of accounting Statements.
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Chapter 2
Business Transactions: Step 1
Are the economic activities of the business that can

be expressed in monetary terms, there are two main
kinds of transactions:
1-External transactions: they are exchanges between

the business and an independent party.
2-Internal transactions: they are events that take

place entirely within the business (do not involve any
exchanges with outside parties) .
-Transaction Analysis: Step 2
every transaction must be analyzed to determine

the following:
1- The individual that are affected by the transaction.
2- the amount of changes in each item.
3- Whether the item would be increased or decreased.
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(the accounting equation should be adjusted according

to the results of the analysis).
Source Documents:
 Source Documents: are the starting point of the

accounting process.
 It provides written evidence that a transaction
has occurred.
 It contains information about the nature of the
transaction and the amount of money involved
(ex. sales invoice).
The Accounting Cycle Definition:
 It is the basic procedures to record, classify and

summarize business transactions.
 Consists of the various steps of processing
accounting information.
 The Cycle ends with the preparation of the
financial statements.
 The information that appears in the financial
statements is the final results of the accounting
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cycle.
 The financial statements are then presented to
interested parties so that they can assess the firmُs
profitability and financial position.
 The accounting Cycle is completed once each

accounting period.
Recording in the General Journal :Step3
 The information about each business transaction

is first recorded in accounting record called the
Journal.
 The information about each business transaction
includes (date, the debit & credit changes in
accounts and a brief explanation of the
transaction.
 The Journal is a chronological record of
business transactions.
 Recording transactions in the journal is called
the Journalizing.
 The entries made are called Journal Entries.
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The Journal serves three useful purposes:
1- Shows all information about transaction in one

place & also provides an explanation.
2- Provides a record of all the events in a life of the

business.
3- Helps in prevent errors.
The Ledger Account: Step 4
• The definition of an account:
An account is a standard form used to accumulate all

the information about changes in individual items of
(assets-liabilities- equity- revenues & expenses).
It has three parts:
(Title, place for record increases & place for record

decreases).
• Every account has two sides:
– The left side always called debit side.
– The right side always called credit side.
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Chapter 2
Items Increases Decreases
Assets Debit Credit

expenses Debit Credit
liabilities credit Debit
equity credit Debit
revenues Credit debit
– The ledger keeps in one place all the

information about changes in specific account
balance.
– All asset have debit balances.
– Debit balances in Assets accounts occur when
the increases were greater than the decreases in
the account.
– Liability and ownerُs equity accounts have
credit balance.
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Steps in the recording process:
• The basic steps in recording process are:

– Analyze each transaction in terms of its effect
on the accounts.
– Enter the transaction information in a journal.
– Transfer the journal information to the
appropriate accounts in the ledger.
The Posting process:
• Posting means:
The procedure of transferring journal entries to the

ledger accounts.
The Trial Balance
• A Trial Balance: is a list of accounts and their

balances at a given time.
• The primary purpose of it is to prove the

mathematical equality of debits and credits after
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posting.
• Its also uncover errors in journalizing and
posting. It is useful in the preparation of
financial statements.
• It dose not prove that all transactions have been
recorded or that the ledger is correct.
• The total of the accounts with debit balances
must be equal to The total of the accounts with
credit balances.
• Errors of the Trial Balance:

• The posting of debit as a credit.
• Arithmetic mistakes .
• Errors in copying account balance in it.
• Listing a debit balance in the credit column.
• Errors in addition of the trial balance.
Financial Statements:
 Financial Statements: are the means by which the
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important accounting information is communicated

to users.
 There are three principal financial statements
used to communicate the required information:
 The Income Statement.
 The Balance Sheet.
 The Statement of Owner Equity.
• The Income Statement:
- The income statement is an account which shows the

company’s performance during the period.
- It’s used to calculate the profit or loss.
- It’s used to compare between what have been hoped

to achieve and actual results.
- Assists in obtaining loans.
- Assists in selling the business.
Gross profit = sales revenue – cost of goods sold
Cost of goods sold =
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beginning inventory + purchases – ending inventory
Profit for the year (Net profit) =
Gross profit – expenses + any source of income other than

the sales revenue.
•The Balance Sheet:
The purpose of a balance sheet is to show the

financial position of a business on a specific date by
listing the assets of business, its liabilities, and the
owner’s equity.
Assets =Liabilities + Owner’s equity
Assets defined as:

Items owned by the business using its sources
of finance . To be considered an asset it must:
1- result from past operations.

2- Have a historical cost.
3-Provide future economic benefits.
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4- Owned or controlled by firm.
Assets may be classified into two categories in order

of their liquidity:
Assets
Monetary assets
(Current assets) inventory, trade Non-monetary Assets
receivable other receivable ,cash Long term assets)
in bank , cash in hand,
investments)
Tangible
Assets( Land, Building, intangible
Machines , equipment, Assets (Goodwill)
vehicles)
Long Term Assets (Non-current assets): Items owned

by the business for long -term use, with no intention of
turning them into cash.
Current assets: Items owned by the business which can
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be easily turned into cash.
Liabilities:
Liabilities defined as :
probable future sacrifices of economic benefits

arising from present obligations of a particular entity as a
result of past operations.
The main kinds are:
-Accounts payable .
- Notes payable.
- Long term Loans.

- Accrued Expenses.
• Owner’s Equity:
- Owner’s Equity =assets – liabilities
- Increased by additional investments or net income.
- Decreased by withdrawing cash or assets by the

owner or by net losses.
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Chapter 2
Usually divided into two main components:

– Capital: is the amount initially invested in the
business by the owner.
– Retained earnings: represent profits of the
business that has not been withdrawn by the
owner.
• The Statement of Owner Equity:
relates the income statements to the balance sheet by

showing the owner’s capital investment changed during
the year.
its elements (capital- net income- new investment-

withdrawal.
G- Limitations of accounting Statements:
Accounting statements and the ratios calculated from

them provide valuable information about the business.
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Chapter 2
They do, however, have limitations and are not capable

of providing a complete picture of the performance and
position of a business. These limitations include:
- Time factor:
The accounting statements are a record of
what has happened in the past, not a guide to the future.
- Historical cost:
The only way to record financial transactions is to

use the actual cost price. However, comparing
transactions taking place at different times can be
difficult because of the effect of inflation.
- Accounting policies:
All businesses should apply the accounting

principles of prudence and consistency which should
help in making comparisons. However, there are
several acceptable accounting policies which may be
applied.
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Chapter 2
- Money measurement (Non- Financial Aspects):

Accounts only record information which can be
expressed in monetary terms. This means that there
are many important factors which influence the
performance of a business that will not appear in the
accounting statements. These factors include:
• The quality of management.
• The goodwill of the business.
• The age and condition of fixed assets and the ability

to adapt in response to changing market conditions.
• Competition and impact of new technology.
Cases
1-1-Read each transaction carefully, and then state the

effect of it on the accounting equation. All the following
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transactions are not related to each other, the first one is

solved to you:
Transaction effect
1- Owner pays capital into the Bank Capital
bank
2- Buy inventory on credit
3- Buy inventory by check
4- Sale of inventory on credit
5- Sale of inventory for check
6- Pay trade payable by check
7- Trade receivable pays

money owing by check
8- Owner takes money from

the business bank account
for his own use
9- Owner pays trade payable

from his private money
outside the firm
2- Complete the gaps in the following table:

Assets liabilities Capital
A) 12,500 1,800
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Chapter 2
B) 28,000 4,900
C) 16,800 12,500
D) 19,600 16,450
E) 6,300 19,200
F) 11,650 39,750
3- Complete the gaps in the following table:

Assets liabilities Capital
A) 55,000 16,900
B) 17,200 34,400
C) 36,100 28,500
D) 119,500 15,400
E) 88,000 62,000
F) 49,000 110,000
1- Which of the following items are liabilities &

which of them are assets?
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A) Office machinery D) Motor vehicles

B) Loan from G Jake E) We owe a supplier for goods
C) furniture F) Bank balance
2- Classify the following items into liabilities &assets:

A) Property F) Motor vehicles
B) Loan from p Sam G) Cash in hand
C) Trade payable H) Owing to bank

Inventory I) Plant & Equipment
D)
Trade receivable
E)
3- Which of the following are shown under the

wrong heading?
Assets Liabilities
Cash at bank Loan from G R
Creditors Machinery
Building Motor vehicles
Stock of goods Furniture
Debtors
capital
4- Draw up Ahmed balance sheet from the following as

at 31 /12/2016:
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Chapter 2
- Capital $15,000
- Office machinery $9,000
- Creditors $900
- Stock of goods $1,550
- Debtors $275
- Cash in bank $5,075
The answer:
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5- Sofian is setting up a new business .Before actually
selling anything, he bought a motor vehicle for $2,000,
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premises for $5,000, and a stock of goods for $1,000, he

did not paying full for his stock of goods and still owes
$400 in respect of them. He borrowed $ 3,000 from Tarek.
After the events just described, and before trading starts,
he has $100 cash in hand & $700 cash in bank .Calculate
the capital.
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9-From the following balances prepare the trial balance
of Jasmine Corp.:
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-Cash 13300
-Prepaid insurance 1200
-Equipment 25000
-Notes payable 15000
-Accounts payable 200
-Capital 20000
-Dividends 700
-Earned revenue 6200
-Advertising Expense 200
-Rent expense 1000
The answer:
Jasmine Corp.
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Chapter 2
Trial balance
December 31,2010
Accounts titles Debit Credit
Cash 13300
Prepaid insurance 1200
Equipment 25000
Notes payable 15000
Accounts payable 200
Capital 20000
Dividends 700
Earned revenue 6200
Advertising Expense
200
Rent expense
1000
41400 41400
10-The accounts in the ledger of Tarek corp. contain

the following balances on decmber31,2010:
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Chapter 2
• Cash 5250
• Accounts receivable 550
• Notes receivable 1440
• Office supplies 230
• Prepaid Insurance 3660
• Equipment 1400
• Trucks 13000
• Accounts payable 200
• Notes payable 8000
• Unearned rent 600
• Capital 12000
• Withdrawals 500
• Revenue 7465
• Heat expenses 235
• Wages 2000
Instructions:
• A - Prepare the Trial balance on December 31
,2010.
• B - Prepare the Income statement for the

period ended on December 31 ,2010.
• C -Prepare the balance sheet on December 31

,2010.
Tarek Corp.
Trial balance
Page - 54 -
Chapter 2
December 31,2010
Accounts titles Debit Credit

Cash 5250
Accounts receivable 550
Notes receivable 1440
Office supplies 230
Prepaid Insurance 3660
Equipment
1400
Tucks
13000
Accounts payable
200
Notes payable
8000
Unearned rent
600
Capital
12000
Withdrawals 500
Revenue
7465
Heat expenses 235
Wages 2000
Total 28265 28265
Tarek corp. Income statement

for the period ended on December 31 ,2010.
Page - 55 -
Chapter 2
Title L.E. L.E.
Revenue 7465
Operating expenses:
Heat expenses 235
Wages 2000
Total expenses (2235)
Total income 5230
Tarek corp. balance sheet

for the period ended on December 31 ,2010.
……………………………………………………………………
……………………………………………………………………
……………………………………………………………………
……………………………………………………………………
……………………………………………………………………
……………………………………………………………………
……………………………………………………………………
……………………………………………………………………
……………………………………………………………………
……………………………………………………………………
……………………………………………………………………
……………………………………………………………………
11- Al Hady , a sole trader, extracted the following
Page - 56 -
Chapter 2
balances from his books of account on 31 December 2015.
Item $
- Motor vehicles 38000
- Provision for depreciation of motor vehicles 10000
- Sales 190000
- Purchases 103000
- Rent 4000
- Wages and salaries 41000
- Sundry expenses 6800
- Drawings 23000
- Trade payables 5000
- Trade receivables 7000
- Bank overdraft 1500
- Cash 100
- Purchase returns 600
- Inventory 12000
- capital ?
Required :Prepare Al Hady's trial balance at 31 /12/2015.
Al Hady Trial balance at 31 December 2015
Page - 57 -
Chapter 2
Item Debit $ Credit $

- Motor vehicles
- Provision for depreciation of
motor vehicles
- Sales
- Purchases
- Rent
- Wages and salaries
- Sundry expenses
- Drawings
- Trade payables
- Trade receivables
- Bank overdraft
- Cash
- Purchase returns
- Inventory
- capital
Total
Page - 58 -
Chapter 2
12- Multiple Choice:

1- what is a balance sheet?
a- A statements of all assets and liabilities on a certain
year.
b- A statement of all the balances in the ledger accounts on
a certain date.
c- A statement showing all the receipts and payments for
the financial year.
d- A statement showing the income and expenditures for
the financial year.
2- A trader provided the following information:
$
Gross profit 50000
Wages paid 16000
Rent received 1000
Heating & lighting paid 4000
Discount received 500
What was the net profit?

a- $28500 c- $29500
Page - 59 -
b- $30500 d-$31500
3- A trader provided the following information for the
Chapter 2
A: complete the following table. Indicate with a tick (√)

whether each item is an asset or a liability.
Item Asset Liability
Office equipment
Prepaid rent
Accrued wages
Bank loan
Inventory of goods for resale
Amount due to creditor
Cash in hand
B: complete the following sentences using the word

(debit) or (credit):
An asset account has a _____________ balance.
A liability account has a _____________ balance.
An expense account has a _____________ balance.
An income account has a _____________ balance.
C- Give one example of an expense account.
…………………………..……………………………………….
Page - 60 -
Chapter 2
D- Name the financial statement in which expenses are

recorded.
……………………………………………………………………
E- Complete the following table. Enter the word (true)
or (false) against each statement.
Every transaction has a twofold aspect
Costs must be matched against related income
Revenue can be recorded before it is earned
Staff expertise can be recorded in the financial
statement
Page - 61 -
Chapter 3
The Accounting Information System
The system of collecting and processing

transaction data and communicating financial
information to decision makers is known as the
accounting information system. Factors that shape
these systems include: the nature of the company’s
business, the types of transactions, the size of the
company, the volume of data, and the information
demands of management and others. Most
businesses use computerized accounting systems
sometimes referred to as electronic data
processing (EDP) systems. These systems handle
all the steps involved in the recording process, from
initial data entry to preparation often financial
statements.
In order to remain competitive, companies
continually improve their accounting systems to
provide accurate and timely data for decision
making. For example, in a recent annual report,
Tootsie Roll states, ―We also invested in additional
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Chapter 3
processing and data storage hardware during the

year.
We view information technology as a key strategic

tool, and are committed to deploying leading edge
technology in this area.‖ In addition, many
companies have upgraded their accounting
information systems in response to the requirements
of Sarbanes-Oxley. In this chapter, we focus on a
manual accounting system because the accounting
concepts and principles do not change whether a
system is computerized or manual, and manual
systems are easier to illustrate.
Table 3-1 summarizes steps The Accounting

Information System.
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Chapter 3
Table(3/1)
Steps the accounting information system
Step1 Accounting  Analyzing transactions

Transactions  Summary of transactions
Step2 The account  Debits and credits
 Debit and credit procedures
 Stockholders’ equity
relationships
 Summary of debit/credit rules
Step3 Steps in the  The journal
recording  The ledger
process  Chart of accounts
 Posting
Step4 The Summary illustration of
recording journalizing and posting
process
illustrated
Step5 The trial Limitations of a trial balance
balance
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Chapter 3
Accounting Transactions
To use an accounting information system,

you need to know which economic events to
recognize (record).
Not all events are recorded and reported in the financial

statements. For example, suppose Soliman Motors hired a
new employee or purchased a new computer. Are these
events entered in its accounting records? The first event
would not be recorded, but the second event would. We call
economic events that require recording in the financial
statements accounting transactions.
An accounting transaction occurs when assets,

liabilities, or stockholders’ equity items change as a result
of some economic event. The purchase of a computer by
Soliman Motors, the Discuss sale of a multi-day guided trip
by Soliman Corporation, and the payment of rent by
Microsoft Table 3-2 Illustration Transaction identification
process
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Chapter 3
Table ( 3/2)
Illustration Transaction identification process
event Record or don’t record

purchase of a computer Yes record
Discuss guided trip options with Don’t record
potential customer
Payment of rent Microsoft Yes record
Step1 Accounting Transactions :
in this chapter, you will learn how to analyze transactions

in terms of their effect on assets, liabilities, and
stockholders’ equity.
Transaction analysis is the process of identifying the

specific effects of economic events on the accounting
equation.
The accounting equation must always balance. Each

transaction has a dual (double-sided) effect on the
equation. For example, if an individual asset is increased,
there must be a corresponding :
1- Decrease in another asset, or
2- Increase in a specific liability, or
3- Increase in stockholders’ equity
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Chapter 3
Two or more items could be affected when an asset

is increased. For example, if a company purchases a
computer for L.E10,000 by paying L.E 6,000 in
cash and signing a note for L.E 4,000, one asset
(equipment) increases L.E 10,000,another asset
(cash) decreases L.E 6,000, and a liability (notes
payable) increases L.E 4,000.
The result is that the accounting equation remains in
balance—assets increased by a net L.E 4,000 and
liabilities increased by L.E 4,000, as shown below.
Assets = Liabilities + Stockholders’ Equity
+10000 = -6000 + 4000
+10000= 4000
In order to analyze the transactions for
Soliman Corporation, we will expand the basic
accounting equation. This will allow us to better
illustrate the impact of transactions on stockholders’
equity. Recall from the balance sheets in Chapters 1
and 2 that stockholders’ equity is comprised of two
parts: common stock and retained earnings.
Common stock is affected when the company issues
new shares of stock in exchange for cash. Retained
earnings is affected when the company earns
revenue, incurs expenses, or pays dividends.
Illustration 3-2 shows the expanded equation.
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Chapter 3
Example 1 :
EVENT(1): INVESTMENT OF CASH BY
STOCKHOLDERS.
On October 1, cash of $10,000 is invested in the
business by investors (primarily your friends and
family) in exchange for $10,000 of common stock.
This event is an accounting transaction because it
results in an increase in both assets and
Basic The asset Cash is increased $10,000 and

Analysis stockholders’ equity (specifically Common
Stock) is increased $10,000.
Equation Assets = Liabilities Stockholders’
Analysis Equity
Cash Common
Stock
(1) +10000 +10000
+10000 0 +10000
TOTAL 10000 10000
The equation is in balance after the issuance of

common stock. Keeping track of the source of each
change in stockholders’ equity is essential for later
accounting activities. In particular, items recorded
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Chapter 3
in the revenue and expense columns

are used for the calculation of net income.
EVENT (2). NOTE ISSUED IN EXCHANGE
FOR CASH. On October 1, Soliman borrowed
$5,000 from CIB Bank by signing a 3-month, 12%,
$5,000 note payable.
This transaction results in an equal increase in
assets and liabilities. The specific effect of this
transaction and the cumulative effect of the first two
transactions are:
Basic The asset Cash is increased $5,000, and the

Analysis liability Notes Payable is increased $5,000

Analysis Equity
Cash Notes Common
Payable Stock
(1) +10000 +10000
(2) +5000 +5000
15000 5000 10000
15000 5000 10000
TOTAL 15000 15000
Total assets are now $15,000, and liabilities plus

stockholders’ equity also total $15,000.
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Chapter 3
EVENT (3): PURCHASE OF OFFICE

EQUIPMENT FOR CASH.
On October 2, Soliman purchased equipment by
paying $5,000 cash to Superior Equipment Sales
This event is a transaction because an equal increase
and decrease in Soliman’s assets occur.
Basic The asset Equipment is increased $5,000; the

Analysis asset Cash is decreased $5,000.

Analysis Equity
Cash Equipment Notes Common
Payable Stock
15000 5000 10000
(3) -5000 +5000
10000 5000 5000 10000

15000 5000 10000
TOTAL 15000 15000
The total assets are now $15,000, and liabilities plus

stockholders’ equity also total $15,000.
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Chapter 3
EVENT (4). RECEIPT OF CASH IN

ADVANCE FROM CUSTOMER.
On October 2, Soliman received a $1,200 cash
advance from AMINA Company's, a client. This
event is a transaction because Soliman received
cash (an asset) for guide services for multi-day trips
that are expected to be completed by Soliman in the
future. Although Soliman received cash, it does not
record revenue until it has performed the work.
In some industries, such as the magazine and airline
industries, customers are expected to prepay. These
companies have a liability to the customer until they
deliver the magazines or provide the flight. When
the company eventually provides
the product or service, it records the revenue.
Since Soliman received cash prior to performance
of the service, Soliman has a liability for the work
due.
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Chapter 3
Basic Analysis The asset Cash is increased $1,200; the liability Unearned
Service Revenue is increased $1,200 because the service has
not been provided yet.
That is, when an advance payment is received, an unearned
revenue (a liability) should be recorded in order to recognize
the obligation that exists..
Equation Analysis Assets = Liabilities Stockholders’ Equity
Cash Equipment Notes Unearned Common
Payable Stock
Service
Revenue
10000 5000 5000 10000
(4) +1200 +1200
11200 5000 5000 1200 10000

16200 6200 10000
TOTAL 16200 16200
Page 78
Chapter 3
EVENT (5): SERVICES PROVIDED FOR

CASH.
On October 3, Soliman received $10,000 in cash
from Mohammed Company for guide services
performed for a corporate event.
This event is a transaction because Soliman
received an asset (cash) in exchange for services.
Guide service is the principal revenue-producing
activity of Soliman. Revenue increases
stockholders’ equity. This transaction, then,
increases both assets and stockholders’ equity
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Chapter 3
Basic The asset Cash is increased $10,000; the revenue Service

Analysis Revenue is increased $10,000
Equation Assets = Liabilities Stockholders’ Equity

Analysis
Cash Equipme Notes Unearned Common Retained Earnings
nt Payable Service Stock
Rev. Exp DIV
Revenue
11200 5000 5000 1200 10000
(5) +10000 +10000
21200 5000 5000 1200 10000 10000

26200 6200 20000
TOTAL 26200 26200
Page 80
Chapter 3
Often companies provide services ―on account.‖

That is, they provide service for which they are paid
at a later date. Revenue, however, is earned when
services are performed. Therefore, revenues would
increase when services are
performed, even though cash has not been received.
Instead of receiving cash, the company receives a
different type of asset, an account receivable.
Accounts receivable represent the right to receive
payment at a later date. Suppose that Soliman had
provided these services on account rather than for
cash. This event would be reported using the
accounting equation as:
Often companies provide services ―on account.‖
That is, they provide service for which they are paid
at a later date. Revenue, however, is earned when
services are performed. Therefore, revenues would
increase when services are performed, even though
cash has not been received. Instead of receiving
cash,
the company receives a different type of asset, an
account receivable. Accounts receivable represent
the right to receive payment at a later date. Suppose
that Soliman had provided these services on account
rather than for cash. This event
would be reported using the accounting equation as:
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Chapter 3
EVENT (6). PAYMENT OF RENT.

On October 3, Soliman Corporation paid its office
rent for the month of October in cash, $900. This
rent payment is a transaction because it results in a
decrease in an asset, cash.
Rent is an expense incurred by Soliman Corporation
in its effort to generate revenues. Expenses
decrease stockholders’ equity. Soliman records
the rent payment by decreasing cash and increasing
expenses to maintain the balance of the accounting
equation.
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Chapter 3
Basic Analysis The expense account Rent Expense is increased $900 because the
payment pertains only to the current month; the asset Cash is
decreased $900.
Cash Equipment Notes Unearned Common Retained Earnings
Payabl Service Stock
+Rev. -Exp -DIV
e Revenue
21200 5000 5000 1200 10000 10000
(6) - 900 -900
20300 5000 5000 1200 10000 10000 900

25300 6200 19100
TOTAL 25300 25300
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Chapter 3
EVENT (7). PURCHASE OF INSURANCE

POLICY FOR CASH.
On October 4, Soliman paid $600 for a one-year
insurance policy that will expire next year on
September 30. Payments of expenses that will
benefit more than one accounting period
are identified as assets called prepaid expenses or
prepayments.
Page 84
Chapter 3
Basic Analysis The asset Cash is decreased $600.The asset Prepaid Insurance
is increased $600
Cash Equi Prepaid Notes Unearned Common Retained Earnings
pme Insurance Payable Service Stock
nt Revenue +Rev. -Exp DI
V
20300 5000 5000 1200 10000 10000 -900
(7)
-600 +600
19700 5000 600 5000 1200 10000 10000 -900
25300 6200 19100
TOTAL 25300 25300
The balance in total assets did not change; one asset account decreased by the same
amount that another increased.
Page 85
Chapter 3
EVENT (8): PURCHASE OF SUPPLIES ON

ACCOUNT. On October 5, Soliman purchased
supplies on account from Mariam Supply for
$2,500.
In this case, ―on account‖ means that the company
receives goods or services that it will pay for at a
later date.
Page 86
Chapter 3
Basic The asset Supplies is increased $2,500; the liability Accounts Payable is increased $2,500.
Analysis

Analysis
Cash Equipment Supplies Prepaid Notes Accounts Unearned Common Retained Earnings
Insurance Payable Payable Service Stock
Revenue +Rev. -Exp -
DIV
19700 5000 600 5000 1200 10000 10000 900
(8) +2500 +2500
19700 5000 2500 600 5000 2500 1200 10000 10000 -900
27800 8700 19100
TOTAL 27800 27800
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Chapter 3
EVENT (9): HIRING OF NEW EMPLOYEES.

On October 9, Soliman hired four new employees
to begin work on October 15. Each employee will
receive a weekly salary of $500 for a five-day work
week, payable every two weeks. Employees will
receive their first paychecks on October 26.
On the date Soliman hires the employees, there is
no effect on the accounting equation because the
assets, liabilities, and stockholders’ equity of the
company have not changed.
Basic Analysis :
An accounting transaction has not occurred. There
is only an agreement that the employees will begin
work on October 15. (See Event (11) for the first
payment.)
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Chapter 3
EVENT (10). PAYMENT OF DIVIDEND.

On October 20, Soliman paid a $500 dividend.
Dividends are a reduction of stockholders’ equity
but not an expense. Dividends are not included in
the calculation of net income. Instead, a dividend is
a distribution of the company’s assets to its
stockholders .
Page 89
Chapter 3
Analysis
Analysis
Revenue +Rev. -Exp -DIV
19700 5000 2500 600 5000 2500 1200 10000 10000 -900
(10) -500 -500
19200 5000 2500 600 5000 2500 1200 10000 10000 -900 -500
27300 8700 18600
TOTAL 27300 27300
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Chapter 3
EVENT (11): PAYMENT OF CASH FOR

EMPLOYEE SALARIES.
Employees have worked two weeks, earning
$4,000 in salaries, which were paid on October 26.
Salaries Expense is an expense that reduces
stockholders’ equity. This event is a transaction
because assets and stockholders’ equity are
affected.
Page 91
Chapter 3
Analysis
Analysis
Revenue +Rev. -Exp -DIV
19200 5000 2500 600 5000 2500 1200 10000 10000 900 500
-4000 -4000
(11)
15200 5000 2500 600 5000 2500 1200 10000 10000 -4900 -500
23300 8700 14600
TOTAL 23300 23300
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Chapter 3
SUMMARY OF TRANSACTIONS
Illustration summarizes the transactions of Soliman
Corporation to show their cumulative effect on the
basic accounting equation.
It includes the transaction number in the first
column on the left. The right-most column shows
the specific effect of any transaction that affects
Remember that Event (9) did not result in a
transaction, so no entry is included for that event.
The illustration demonstrates three important
points:
1. Each transaction is analyzed in terms of its effect
on assets, liabilities, and stockholders’ equity.
2. The two sides of the equation must always be
equal.
3. The cause of each change in stockholders’ equity
must be indicated .
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Chapter 3
Report ( 2 )
Name :……………………………………………..
Situate :……………………………………………..
Date :………/………/……………………………...
A tabular analysis of the transactions made by Roberta Mendez &

Co., a certified public accounting firm, for the month of August is
shown below. Each increase and decrease in stockholders’ equity is
explained.

Analysis
Cash Equipment Notes Common Retained Earnings
Payable Stock
+Rev. -Exp DI
V
(1) +25000 +25000
(2) +7000 +7000
(3) +8000 +8000
(4) -850 -850
32150 7000 7000 25000 8000 -850

39150 7000 32150
TOTAL 39150 39150
Describe each transaction that occurred for the month?
1. ……………………………………………………………………
……………………………………………………………………
……………………………………………………..………….…
2. ……………………………………………………………………
……………………………………………………………………
3. ……..………………………………………………………………
…………………………………………………………………
……………………………………………………………..…..
Page 94
Chapter 3
Steps in the Recording Process
Although it is possible to enter transaction

information directly into the accounts, few
businesses do so. Practically every business uses
these basic steps in the recording process:
1. Analyze each transaction in terms of its effect on

the accounts.
2. Enter the transaction information in a journal.
3. Transfer the journal information to the
The actual sequence of events begins with the
transaction. Evidence of the transaction comes in
the form of a source document, such as a sales slip,
a check, a bill, or a cash register tape. This evidence
is analyzed to determine the effect of the transaction
on specific accounts. The transaction is then entered
in the journal. Finally, the journal entry is
transferred to the designated accounts in the ledger.
The sequence of events in the recording process is
shown in Illustration.
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Chapter 3
THE JOURNAL
Transactions are initially recorded in chronological

order in journals before they are transferred to the
accounts. For each transaction the journal shows the
debit and credit effects on specific accounts. (In a
computerized system, journals are kept as files, and
accounts are recorded in computer databases.)
Companies may use various kinds of journals, but
every company has at least the most basic form of
journal, a general journal. The journal makes
three significant contributions to the recording
process:
1. It discloses in one place the complete effect of a
transaction.
2. It provides a chronological record of
transactions.
3. It helps to prevent or locate errors because the
debit and credit amounts for each entry can be
readily compared .
A complete entry consists of:
1) the date of the transaction.
2) the accounts and amounts to be debited and
credited.
3) a brief explanation of the transaction
Note the following features of the journal entries.
1. The date of the transaction is entered in the Date
column.
2. The account to be debited is entered first at the
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Chapter 3
left. The account to be credited is then entered on

the next line, indented under the line above. The
indentation differentiates debits from credits and
decreases the possibility of switching the debit and
credit amounts.
3. The amounts for the debits are recorded in the
Debit (left) column, and the amounts for the credits
are recorded in the Credit (right) column.
4. A brief explanation of the transaction is given
To illustrate the technique of journalizing, let’s look
at the first three transactions of Soliman
Corporation in equation form. Explain what a
journal is and how it helps in the recording process.
Page 97
Chapter 3
Solution
GENERAL JOURNAL SOLIMAN
Date Account Titles and Explanation Debit Credit
OCT 1 Cash 10000

Common Stock 10000
(Issued stock for cash)
OCT 1 Cash 5000
Payable 5000
(Issued 3-month, 12% note payable
for cash)
OCT 2 Equipment 5000
Cash 5000
(Purchased equipment for cash)
OCT 2 Cash 1200
Unearned service revenue 1200
received cash prior to performance
of the service
OCT 3 Cash 10000
Service revenue 10000
received cash for services
performed
OCT 3 Rent Expense 900

Cash 900
the payment Cash to rent
expense
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Chapter 3
OCT 4 Insurance 600

Cash 600
the payment Cash to insurance
OCT 5 Supplies 2500

Account payable 2500
Purchased supplies on account
from Mariam
OCT 9 There is no effect on the accounting equation because
the assets, liabilities, and stockholders’ equity of the
company have not changed. An accounting transaction
has not occurred. There is only an agreement that the
employees will begin work on October 15
OCT 20 Dividend 500

Cash 500
Soliman paid a 500 dividend
OCT 26 Salaries Expense 4000
Cash 4000
the payment Cash to salaries
expense
Page 99
Chapter 3
The Account
Rather than using a tabular summary like the one in
Illustration for Soliman Corporation, an accounting
information system uses accounts. An account is an
individual accounting record of increases and
decreases in a specific asset, liability, stockholders’
equity, revenue, or expense item. For example,
Soliman Corporation has separate accounts for
Cash, Accounts Receivable, Accounts Payable,
Service Revenue, Salaries Expense, and so on.
(Note that whenever we are referring to a specific
account, we capitalize the name.) In its simplest
form, an account consists of three parts:
(1) the title of the account.(2) a left or debit side,
and (3) a right or credit side. Because the alignment
of these parts of an account resembles the letter T, it
is referred to as a
T account. The basic form of an account is shown
in Illustration
3-3
DR Title of Account CR
Left or debit side Right or credit side
We use this form of account often throughout this

book to explain basic accounting relationships.
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Chapter 3
DEBITS AND CREDITS

The term debit indicates the left side of an account,
and credit indicates the right side. They are
commonly abbreviated as Dr. for debit and Cr. for
credit. They do not mean increase or decrease, as is
commonly thought. We use the terms debit and
credit repeatedly in the recording process to
describe where entries are made in accounts. For
example, the act of entering an amount on the left
side of an account is called debiting the account.
Making an entry on the right side is crediting the
account. When comparing the totals of the two
sides, an account shows a debit balance.
if the total of the debit amounts exceeds the credits.
An account shows a credit balance.
if the credit amounts exceed the debits. Note the
position of the debit side and credit side.
In Illustration Soliman Corporation The procedure
of recording debits and credits in an account is
shown inIllustration for the transactions affecting
the Cash account of Sierra. The data are taken from
the Cash column of the tabular summary in
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Chapter 3
DR Cash Account CR
(1) 10000 (3) 5000
(2) 5000 (6) 900
(4) 1200 (7) 600
(5) 10000 (10) 500
(11) 4000
Balance debit 15200
Every positive item in the tabular summary

represents a receipt of cash; every negative amount
represents a payment of cash. Notice that in the
account form we record the increases in cash as
debits, and the decreases in cash as credits. For
example, the $10,000 receipt of cash (in red) is
debited to Cash, and the $5,000 payment of cash (in
blue) is credited to Cash.
Having increases on one side and decreases on the
other reduces recording errors and helps in
determining the totals of each side of the account as
well as the account balance.
The balance is determined by netting the two sides
(subtracting one amount from the other). The
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Chapter 3
account balance, a debit of $15,200, indicates that

Sierra had $15,200 more increases than decreases in
cash. That is, since it started with a balance of zero,
it has $15,200 in its Cash account
DEBIT AND CREDIT PROCEDURES
Each transaction must affect two or more accounts
to keep the basic accounting equation in balance. In
other words, for each transaction, debits must
equal credits. The equality of debits and credits
provides the basis for the double entry accounting
system.
Under the double-entry system, the two-sided
effect of each transaction is recorded in appropriate
accounts. This system provides a logical method for
recording transactions. The double-entry system
also helps to ensure the accuracy of the
recorded amounts and helps to detect errors such as
those at Fidelity Investments as discussed in the
Feature Story. If every transaction is recorded with
equal debits and credits, then the sum of all the
debits to the accounts must equal the sum of all
the credits. The double-entry system for
determining the equality of the accounting equation
is much more efficient than the plus/minus
procedure used earlier.
Dr./Cr. Procedures for Assets and Liabilities ,
increases in Cash—an asset—were entered on the
left side, and decreases in Cash were entered on the
right side. We know that both sides of the basic
equation (Assets Liabilities Stockholders’ Equity)
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Chapter 3
must be equal. It therefore follows that increases

and decreases in liabilities will have to be recorded
opposite from increases and decreases in assets.
Thus, increases in liabilities must be entered on the
right or credit side, and decreases in liabilities must
be entered on the left or debit side. The effects that
debits and credits have on assets and liabilities are
summarized in Illustration
DR Title of Account CR
Increase assets Decrease assets
Decrease liabilities Increase liabilities
1- Asset accounts normally show debit balances.

That is, debits to a specific asset account should
exceed credits to that account.
2- liability accounts normally show credit
balances. That is, credits to a liability account
should exceed debits to that account.
Knowing which is the normal balance in an account
may help when you are trying to identify errors. For
example, a credit balance in an asset account, such
as Land, or a debit balance in a liability account,
such as Salaries Payable, usually indicates errors in
recording. Occasionally, however, an abnormal
balance
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Chapter 3
may be correct. The Cash account, for example, will

have a credit balance when a company has
overdrawn its bank balance (written a check that
―bounced‖). In automated accounting systems, the
computer is programmed to flag violations
of the normal balance and to print out error or
exception reports. In manual systems, careful visual
inspection of the accounts is required to detect
normal balance problems.
3- Dr./Cr. Procedures for Stockholders’ Equity
we indicated that stockholders’ equity is comprised
of two parts: common stock and retained earnings.
In the transaction events earlier in this chapter, you
saw that revenues, expenses, and the payment of
dividends affect retained earnings. Therefore, the
subdivisions of stockholders’ equity are: common
stock, retained earnings, dividends, revenues, and
expenses.
4- COMMON STOCK.
Common stock is issued to investors in exchange
for the stockholders’ investment. The common
stock account is increased by credits and decreased
by debits. For example, when cash is invested in the
business, cash is debited and common stock is
credited.
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5- RETAINED EARNINGS.
Retained earnings is net income that is retained in
the business. It represents the portion of
stockholders’ equity that has been accumulated
through the profitable operation of the company.
Retained earnings is increased by credits (for
example, by net income) and decreased by debits
(for example, by a net loss).
6- DIVIDENDS.
A dividend is a distribution by a corporation to its
stockholders. The most common form of
distribution is a cash dividend. Dividends result in a
reduction of the stockholders’ claims on retained
earnings. Because dividends reduce stockholders’
equity, increases in the Dividends account are
recorded with debits.
7- REVENUES AND EXPENSES.
When a company earns revenues, stockholders’
equity is increased. Revenue accounts are increased
by credits and decreased by debits.
Expenses decrease stockholders’ equity. Thus,
expense accounts are increased by debits and
decreased by credits. Credits to revenue accounts
should exceed debits; debits to expense accounts
should exceed credits.
Thus, revenue accounts normally show credit
balances, and expense accounts normally show
debit balances.
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Table 3-3 Summary of debit /credit rules
ELEMT DR CR
Asset + -
liability - +
COMMON STOCK - +
Stockholders’ Equity - +
RETAINED EARNINGS - +
DIVIDENDS + -
REVENUES - +
EXPENSES + -
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POSTING
The procedure of transferring journal entry amounts
to ledger accounts is called posting. This phase of
the recording process accumulates the effects of
journalized transactions in the individual
accounts. Posting involves these steps:
1. In the ledger, enter in the appropriate columns
of the debited account(s) the date and debit
amount shown in the journal.
2. In the ledger, enter in the appropriate
columns of the credited account(s) the
date and credit amount shown in the
journal.
The Recording Process Illustrated
Illustrations on the following pages show the basic
steps in the recording process using the October
transactions of Soliman Corporation. Soliman ’s
accounting period is a month. A basic analysis and a
debit–credit analysis precede the journalizing and
posting of each transaction.
Study these transaction analyses carefully. The
purpose of transaction analysis is first to identify
the type of account involved and then to
determine whether a debit or a credit to the
account is required. You should always perform
this type of analysis before preparing a journal
entry. Doing so will help you understand the journal
entries discussed in this chapter .
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Posting to ledger account afer each event of Soliman Corporation

Date Journal Account 1 Account 2
Oct 1 Cash 10000 Cash Common Stock
Common Stock 10000 Oct1 10000 Oct1 10000
Oct1 Cash 5000 Cash Notes Payable

Notes Payable 5000 Oct1 10000 Oct1 5000
Oct1 5000
Oct 2 Equipment 5000 Equipment Cash

Cash 5000 Oct2 5000 Oct1 10000 Oct 2 5000
Oct2 5000
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Oct 2 Cash 1200 Cash Unearned service revenue

Unearned 1200 Oct1 10000 Oct 5000 Oct 2 1200
service revenue Oct1 5000
Oct 2 1200
Oct 3 Cash 10000 Cash Service revenue

Service revenue 10000 Oct1 10000 Oct1 5000 Oct 3 10000
Oct1 5000
Oct 2 1200
Oct 3 10000
Oct3 Rent Expense 900 Rent Expense Cash

Cash 900 Oct 3 900 Oct1 10000 Oct1 5000
Oct1 5000 Oct 3 900
Oct 2 1200
Oct 3 10000
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Oct 4 Insurance 600 Insurance Cash

Cash 600 OCT4 600 Oct1 10000 Oct1 5000
Oct1 5000 Oct 3 900
Oct 2 1200 Oct 4 600
Oct 3 10000
Oct 5 Supplies 2500 Supplies Account payable

Account 2500 Oct 5 2500 Oct 5 2500
payable
Oct 9 There is no effect on the accounting equation because the assets, liabilities, and stockholders’
equity of the company have not changed. An accounting transaction has not occurred. There is
only an agreement that the employees will begin work on October 15
Oct Dividend 500 Dividend Cash

20 Cash 500 Oct 20 500 Oct1 10000 Oct1 5000
Oct1 5000 Oct 3 900
Oct 2 1200 Oct 4 600
Oct 3 10000 Oct 20 500
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Oct2 Salaries 4000 Salaries Expense Cash

6 Expense 4000 Oct 26 4000 Oct1 10000 Oct1 5000
Oct1 5000 Oct 3 900
Cash Oct 2 1200 Oct 4 600
Oct 3 10000 Oct 20 500
Oct 4000
26
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DR Cash CR
Oct, 1 10000 Oct, 2 5000
1 5000 3 900
2 1200 4 600
3 10000 20 500
26 4000
Bal. 15200
DR Common Stock CR
Oct, 1 10000
Bal. 10000
DR Notes Payable CR
Oct, 1 5000
Bal. 5000
DR Equipment CR
Oct, 2 5000
Bal. 5000
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DR Unearned service CR
revenue
Oct, 2 1200
Bal. 1200
DR Service revenue CR
Oct, 3 10000
Bal. 10000
DR Rent Expense CR
Oct, 3 900
Bal. 900
DR Prepaid Insurance CR
Oct, 4 600
Bal. 600
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DR Supplies CR
Oct, 5 2500
Bal. 2500
DR Account payable CR
Oct, 5 2500
Bal. 2500
DR Dividend CR
Oct, 20 500
Bal. 500
DR Salaries Expense CR
Oct, 26 4000
Bal. 4000
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The Trial Balance
A trial balance lists accounts and their balances at

a given time. A company usually prepares a trial
balance at the end of an accounting period. The
accounts are listed in the order in which they appear
in the ledger.
Debit balances are listed in the left column and
credit balances in the right column. The totals of the
two columns must be equal.
The trial balance proves the mathematical
equality of debits and credits after posting. Under
the double-entry system this equality occurs when
the sum of the debit account balances equals the
sum of the credit account balances.
A trial balance may also uncover errors in
journalizing and posting. For example, a trial
balance may well have detected the error at Fidelity
Investments discussed in the Feature Story. In
addition, a trial balance is useful in the
preparation of financial statements.
A trial balance does not prove that all transactions

have been recorded or that the ledger is correct.
Numerous errors may exist even though the trial
balance column totals agree. For example, the trial
balance may balance even when any of the
following occurs:
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Chapter 3
(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. In other words, as long as
equal debits and credits are posted, even to the
wrong account or in the wrong amount, the total
debits will equal the total credits. Nevertheless,
despite these limitations, the trial balance is
a useful screen for finding errors and is frequently
used in practice.
These are the procedures for preparing a trial
balance:
1. List the account titles and their balances.
2. Total the debit column and total the credit
column.
3. Verify the equality of the two columns.
Illustration presents the trial balance prepared from
the ledger of Soliman Corporation. Note that the
total debits, $28,700, equal the total credits, $28,700
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Trail Balance October 31/12/ 2016

ACCOUNT DR CR
Cash 15200
Common stock 10000
Notes payable 5000
Equipment 5000
Services revenue 10000
Rent expenses 900
supplies 2500
dividends 500
Salaries expenses 4000
28700 28700
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Example (2) :
The following events occurred during the
September month of business of Happy Dream
salon:
1) On 1 Sep, Issued common stock to
shareholders in exchange for 20,000 cash.
2) On 2 Sep, Purchased 4,800 of equipment on
account (to be paid in 30 days) from Rana frag.
3) On 5 Sep, Interviewed three people for the
position of beautician.
4) On 9 Sep, borrowed $5,000 from ADIB Bank
by signing a 3-month, 12%, $5,000 note
payable
5) On 12 Sep, Received a 2500 cash advance
from Biter, a client.
6) On 15 Sep, Paid 1600 for a one-month rent.
7) On 19 Sep, Dream purchased supplies on
account from Mariam Supply for 1,500.
8) On 22 Sep, Purchased 3500 equipment cash
from Mahmoud Supply.
9) On24 Sep ,Paid 800 to supplier Ran frag cash.
10)On 25 Sep, Dream paid 2900 cash office
salaries for the month.
11) On3 Sep, Paid 3000 to supplier Ran frag cash.
In what form (type of record) should the
company record these activities Prepare:
1- the entries to record the transactions .
2- Cash account , Rana Frag account and
Equipment account .
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Chapter 3
Solution
General Journal Happy Dream salon

1Sep Cash 20000

Common Stock 20000
(Issued stock for cash)
2 Sep Equipment 4800

from Rana Frag
5 Sep There is no effect on the accounting equation because

the assets, liabilities, and stockholders’ equity of the
company have not changed.
9 Sep Cash 5000

Notes Payable 5000
(Issued 3-month, 12% note payable
for cash)
12 Sep Cash 2500
received cash prior to performance
of the service
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Chapter 3
15 Sep Rent Expense 1600
Cash 1600
the payment Cash to rent
expense
19 Sep Supplies 1500

from Mariam
22 Sep Equipment 3500
Cash 3500
(Purchased equipment for cash)
24 Sep Account payable 1800

Cash 1800
the payment Cash to supplier
Rana frag
25 Sep Salaries Expense 2900
Cash 2900
the payment Cash to salaries
expense
30 Sep Account payable 3000
Cash 3000
the payment Cash to supplier
Rana frag
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Chapter 3
DR Cash CR
1 Sep 20000 15 Sep 1600
9 Sep 5000 22 Sep 3500
12Sep 2500 25 Sep 2900
30 Sep 3000
16500
DR Account payable / Rana Frag CR

24 Sep 800 2 Sep 4800
30 Sep 3000
1000
DR Equipment CR
22Sep 5000
5000
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Chapter 3
Example (3) :
Mohammed and Sofian student investors

opened Campus Carpet Cleaning, Inc.
On September 1, 2016 . During the first month of
operations, the following transactions occurred.
Sept. 1 Stockholders invested $20,000 cash in the
business.
Sept 2 Paid $1,000 cash for store rent for the month
Sept.3 Purchased industrial carpet-cleaning
equipment for $25,000, paying $10,000 in cash and
signing a $15,000 6-month, 12% note payable.
Sept4 Paid $1,200 for 1-year accident insurance
policy.
Sept.10 Received bill from the Daily News for
advertising the opening of the cleaning
service, $200.
Sept. 15 Performed services on account for $6,200.
Sept .20 Paid a $700 cash dividend to stockholders.
Sept. 30 Received $5,000 from customers billed on
September 15.
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Date Journal Side 1 Side 2

Sept Cash 20000 Cash Common Stock
1 Common Stock 20000 Sept1 20000 Sept1 20000
Bal. 20000
Sept Rent Expense 1000 Rent Expense Cash
2 Cash 1000 Sept2 1000 Sept1 20000 Sept2 1000
Bal. 1000
Sept Equipment 22500 Equipment Cash
3 Cash 10000 Sept3 25000 Sept1 20000 Sept2 1000
Notes payable 15000 Sept3 10000
Bal. 25000 Notes payable
Sept3 15000
Bal. 15000
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Sept4 Prepaid Insurance 1200 Prepaid Insurance Cash

Cash 1200 Sept4 1200 Sept1 20000 Sept2 1000
Sept3 10000
Bal. Sept 4 1200
1200
Sept Advertising Expense 200 Advertising Expense Account payable

10
Account payable 200 Sept10 200 Sept10 200
Bal. 200 Bal. 200
Sept Account 6200 Account receivable service revenue

15 receivable
service revenue 6200 Sept 6200 Sept 6200
15 15
Bal. 6200
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Chapter 3
Sept Dividend 700 Dividend Cash

20
Cash 700 Sept 700 Sept1 20000 Sept2 1000
20 Sept3 10000
Sept 4 1200
Sept20 700
Sept Cash 5000 Cash Account receivable

30 Account
receivable 5000 Sept1 20000 Sept2 1000 Sept 6200 Sept30 5000
Sept3 10000 15
Sept3 5000 Sept 4 1200
0 Sept20 700
Bal. 12100
Bal. 1200
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Chapter 3
Trail Balance October 31/12/ 2016

ACCOUNT DR CR
Cash 12100
Common stock 20000
Equipment 25000
Notes payable 15000
Account payable 200
dividends 700
Services revenue 6200
Advertising expenses 200
Rent expenses 1000
supplies 2500
Account receivable 1200
41200 41200
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Chapter 3
Summary of Study Objectives
1 Analyze the effect of business transactions on the

basic accounting equation. Each business
transaction must have a dual effect on the
accounting equation. For example, if an individual
asset is increased, there must be a corresponding (a)
decrease in another asset, or (b) increase in a
specific liability, or (c) increase in stockholders’
equity.
2 Explain what an account is and how it helps in the

recording process. An account is an individual
accounting record of increases and decreases in
specific asset, liability, and stockholders’ equity
items.
3 Define debits and credits and explain how they

are used to record business transactions. The terms
debit and credit are synonymous with left and right.
Assets, dividends, and expenses are increased by
debits and decreased by credits. Liabilities, common
stock, retained earnings, and revenues are increased
by credits and decreased by debits.
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4 Identify the basic steps in the recording process.

The basic steps in the recording process are:
(a) Analyze each transaction in terms of its effect on
the accounts,
(b) Enter the transaction information in a journal,
and (c) Transfer the journal information to the
5 Explain what a journal is and how it helps in the

recording process. The initial accounting record of a
transaction is entered in a journal before the data are
entered in the accounts. A journal (a) discloses in
one place the complete effect of a transaction, (b)
provides a chronological record of transactions, and
(c) prevents or locates errors because the debit and
credit amounts for each entry can be readily
compared.
6 Explain what a ledger is and how it helps in the

recording process. The entire group of accounts
maintained by a company is referred to collectively
as a ledger. The ledger keeps in one place all the
information about changes in specific account
balances.
7 Explain what posting is and how it helps in the

recording process. Posting is the procedure of
transferring journal entries to the ledger accounts.
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This phase of the recording process accumulates the

effects of journalized transactions in the individual
accounts.
8 Explain the purposes of a trial balance. A trial

balance is a list of accounts and their balances at a
given time. Theprimary purpose of the trial balance
is to prove the mathematical equality of debits and
credits after posting. Atrial balance also uncovers
errors in journalizing and posting and is useful in
preparing financial statement .
TRUE-FALSE STATEMENTS
1. Many business transactions affect more than

one time period.
2. The time period assumption states that the

economic life of a business entity can be
divided into artificial time periods.
3. The time period assumption is often referred

to as the expense recognition principle.
4. A company's calendar year and fiscal year are

always the same.
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Chapter 3
5. Accounting time periods that are one year in

length are referred to as interim periods.
6. Income will always be greater under the cash

basis of accounting than under the accrual
basis of accounting.
7. The cash basis of accounting is not in

accordance with generally accepted
accounting principles.
8. The expense recognition principle requires

that efforts be matched with accomplishments.
9. Expense recognition is tied to revenue

recognition.
10. The revenue recognition principle dictates that

revenue be recognized in the accounting
period in which cash is received.
11. Adjusting entries are not necessary if the trial

balance debit and credit columns balances are
equal.
12. An adjusting entry always involves two

balance sheet accounts.
13. Adjusting entries are often made because

some business events are not recorded as they
occur.
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14. Adjusting entries are recorded in the general

journal but are not posted to the accounts in
the general ledger.
15. Revenue received before it is earned and

expenses paid before being used or consumed
are both initially recorded as liabilities.
16. Accrued revenues are revenues which have

been received but not yet earned.
17. The book value of a depreciable asset is

always equal to its market value because
depreciation is a valuation technique.
18. Accumulated Depreciation is a liability

account and has a credit normal account
balance.
19. A liability—revenue account relationship

exists with an unearned rent revenue adjusting
entry.
20. The balances of the Depreciation Expense and

the Accumulated Depreciation accounts
should always be the same.
21. Unearned revenue is a prepayment that

requires an adjusting entry when services are
performed.
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22. Asset prepayments become expenses when

they expire.
23. A contra asset account is subtracted from a

related account in the balance sheet.
24. If prepaid costs are initially recorded as an

asset, no adjusting entries will be required in
the future.
25. The cost of a depreciable asset less

accumulated depreciation reflects the book
value of the asset.
26. Accrued revenues are revenues that have been

earned and received before financial
statements have been prepared.
27. Financial statements can be prepared from the

information provided by an adjusted trial
balance.
28. The adjusting entry at the end of the period to

record an expired cost may be different
depending on whether the cost was initially
recorded as an asset or an expense.
29. Rent received in advance and credited to a rent
revenue account which is still unearned at the
end of the period, will require an adjusting
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Chapter 3
entry crediting a liability account for the

amount still unearned.
30. An adjusting entry requiring a credit to

Insurance Expense indicates that the initial
transaction was charged to an asset account.
31. The expense recognition principle requires

that expenses be matched with revenues.
32. In general, adjusting entries are required each

time financial statements are prepared.
33. Every adjusting entry affects one balance

sheet account and one income statement
account.
34. The Accumulated Depreciation account is a

contra asset account that is reported on the
balance sheet.
35. Accrued revenues are amounts recorded and

received but not yet earned.
36. An adjusted trial balance should be prepared

before the adjusting entries are made.
37. When a prepaid expense is initially debited to

an expense account, expenses and assets are
both overstated prior to adjustment.
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MULTIPLE CHOICE QUESTIONS

1. The effects on the basic accounting equation of
performing services for cash are to:
(a) increase assets and decrease stockholders’
equity.
(b) increase assets and increase stockholders’
equity.
(c) increase assets and increase liabilities.
(d) increase liabilities and increase stockholders’
equity.
2. Genesis Company buys a $900 machine on credit
.This transaction will affect the:
(a) income statement only.
(b) balance sheet only.
(c) income statement and retained earnings
statement only.
(d) income statement, retained earnings
statement, and balance sheet.
3. Which of the following events is not recorded in
the accounting records?
(a) Equipment is purchased on account.
(b) An employee is terminated.
(c) A cash investment is made into the business.
(d) Company pays dividend to stockholders.
4. During 2012, Gibson Company assets decreased
$50,000 and its liabilities decreased $90,000. Its
stockholders’ equity therefore:
(a) increased $40,000.
(b) decreased $140,000.
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Chapter 3
(c) decreased $40,000.

(d) increased $140,000.
5. Which statement about an account is true?
(a) In its simplest form, an account consists of
two parts.
(b) An account is an individual accounting record
of increases and decreases in specific asset,
liability, and stockholders’ equity items.
(c) There are separate accounts for specific assets
and liabilities but only one account for
stockholders’ equity items.
(d) The left side of an account is the credit or
decrease side.
6. 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.
7. A revenue account:
(a) is increased by debits.
(b) is decreased by credits.
(c) has a normal balance of a debit.
(d) is increased by credits.
8. Which accounts normally have debit balances?
(a) Assets, expenses, and revenues.
(b) Assets, expenses, and retained earnings.
(c) Assets, liabilities, and dividends.
(d) Assets, dividends, and expenses.
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Chapter 3
9. Paying an account payable with cash affects the

components of the accounting equation in the
following way:
(a) Decreases stockholders’ equity and decreases
liabilities.
(b) Increases assets and decreases liabilities.
(c) Decreases assets and increases stockholders’
equity.
(d) Decreases assets and decreases liabilities.
10. Which is not part of the recording process?
(a) Analyzing transactions.
(b) Preparing a trial balance.
(c) Entering transactions in a journal.
(d) Posting transactions.
11. Which of these statements about a journal is
false?
(a) It contains only revenue and expense
accounts.
(b) It provides a chronological record of
transactions.
(c) It helps to locate errors because the debit and
credit amounts for each entry can be readily
compared.
(d) It discloses in one place the complete effect
of a transaction.
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Chapter 3
12. A ledger:
(a) contains only asset and liability accounts.
(b) should show accounts in alphabetical order.
(c) is a collection of the entire group of accounts
maintained by a company.
(d) provides a chronological record of
transactions.
13. 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.
14. A trial balance:

(a) is a list of accounts with their balances at a
given time.
(b) proves that proper account titles were used.
(c) will not balance if a correct journal entry is
posted twice.
(d) proves that all transactions have been
recorded.
15. 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 dividend is debited to Dividends
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.Go to the book’s companion
website,
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Chapter 3
16. Monthly and quarterly time periods are called

a. calendar periods.
b. fiscal periods.
c. interim periods.
d. quarterly periods.
17. The time period assumption states that
a. a transaction can only affect one period of
time.
b. estimates should not be made if a transaction
affects more than one time period.
c. adjustments to the enterprise's accounts can
only be made in the time period when the
business terminates its operations.
d. the economic life of a business can be divided
into artificial time periods.
18. An accounting time period that is one year in
length, but does not begin on January 1, is
referred to as
a. a fiscal year.
b. an interim period.
c. the time period assumption.
d. a reporting period.
19. Adjustments would not be necessary if

financial statements were prepared to reflect net
income from
a. monthly operations.
b. fiscal year operations.
c. interim operations.
d. lifetime operations.
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Chapter 3
20. Management usually desires ________

financial statements and the IRS requires all
businesses to file _________ tax returns.
a. annual, annual
b. monthly, annual
c. quarterly, monthly
d. monthly, monthly
21. The time period assumption is also

referred to as the
a. calendar assumption.
b. cyclicity assumption.
c. periodicity assumption.
d. fiscal assumption.
22. In general, the shorter the time period, the

difficulty of making the proper adjustments to
accounts
a. is increased.
b. is decreased.
c. is unaffected.
d. depends on if there is a profit or loss.
23. Which of the following is not a common time

period chosen by businesses as their accounting
period?
a. Daily
b. Monthly
c. Quarterly
d. Annually
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Chapter 3
24. Which of the following time periods would

not be referred to as an interim period?
a. Monthly
b. Quarterly
c. Semi-annually
d. Annually
25. The fiscal year of a business is usually

determined by
a. the IRS.
b. a lottery.
c. the business.
d. the SEC.
26. Which of the following are in accordance with

generally accepted accounting principles?
a. Accrual basis accounting
b. Cash basis accounting
c. Both accrual basis and cash basis accounting
d. Neither accrual basis nor cash basis
accounting
27. The revenue recognition principle dictates that

revenue should be recognized in the accounting
records
a. when cash is received.
b. when it is earned.
c. at the end of the month.
d. in the period that income taxes are paid.
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Chapter 3
28. In a service-type business, revenue is

considered earned
a. at the end of the month.
b. at the end of the year.
c. when the service is performed.
d. when cash is received.
29. The expense recognition principle matches

a. customers with businesses.
b. expenses with revenues.
c. assets with liabilities.
d. creditors with businesses.
30. Ron's Hot Rod Shop follows the revenue
recognition principle. Ron services a car on July
31. The customer picks up the vehicle on August
1 and mails the payment to Ron on August 5.
Ron receives the check in the mail on August 6.
When should Ron show that the revenue was
earned?
a. July 31
b. August 1
c. August 5
d. August 6
31. A company spends $10 million dollars for an
office building. Over what period should the cost
be written off?
a. When the $10 million is expended in cash.
b. All in the first year.
c. Over the useful life of the building.
d. After $10 million in revenue is earned.
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Chapter 3
32. The expense recognition principle states that

expenses should be matched with revenues.
Another way of stating the principle is to say that
a. assets should be matched with liabilities.
b. efforts should be matched wit accomplishments.
c. dividends to stockholders should be matched
with stockholders' investments.
d. cash payments should be matched with cash
receipts.
33. A flower shop makes a large sale for $1,000
on November 30. The customer is sent a
statement on December 5 and a check is received
on December 10. The flower shop follows GAAP
and applies the revenue recognition principle.
When is the $1,000 considered to be earned?
a. December 5.
b. December 10.
c. November 30.
d. December 1.
34. A candy factory's employees work overtime to

finish an order that is sold on February 28. The
office sends a statement to the customer in early
March and payment is received by mid-March.
The overtime wages should be expensed in
a. February.
b. March.
c. the period when the workers receive their
checks.
d. either in February or March depending on
when the pay period ends.
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Chapter 3
35. Expenses sometimes make their contribution

to revenue in a different period than when the
expense is paid. When wages are incurred in one
period and paid in the next period, this often
leads to which account appearing on the balance
sheet at the end of the time period?
a. Due from Employees.
b. Due to Employer.
c. Wages Payable.
d. Wages Expense.
36. Under accrual-basis accounting

a. cash must be received before revenue is
recognized.
b. net income is calculated by matching cash
outflows against cash inflows.
c. events that change a company's financial
statements are recognized in the period they
occur rather than in
the period in which cash is paid or received.
d. the ledger accounts must be adjusted to reflect
cash basis of accounting before financial
statements are prepared under generally
accepted accounting principles.
37. Adjusting entries are required

a. yearly.
b. quarterly.
c. monthly.
d. every time financial statements are prepared.
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Chapter 3
38. Which is not an application of revenue

recognition?
a. Recording revenue as an adjusting entry on
the last day of the accounting period.
b. Accepting cash from an established customer
for services to be performed over the next
three months.
c. Billing customers on June 30 for services
completed during June.
d. Receiving cash for services performed.
39. Which statement is correct?

a. As long as a company consistently uses the
cash basis of accounting, generally accepted
accounting principles allow its use.
b. The use of the cash basis of accounting
violates both the revenue recognition and
expense recognition principles.
c. The cash basis of accounting is objective
because no one can be certain of the amount of
revenue until the cash is received.
d. As long as management is ethical, there are no
problems with using the cash basis of
accounting.
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Chapter 3
40. If a resource has been consumed but a bill has

not been received at the end of the accounting
period, then
a. an expense should be recorded when the bill is
received.
b. an expense should be recorded when the cash
is paid out.
c. an adjusting entry should be made recognizing
the expense.
d. it is optional whether to record the expense
before the bill is received.
41. Accounts often need to be adjusted because

a. there are never enough accounts to record all
the transactions.
b. many transactions affect more than one time
period.
c. there are always errors made in recording
transactions.
d. management can't decide what they want to
report.
42. Adjusting entries are

a. not necessary if the accounting system is
operating properly.
b. usually required before financial statements
are prepared.
c. made whenever management desires to
change an account balance.
d. made to balance sheet accounts only.
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Chapter 3
43. Expenses incurred but not yet paid or recorded

are called
a. prepaid expenses.
b. accrued expenses.
c. interim expenses.
d. unearned expenses.
44. A law firm received $2,000 cash for legal

services to be rendered in the future. The full
amount was credited to the liability account
Unearned Legal Fees. If the legal services have
been rendered at the end of the accounting period
and no adjusting entry is made, this would cause
a. expenses to be overstated.
b. net income to be overstated.
c. liabilities to be understated.
d. revenues to be understated.
45. Adjusting entries can be classified as

a. postponements and advances.
b. accruals and deferrals.
c. deferrals and postponements.
d. accruals and advances.
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Chapter 3
Report ( 3 )
The following events occurred during the
September month of business of HGAZE:
1. On November 1, cash of $30,000 is invested in
the business by investors (primarily your friends
and family) in exchange for $30,000 of common
stock.
2. On 2, Purchased 2,300 of equipment on account
(to be paid in 30 days) from gasmen tmraz.
3. On 5, Interviewed three people for the position of
beautician.
4. On 9 , borrowed $9,000 from NBD Bank by
signing a 3-month, 12%, $5,000 note payable
5. On 12, Received a 2500 cash advance from GOD
, a client.
6. On 15, Paid 2600 for a one-month rent.
7. On 19, purchased supplies on account from
Mariam Supply for 2,500.
8. On 22, Purchased 1500 equipment cash from
Mahmoud Supply.
9. On 25, paid 1900 cash office salaries for the
month.
10. On3, Paid 2000 to supplier gasmen tmraz.
In what form (type of record) should the
company record these activities Prepare:
1- the entries to record the transactions .
2- cash account , gasmen tmraz account and
Equipment .
Page 148
Chapter 3
Solation Quiz ( 3 )
Name ……………………
Situate………………………
Page 149
Chapter 3
Page 150
Chapter 3
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Chapter 4
Chapter Four
Accounting for Long-Term Assets
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Chapter 4
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Chapter 4
Accounting for Long-Term Assets
This chapter will look at the accounting for

long-term assets which includes both tangible and
intangible assets. After you have finished this
chapter, you should be able to:
- Define the Long- term Assets.

- Recognize the accounting principles related
to long-term assets.
- Compute the total cost of long-term assets.
- Know the two types of Long-term assets.
- Define depreciation, compute depreciation under the
four methods covered in the text.
-Distinguish between capital and revenue expenditures.
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Chapter 4
1-The Definition of Long- term Assets:
Long-term operational assets are defined as resources

with economic lives of more than a year that a business
possesses and uses in generating revenue.
The cost of long-term assets is recognized as an expense

in the accounting periods in which they are used. So, if a
table is expected to have an economic life of three years,
then the table cost will be allocated over this three-year
period.
2. Accounting principles related to long-term assets:
a. Cost principle should be followed when determining

the cost of long-term assets:
The cost principle states that the cost of the asset

should equal the cash or cash equivalent value of all
expenditures reasonable and necessary to acquire the asset
and get it ready for its intended usage. Therefore, cost such
as freight, installation, sales taxes, or legal fees may be
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Chapter 4
included in the cost of the asset and recorded as a debit to

the asset account.
b. Matching principle should be followed to allocate the

cost of the asset over the useful life of the asset:
The matching principle requires that you record the

cost of long-term assets as an asset and then record
depreciation (depletion or amortization) when the asset is
used to help produce income.
3-All assets are recorded at their historical cost:
A historical cost includes the purchase price and any

additional costs necessary to obtain the asset and prepare
it for the intended use. Additional costs (costs besides the
purchase price) may include transportation costs,
insurance for asset delivery and others.
The following are some costs usually included in the

historical cost of an asset:
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Chapter 4
1. Purchase of a building: purchase price, title search

and transfer documents, real estate fees, and
remodeling costs.
2. Purchase of equipment: purchase price, delivery

costs, installation, and costs for modifications to
prepare the asset for intended use.
3. Purchase of land: purchase price, removal of old

buildings, title search and transfer documents, and
real estate fees.
There are a number of expenditures that cannot be

included into the cost of an asset. Such expenditures
include payments for fines, damages, and so on, which are
not considered normal costs of acquiring an asset.
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Chapter 4
4- Capital expenditures vs. revenue expenditures:
a. Capital expenditure:
- Expenditures for the purchase or expansion of long
term assets.
- Capital expenditures benefit more than one
accounting period.
-They may increase the quality or quantity of output of
an asset.
- They may improve the efficiency or usefulness of an
asset.
- They are not considered routine in nature.
- Capital expenditures are recorded as in increase to an
asset account.
- Additions, betterments and extraordinary repairs are
considered capital expenditures.
b. Revenue expenditures:
- Expenditures related to the maintenance and
operation of long-term asset necessary to keep a long-
term asset in good operating condition.
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Chapter 4
-Revenue expenditures benefit only the current

accounting period.
-They are typically considered routine in nature.
They tend to be smaller amounts than capital
expenditures.
- Revenue expenditures are recorded as an increase in
an expense account.
5- The Two Types of Long-term Assets:
Long-term assets can be tangible and intangible.
Tangible assets are those which one can touch and

include natural resources, machinery, tools, equipment,
buildings and land, among others.
Intangible assets may be represented by a piece of paper

or document. The real value of such assets is the rights
and privileges extended to their owners. Examples of
intangible assets can be patents, trademarks and customer
lists.
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Chapter 4
Tangible assets are divided into three categories:

property, plant and equipment; natural resources; and
land.
Property, plant, and equipment include furniture,

cash registers, computers, and others. In order to keep
track of all assets in this category an entity can assign
subcategories for a particular item or items of similar
nature. The process of expense recognition for property,
plan, and equipment is called depreciation.
Depreciation is allocation of the cost of property, plant,

and equipment to expenses over their useful (economic)
life in a systematic and rational manner.
Natural resources consist in (but not limited to) gas

reserves, reserves of timber, mines, and so on. These
assets are sometimes called wasting resources because
their value diminishes as the resources are removed and
used. The process of expense recognition for natural
resources is called depletion.
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Chapter 4
Depletion is allocation of the cost of natural resources to

expenses in a systematic and rational manner over the
resources useful life.
Land is classified as a separate category for one major

reason - land is not a subject to depreciation or depletion.
Land is considered to have an infinite life, which makes it
impossible to estimate its depreciation or depletion.
Intangible assets also fall into a few categories:

specifically identifiable intangible assets, and goodwill
and intangible assets with indefinite lives.
Specifically identifiable intangible assets can be acquired

individually. They include patents, copyrights, etc. The
process of expense recognition for this category of assets
is called amortization.
Amortization is allocation of the cost of intangible assets

to expense in a systematic and rational manner over the
useful life of the asset.
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Chapter 4
Goodwill and identifiable intangible assets with indefinite

lives represent the second group of intangible assets. A
company can record goodwill only by purchasing another
company with good reputation, established clientele, or
other features that provide an above-average profit
potential. Identifiable intangible assets with indefinite
lives do not have definite useful lives or such lives are not
practicable to determine. Examples of such intangibles
may be renewable broadcast licenses or trademarks (in
certain circumstances).
Neither goodwill nor intangibles with indefinite lives are

subject to amortization. However, those assets are subject
to the impairment test as defined by generally accepted
accounting standards.
6- Depreciation Methods – need to know all 4 methods!
A- Straight line depreciation is a depreciation method

in which periodic depreciation is the same for each
period of the asset useful life.
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Chapter 4
Cost - residual value

Estimated useful life = Depreciation per year
This is the most popular method for financial accounting

purposes.
Amortization is computed like straight–line method.
Accumulated depreciation is :
- Accumulated in a contra asset account.
- Increases every year which in effect decreases the

asset book value.
Example:
A Company purchased a new machine at a cost of

$44,000 on January 1, 2011. The expected useful life of
the new machine is 4 years and a salvage value of $4,000.
Determine the depreciation for each year
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Chapter 4
The answer:
Depreciation per year = Cost - residual value
Estimated useful life
= ( 44000 – 4000) / 4 = 10000 $ per/ year
b- Double-declining method applies a constant rate

(double of the straight-line rate) to the net book value of
the asset and produces a decreasing annual depreciation
expense over the asset useful life. The decrease in
depreciation relates to the decrease in the asset's net
book value in each subsequent period.
Double-declining method is used to record higher

depreciation expense in the earlier stages of an asset's life
and respectively lower depreciation expense as the asset
ages. This method is sometimes called accelerated
depreciation method.
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Chapter 4
To determine depreciation expense under double-

declining method, accountants do the following:
1. Calculate the straight-line rate. It is calculated by

dividing 100% by the number of years the asset is
expected to be in use.
2. Determine the double-declining balance rate by

multiplying the straight-line rate by two.
3. Apply the double-declining balance rate to the book

(carrying) value of the asset at the beginning of each
period.
Example:

The company has an accounting year ending December
31. Compute the depreciation for each year by using
Double-declining method.
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Chapter 4
The answer:
1- Calculate the straight-line rate:
= 100% / expected useful life
100% /4 = 25%
2- Determine the double-declining balance rate :
= 25% × 2 = 50%
3- Apply the double-declining balance rate to the

book value of the asset at the beginning of each
period:
Year 2013: Depreciation =(23000 × 50%) = 11500$
Year 2014:depreciation = (23000-11500) 50%= 5750$
Year 2015: depreciation = (23000-11500-5750) 50%
= 2875$
C- Units-of-production method determines the useful

life of an asset based on the units of production. Each
period, the units of production determine the depreciation
expense.
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Chapter 4
This method was designed to better match expenses with

revenues when expenses change greatly from one year to
another.
Production Method – results in equal depreciation each

unit of usage during the assets life
Cost - residual value

Estimated useful units = Depreciation per unit
The units of production is the most common method to

allocate the cost of natural resources.
Example:

If the useful life was measured in hours, it is expected that
a total of 40,000 hours will be used by the machine over
its life. The company has an accounting year ending
December 31.
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Chapter 4
Compute the depreciation for each year if the

machine hours in use as follow 8,000 hours in year 2013,
12,000 hours in year 2014, 4,000 hours in year 2015 and
16,000 hours in year 2016.
The answer:
1- Depreciation per hours = Cost - residual value

Estimated useful hours
= ( 23000 – 3000)/40000
= 1/2 $per / hours
2- Depreciation for each year:
year Cost per hour Hours in use Depreciation

A B C= A× B
2013 1/2 8000 4000
2014 1/2 12000 6000
2015 1/2 4000 2000
2016 1/2 16000 8000
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Chapter 4
d- Sum-of-the-years-digits method applies a decreasing

rate to the asset depreciable value and produces a
decreasing depreciation expense over the useful life of the
asset. The decreasing rate equals the fraction of a current
year's digit to the total of all year digits in the asset useful
life.
This method is similar to the double-declining method

because it also assumes that an asset is used more
extensively during the first years of operation. Under this
method, an important consideration is given to the number
of years in the asset's useful life.
The following steps are to be taken to determine the

amounts of depreciation expense:
1. Sum up the year digits, beginning with the number

of years the asset will be in use and going down to
1.Example, if an asset will be used for 5 years, the
resulting total will be 15 = 5 + 4 + 3 + 2 + 1.
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Chapter 4
2. Determine the depreciation for each year by

multiplying the depreciable cost (historical cost -
salvage value) by the fraction of each year digit to
the total of all year digits (from step one). For
instance, the depreciation expense for the first year
will be Depreciable Cost x 5 ÷ 15, for the second the
expense will be Depreciable Cost x 4 ÷ 15, and so
on till Depreciable Cost x 1 ÷ 15 in the last year.
Example:

$37,000 on January 1, 2011. The expected useful
life of the new machine is 5 years and a salvage
value of $7,000. Determine the depreciation for
each year by using Sum-of-the-years-digits
method .
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Chapter 4
The answer:
- Total years = 5+4+3+2+1= 15

- Determine the depreciation for each year:
Year (1) = (37000 – 7000) × 5/15 = 10000$
Year (2) = (37000 – 7000) × 4/15 = 8000$
Year (3) = (37000 – 7000) × 3/15 = 6000$
Year (4) = (37000 – 7000) × 2/15 = 4000$
Year (5) = (37000 – 7000) × 1/15 = 2000$
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Chapter 4
QUESTIONS/PROBLEMS
1- Why must the cost of long-term assets be allocated to

futures accounting period? What are some of the problems
with this allocation process?
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2- Explain the meaning of capital expenditures. How does

it differ from revenue expenditures?
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Chapter 4
3- Explain the accountant's concept of depreciation. Is

depreciation a cost allocation or asset valuation process?
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Chapter 4
4- Complete each of the following statement by filling in

the appropriate word or words:
a- An expenditure for repairs, maintenance, or other

services needed to maintain or operate plant assets is a(n)
_____________________ expenditure.
b- An expenditure for the purchase or expansion of a long-

term asset is a(n) _____________________ expenditure.
c- _________________ is the periodic allocation of the

cost of tangible long-term assets (other than land, natural
resources, or intangible assets) over its estimated useful
life.
d- The allocation of the cost of a natural resource to those

periods in which the firm receives the resource's benefits
is called ____________________, and the similar
allocation of the cost of an intangible is called
____________________.
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Chapter 4
e- The _________________ method of depreciation

applies a fixed percentage rate to an asset's book value as
of the beginning of each period.
f- The __________________ method of depreciation

assumes that depreciation depends only on the passage of
time and this method allocates an equal amount of
depreciation to each period of time.
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Chapter 4
5- A one year old building was purchased for $150,000

and has accumulated depreciation of $20,000 and a
residual value of $50,000. Assuming straight-line
depreciation is being used, compute its estimated useful
life?
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Chapter 4
6- A Company purchased a new machine at a cost of

If the useful life was measured in units, it is expected that
a total of 50,000 units will be produced by the machine
over its life. The company has an accounting year ending
December 31. Complete the following table assuming the
machine produced a total of 15,000 units in year 2011,
22,000 units in year 2012, and 13,000 units in year 2013.
Depreciation Depreciation expense

methods Year1(2011) Year2 Year3(2013)
(2012)
Straight- line
Units-of-activity
Double-
declining-balance
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Chapter 4
7-Ahmed spent $8410 buying a new vehicle. The

invoice showed:
$
Vehicle 8000
Number plates 50
Insurance for 24 months 360
How much was the capital expenditure?
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8- on 1 February Sara purchased equipment costing

$8500. The equipment is expected to have a useful life of
4 years . Its estimated scrap value is $500.
Required:
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Chapter 4
Calculate the amount of depreciation for each of

the three years ending 31 January 2013, 2014 ,2015,
2016 using
- straight line method of depreciation .
- Double-declining method
The answer:
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Chapter 4
The answers for some questions :
1-The cost of long-term assets must be allocated to future

accounting periods because the firm receives benefits in
the future and the matching convention requires that
allocations be made so as to match the expired benefits
with the resources they have helped to produce.
Problems inherent in the allocation process are

distinguishing between a capital expenditures and a
revenue expenditure, measuring and recording the
acquisition cost, estimating the useful life of an asset,
and estimating the value of the asset at the end of its
useful life.
2. Capital expenditures are expenditures that produce an

asset whose economic life extends beyond the current
period. Revenue expenditures are expenditures for
services or assets whose economic utility is completely
consumed within the current period.
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Chapter 4
IF a capital expenditure is classified in error as a

revenue expenditure, that period's expenses would be
overstated and net income, retained earnings, and total
assets would be understated. In future periods expenses
would be understated and net income would be
overstated.
3. Accountants view depreciation as an allocation of cost

to the periods in which the enterprise received benefits
from the assets. Depreciation is the process that the cost of
the asset is gradually allocated to expense over the useful
life of the asset. Depreciation is NOT done to report the
asset at its current market value. Asset impairment
computations are reviewed annually to adjust an assets
value when the present value of the asset’s market value is
lower than its carrying value.
4. To record the sale or retirement of an asset, the asset

account and the Accumulated Depreciation account that
relates to that asset are removed from (taken off) of the
accounting records. Assets received when the old asset is
retired or sold are recognized and the appropriate gain or
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Chapter 4
loss from the sale or retirement should be recognized. The

gain or loss on the disposal of the asset is computed as the
difference between the net proceeds from the sale or
retirement and the book value of the asset at the time of
the sale or retirement. If the net proceeds exceed the book
value, a gain is recorded. If the book value exceeds the net
proceeds, a loss is recorded.
6- VOCABULARY:
a. revenue
b. capital
c. Depreciation
d. depletion...amortization
e. declining-balance
f. straight-line
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Chapter 5
CHAPTER 5
ACCOUNTING INFORMATION SYSTEMS:
AN OVERVIEW
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CHAPTER 5
INTRODUCTION
• Questions to be addressed in this chapter include:

– What is the meaning of system, data, and information?
– What is an accounting information system (AIS)?
– Why is the AIS an important topic to study?
– What is the role of the AIS in the value chain?
– How does the AIS provide information for decision
making?
– What are the basic strategies and strategic positions an
organization can pursue?
SYSTEMS, DATA, AND INFORMATION
• A system is a set of interrelated components that interact

to achieve a goal. Most systems are composed of smaller
subsystems and vice versa.
• Every organization has goals, and the sub-systems should
be designed to maximize achievement of the
organization’s goals--even to the detriment of the
subsystem itself. For example, the production
department (a subsystem) of a company might have to
forego its goal of staying within its budget in order to
meet the organization’s goal of delivering product on
time.
• Goal conflict occurs when the activity of a subsystem
is not consistent with another subsystem or with the
larger system.
• Goal congruence occurs when the subsystem’s goals
are in line with the organization’s goals.
Chapter 5
• The larger and more complicated a system, the more

difficult it is to achieve goal congruence.
• The systems concept encourages integration (i.e.,
minimizing the duplication of recording, storing,
reporting, and processing).
• Data are facts that are collected, recorded, stored, and
processed by an information system.
• Organizations collect data about events that occur,
resources that are affected by those events, and
agents who participate in the events
• Information is different from data. Information is
data that have been organized and processed to
provide meaning to a user. Usually, more
information and better information translates into
better decisions. However, when you get more
information than you can effectively assimilate, you
suffer from information overload. When you’ve
reached the overload point, the quality of decisions
declines while the costs of producing the information
increases.
• The value of information can be measured as its
benefits minus its costs. Costs are more difficult to
quantify.
• Characteristics that make information useful:
– Relevance—reduces uncertainty by helping
predict or confirm;
– Reliability—dependable and free from error or bias;
– Completeness—doesn’t leave out anything
important;
– Timeliness—received in time to affect the decision;
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CHAPTER 5
– Understandability—presented so it’s
comprehensible and useful;
– Verifiability—independent people would produce
the same result; and
– Accessibility—available when needed in a useable
format.
– Information is provided to both external and internal
users.
– External users primarily use information that is
either mandatory (e.g., required by government) or
essential (needed to conduct business).
– In providing mandatory or essential information, the
focus should be on minimizing costs, meeting
regulatory requirements, and meeting minimum
standards of reliability and usefulness.
• Internal users primarily use discretionary
information.
– The primary focus in producing this information is
ensuring that benefits exceed costs, i.e., the
information has positive value.
WHAT IS AN AIS?
• An AIS is a system that collects, records, stores, and

processes data to produce information for decision
makers.
• An AIS can use advanced technology, be a simple
paper-and-pencil system, or be something in between.
Technology is simply a tool to create, maintain, or
improve a system.
• The functions of an AIS are to:
Chapter 5
– Collect and store data about events, resources, and

agents.
– Transform that data into information that
management can use to make decisions about
events, resources, and agents.
– Provide adequate controls to ensure that the
entity’s resources (including data) are available
when needed, as well as accurate and reliable.
WHY STUDY ACCOUNTING INFORMATION

SYSTEMS?
• It’s fundamental to accounting.

– It helps accountants understand how information
systems are designed, implemented and used; how
financial information is reported; and how that
information is used to make decisions.
– While other accounting courses focus on how data
is provided and used, an AIS course focuses on
how data is collected and transformed and how its
reliability is ensured.
• The skills are critical to career success.
– Auditors need to evaluate accuracy and reliability
of information.
– Tax accountants need to have confidence in the
accuracy of client data.
– Systems work is considered the most important
activity performed by accountants in private
industry and not-for-profits.
– Systems design is often an important aspect of
management consulting.
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• The AIS course complements other systems courses by

emphasizing accountability and control rather than
design and implementation.
• AIS topics make up about 25% of the Business
Environment and Concepts section of the new CPA
exam.
• AIS topics impact corporate strategy and culture.
– AIS design is affected by IT, organization
strategy, and organization culture.
– IT affects the organization’s business strategy.
– The AIS affects organization culture by altering
the dispersion and availability of information.
Chapter 5
ROLE OF THE AIS IN THE VALUE CHAIN
• The objective of most organizations is to provide

value to their customers. While ―adding value‖ is a
commonly used buzzword, in its genuine sense, it
means making the value of the finished component
greater than the sum of its parts. It may mean making
it faster, making it more reliable, providing better
service or advice, providing something in limited
supply (like O-negative blood or rare gems),
providing enhanced features, or customizing it.
• Value is provided by performing a series of activities
referred to as the value chain. These include primary
and support activities (sometimes referred to as ―line‖
and ―staff‖ activities respectively).
• Primary activities include:
– Inbound logistics—receiving, storing, and
distributing inputs.
– Operations—transforming inputs into outputs.
– Outbound logistics—distributing goods or
services to customers.
– Marketing and sales—helping customers buy
the product.
– Service—post-sale support, such as repair and
maintenance.
• Support activities include:
– Firm infrastructure—accountants, lawyers,
administration, AIS.
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– Human resources—recruiting, hiring, training,

and compensating.
– Technology—R&D, website development, and
other activities to improve products or services.
– Purchasing—buying inputs and other resources.
• Information technology can significantly impact the
efficiency and effectiveness with which the preceding
activities are carried out. An organization’s value
chain can be connected with the value chains of its
customers, suppliers, and distributors. The linking of
these separate value chains creates a larger system
known as a supply chain. IT can facilitate synergistic
linkages that improve the performance of each
company’s value chain.
• There is variation in the degree of structure used to
make decisions:
– Structured decisions—repetitive and routine,
can be delegated to lower-level employees.
– Semi-structured decisions—have incomplete
rules and require some subjectivity.
– Structured decisions—Nonrecurring and non-
routine. Require much subjectivity.
• There is variation in the degree of structure used to
make decisions:
– Structured decisions—relate to day-to-day
performance of specific tasks.
– Semi-structured decisions—regard utilizing
resources to accomplish organizational
objectives, e.g., budgeting.
– Structured decisions—involves setting those
objectives and the policies to achieve them.
Chapter 5
• In general, the higher a manager is in the

organization, the more likely he/she is to be engaging
in less structured decisions and broader scope (i.e.,
strategic planning) decisions.
THE AIS AND CORPORATE STRATEGY
• Corporations have unlimited opportunities to invest in

technology but limited resources with which to do so.
Consequently, they must identify the improvements
likely to yield the highest return. This decision
requires an understanding of the entity’s overall
business strategy.
• Michael Porter suggests that there are two basic
business strategies companies can follow—either a
product-differentiation strategy or a low-cost strategy.
• A product differentiation strategy involves setting
your product apart from those of your competitors,
i.e., building a ―better‖ mousetrap by offering one
that’s faster, has enhanced features, etc.
• A low-cost strategy involves offering a cheaper
mousetrap than your competitors. The low cost is
made possible by operating more efficiently.
• Sometimes a company can do both, but they normally
have to choose.
• Porter also argues that companies must choose a
strategic position among three choices:
– Variety-based strategic position—offers a subset of
the industry’s products or services. Example: An
insurance company that only offers life insurance.
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– Needs-based strategic position—serves most or all

of the needs of a particular group of customers in a
target market. Example: Farm Bureau insurance
companies that tailored products to the needs to
farmers.
– Access-based strategic position—serves a subset of
customers who differ from others in terms of
factors such as geographic location or size.
Example: Providing satellite internet to rural users
who do not have access to cable or DSL.
• These strategic positions are not mutually exclusive
and can overlap
• Choosing a strategic position is important because it
helps a company focus its efforts as opposed to trying
to be everything to everybody. Example: A radio
station that tries to play all types of music will
probably fail.
• It’s critical to design the organization’s activities so
they reinforce one another in achieving the selected
strategic position. The result is synergy, which is
difficult for competitors to imitate.
• The growth of the Internet has profoundly affected
the way value chain activities are performed:
– Inbound and outbound logistics can be streamlined
for products that can be digitized, like books and
music.
– The Internet allows companies to cut costs, which
impacts strategy and strategic position.
– Because the Internet is available to everyone,
intense price competition can result. The outcome
Chapter 5
may be that many companies shift from low-cost to

product-differentiation strategies.
– The Internet may impede access-based strategic
positions.
• The AIS should help a company adopt and maintain
its strategic position. Requires that data be collected
about each activity and requires the collection and
integration of both financial and non-financial data.
• The authors believe that accounting and information
systems should be closely integrated and that the AIS
should be the primary information system to provide
users with information they need to perform their
jobs.
SUMMARY OF MATERIAL COVERED
• The meaning of system, data, and information.

• What an AIS is; why it’s an important topic to study;
what its role is in the value chain; and how it provides
information for decision making.
• The basic strategies and strategic positions an
organization can pursue and how these strategies
interact with the AIS.
TEACHING AIDS
• This chapter contains a lot of terminology that may be
new to students. The following page contains a
crossword puzzle that can be distributed to students to
help them learn key terminology. End of chapter
problems can be assigned to help them apply the
concepts.
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MULTIPLE CHOICE
1. A set of two or more interrelated components that interact
to achieve a goal is:
a- A system
b- An accounting information system
c- Data
d- Mandatory information
2. This results when a subsystem achieves its goals while

contributing to the organization's overall goal.
a) Goal conflict
b) Goal congruence
c) Value of information
d) Systems congruence
3. Goal conflict may result when

a) A decision or action of a subsystem is inconsistent
with the system as a whole.
b) A subsystem achieves its goals while contributing to
the organization's overall goal.
c) Duplicate recording, storage and processes are
eliminated.
d) The data exceeds the amount the human mind can
absorb and process.
Chapter 5
4. Facts that are collected, recorded, stored and processed

by an information system
a) Information
b) Data
c) Systems
d) Mandatory information
5. Information is
a) What happens when the data exceeds the amount
the human mind can absorb.
b) The benefit produced by the information minus the
cost of producing it.
c) Facts that are collected, recorded, stored, and
processed by an information system.
d) Data that have been organized and processed to
provide meaning to a user.
6. Data are
a) facts entered, stored, and processed by an
information system.
b) processed output that is useful to decision makers.
c) another word for information.
d) quantitative facts that are not qualitative by nature.
7. Which of the following statements below shows the

contrast between data and information?
a) Data is the output of an AIS.
b) Information is the primary output of an AIS.
c) Data is more useful in decision-making than
information.
d) Data and information are the same.
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8. Information is
a) basically the same as data.
b) raw facts about transactions.
c) potentially useful facts when processed in a timely
manner.
d) data that has been organized and processed so that it's
meaningful.
9. Humans can absorb and process only so much
information. Information __________ occurs when
those limits are passed.
a) overload
b) excess
c) anxiety
d) discretion
10. The value of information can best be defined as
a) how useful it is to decision makers.
b) the benefits produced by possessing and using the
information minus the cost of producing it.
c) how relevant it is.
d) the extent to which it maximizes the value chain.
11. The benefit produced by the information minus the
cost of producing it.
a) Goal congruence
b) Information
c) Information overload
d) Value of information
Chapter 5
12. An accounting information system (AIS) processes

__________ to provide users with __________.
a) data; information
b) data; transactions
c) information; data
d) data; benefits
13. How many components are found in an AIS?
a) three
b) four
c) five
d) six
14. An accounting information system in part consists of

a) People, hardware and programs.
b) Information, programs and computers.
c) People, procedures, data, software and information
technology infrastructure.
d) Internal controls and accounting records
15. Information that reduces uncertainty, improves

decision makers' ability to make predictions, or confirms
or corrects their prior expectations, is said to be
a) Complete
b) Relevant
c) Reliable
d) Timely
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CHAPTER 6
Systems Development and Documentation Techniques
Page 201
CHAPTER 6
INTRODUCTION
• Questions to be addressed in this chapter include:

– What is the purpose of documentation?
– Why do accountants need to understand
documentation?
– What documentation techniques are used in
accounting systems?
– What are data flow diagrams and flowcharts?
How are they alike and different, and how are
they prepared?
• Documentation includes narratives (written
descriptions), flowcharts, diagrams, and other
written material. Documentation covers the who,
what, when, where, why, and how of data entry,
processing, storage, information output, and system
controls.
– Accountants use documentation to understand
how a system works; to evaluate the strengths
and weaknesses of an entity’s internal
controls; and to determine if a proposed
system meets the needs of its users. They
prepare documentation to demonstrate how a
proposed system would work or demonstrate
their understanding of a system of internal
controls.
• In this chapter, we discuss two of the most common
documentation tools:
– Data flow diagrams--Graphical descriptions
of the sources and destinations of data. DFDs
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show where data comes from, how it flows,

the processes performed on it, and where it
goes.
– Flowcharts Include three types:
• Document flowcharts describe the flow
of documents and information between
departments or units.
• System flowcharts describe the
relationship between inputs, processing,
and outputs for a system.
• Program flowcharts describe the
sequence of logical operations
performed in a computer program.
• Documentation techniques are necessary tools for
accountants:
– SAS-94 requires that auditors understand the
automated and manual procedures an entity
uses.
– This understanding can be gleaned through
documenting the internal control system—a
process that effectively exposes strengths and
weaknesses of the system.
– Sarbanes-Oxley (2002) effectively requires
that publicly-traded corporations and their
auditors document and test the company’s
internal controls.
– Auditing Standard No. 2 promulgated by the
PCAOB requires that the external auditor
express an opinion on the client’s system of
internal controls.
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• Documentation tools help accountants by

organizing very complicated systems into a form
that can be more readily understood and helping
new team members understand a pre-existing
system.
• Both DFDs and flowcharts are used frequently by
IS professionals, can be prepared with available
software, and are tested on professional exams.
DATA FLOW DIAGRAMS
• A data flow diagram (DFD) graphically describes

the flow of data within an organization. It is used to
document existing systems and to plan and design
new systems. There is no black-and-white approach
to developing a DFD.
• A data flow diagram consists of four basic
elements:
– Data sources and destinations appear as
squares. They represent organizations or
individuals that send or receive data used or
produced by the system. An item can be both
a source and a destination.
– Data flows appear as arrows. They represent
the flow of data between sources and
destinations, processes, and data stores. A
data flow can be two way and would then
have a bidirectional arrow.
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– Transformation processes appear as circles

and represent the transformation of data.
– Data stores appear as two horizontal lines and
represent a temporary or permanent repository
of data.
• Data flows and data stores are typically collections
of data elements. Example: A data flow labeled
student information might contain elements such as
student name, date of birth, ID number, address,
phone number, and major. The data dictionary
contains a description of all data elements, data
stores, and data flows in a system.
• Few systems can be fully diagrammed on one sheet
of paper, and users have needs for differing levels
of detail. Consequently, DFDs are subdivided into
successively lower levels to provide increasing
amounts of detail.
• The highest level of DFD is called a context
diagram. (See Figure 3-5 in textbook.) The
context diagram provides a summary-level view of
the system. It depicts a data processing system and
the external entities that are sources of its input and
destinations of its output. The context diagram can
be broken into greater levels of detail.
• Guidelines for creating DFDs:
– RULE 1: Understand the system. Observe
the flow of information and interview people
involved to gain that understanding.
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– RULE 2: Ignore control processes and control

actions (e.g., error corrections). Only very
critical error paths should be included.
– RULE 3: Determine the system boundaries—
where it starts and stops. If you’re not sure
about a process, include it for the time being.
– RULE 4: Draw the context diagram first, and
then draw successively greater levels of detail.
– RULE 5: Identify and label all data flows.
The only ones that do not have to be labeled
are those that go into or come out of data
stores.
– RULE 6: Data flows that always flow
together should be grouped together. Those
that do not flow together should be shown on
separate lines.
– RULE 7: Show a process (circle) wherever a
data flow is converted from one form to
another. Likewise, every process should have
at least one incoming data flow and at least
one outgoing data flow.
– RULE 8: Transformation processes that are
logically related or occur simultaneously can
be grouped in one bubble.
– RULE 9: Number each process sequentially.
A process labeled 5.0 would be exploded at
the next level into processes numbered 5.1,
5.2, etc. A process labeled 5.2 would be
exploded into 5.21, 5.22, etc.
– RULE 10: Process names should include
action verbs, such as update, prepare, etc.
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– RULE 11: Identify and label all data stores,

whether temporary or permanent.
– RULE 12: Identify and label all sources and
destinations. An entity can be both a source
and destination. You may wish to include
such items twice on the diagram, if needed, to
avoid excessive or crossing lines.
– RULE 13: As much as possible, organize the
flow from top to bottom and left to right.
– RULE 14: You’re not likely to get it beautiful
the first time, so plan to go through several
iterations of refinements.
– RULE 15: On the final copy, lines should not
cross. On each page, include the name of the
DFD, date prepared, and preparer’s name.
• The data flow diagram focuses on the logical flow
of data. The next section covers flowcharts, which
place greater emphasis on physical details.
FLOWCHARTS
• A flowchart is an analytical technique that describes

some aspect of an information system in a clear,
concise, and logical manner.
• Flowcharts use a set of standard symbols to depict

processing procedures and the flow of data. Every
shape on a flowchart depicts a unique operation,
input, processing activity, or storage medium.
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• In the days of yore, flowcharts were commonly

drawn with templates. Now, it is more common to
use a software program such as Visio. Microsoft
Power Point is also used. The software uses pre-
drawn shapes, and the developer drags the shapes
into the drawing.
• There are four types of flowcharting symbols:

 Input/output symbols indicate the type of
device or media that provides input to or
records output from a process.
 Processing symbols indicate the type of
device used to process the data or whether the
data is processed manually.
 Storage symbols indicate the type of device
used to store data while the system is not
using it.
 Flow and miscellaneous symbols may
indicate the flow of data and goods, the
beginning or end of the flowchart, the location
of a decision, or an explanatory note.
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INPUT/OUTPUT SYMBOLS
• Document symbol represents a

document or report that is prepared by
hand or printed by a computer.
• Multiple Copies of One Document--

The document copies should be
numbered in the upper, right-hand
corner.
• Input/Output; Journal/Ledger symbol

can represent any input or output on a
program flowchart. Also represents
accounting journals or ledgers in a
document flowchart.
• Display symbol represents information

displayed by an online output device
such as a terminal, monitor, or screen.
• Online Keying symbol represents data
entry by an online device such as a
terminal or personal computer.
• Terminal or Personal Computer

symbol combines the display and online
keying symbols to represent terminals
and personal computers.
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CHAPTER 6
• Transmittal Tape symbol represents

manually prepared control totals which
are to be compared to computer totals
for control purposes.
ROCESSING SYMBOLS
• Computer Processing symbol

represents a process performed by
a computer, which usually results
in a change in data or
information.
• Manual Operation symbol

represents a processing operation
that is performed manually.
• Auxiliary Operation represents a

processing operation carried out
by a device other than a
computer, e.g., an optical
character scanner.
• Off-line Keying Operation

symbol represents an operation
that uses an off-line keying
device, such as a cash register or
keying to a disk.
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STORAGE SYMBOLS
• Magnetic disk symbol represents

data stored permanently on a
magnetic disk. Frequently used
to represent master files and
databases.
• Magnetic Tape symbol

represents data stored on a
magnetic tape. Sometimes
represents transaction files.
• Diskette symbol represents data

stored on a floppy disk or zip
disk.
• Online Storage symbol

represents data stored in a
temporary online file on a direct-
access medium such as a
magnetic disk.
• File symbol represents a file of

documents that are manually
stored and retrieved. Letter
indicates the ordering sequence:
A = alphabetic order; D = date
order; N = numeric order.
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FLOW AND MISCELLANEOUS SYMBOLS
• Document or Processing
Flow symbol represents the
direction of processing or
document flow. Normal flow
is top to bottom and left to
right.
• Data/Information Flow
symbol represents the
direction of data/information
flow. Often used to show
data being copied from one
document to another.
• Communication Link
symbol represents the
transmission of data from one
location to another via
communication lines.
• On-page connector symbol

connects processing from one
location to another on the
same page. Used to avoid
crisscrossing lines.
• Off-page connector symbol

connects the processing flow
between two different pages.
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CHAPTER 6
Signals the exit from one

page and the corresponding
entrance on another page.
• Terminal symbol represents

the beginning, end, or a point
of interruption in a process or
program. Also used to
indicate an external party.
• Decision symbol represents a

decision-making step. Used
in a program flowchart to
show branching to alternate
paths.
• Annotation symbol provides

for the addition of descriptive
comments or explanatory
notes as clarification.
DOCUMENT FLOWCHARTS
• A document flowchart shows the flow of

documents and information among areas of
responsibility in an organization. These flowcharts
trace a document from cradle to grave and show
where a document comes from, where it’s
distributed, how it’s used, its ultimate disposition,
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and everything that happens as it flows through the

system.
• Internal control flowcharts are document
flowcharts used to evaluate the adequacy of internal
controls, such as segregation of duties or internal
checks. They can reveal weaknesses or
inefficiencies such as inadequate communication
flows, unnecessarily complex document flows, and
procedures that cause wasteful delays.
• Document flowcharts are also prepared in the
system design process.
• Guidelines for preparing flowcharts:
– As with DFDs, you can’t effectively prepare a
flowchart if you don’t understand the system,
so interview users, developers, auditors, and
management; administer questionnaires; read
through narratives; and walk through systems
transactions.
– Identify entities to be flowcharted, e.g.,
departments, functions, external parties,
documents or information flows, and
processes.
– As you read through a narrative, mark the
preceding items with different shapes (e.g.,
drawing a rectangle around entities, circling
documents, etc.).
– Use separate columns for the activity of each
entity.
– Flowchart the normal course of operations,
and identify exceptions with annotations.
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– As much as possible, draw the flow from top

to bottom and left to right.
– Use standard flowcharting symbols, and draw
with a template or computer.
– Clearly label all symbols. Use annotations if
necessary to provide adequate explanation.
– Give the flowchart a clear beginning and
ending. Show where each document
originated and its final disposition.
– One approach you can use is to read through
the narrative and for each step define: what
was (were) the input(s); what process was
carried out; and what was (were) the output(s).
The flow sequence should be input -- process
– output.
– Every manual process should have at least one
input and at least one output.
– Show all data entered into or retrieved from a
computer file as passing through a process
first.
– Do not show process symbols for forwarding
a document to another entity or filing a
document
– Do not connect two documents except when
forwarding to another column. When a
document is forwarded, show it in both
locations.
– When using multiple copies of a document,
place document numbers in the upper, right-
hand corner.
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– Show on-page connectors and label them

clearly to avoid excess flow lines.
– Use off-page connectors if the flow goes to
another page.
– If a flowchart takes more than one page, label
the pages as 1 of 5, 2 of 5, 3 of 5, etc.
– Show documents or reports first in the column
where they are created.
– Start with a rough draft; then redesign to avoid
clutter and crossed lines.
– Verify the accuracy of your flowchart by
reviewing it with users, etc.
– Place the flowchart name, the date, and the
preparer’s name on each page of the final
copy.
SYSTEM FLOWCHARTS
• A system flowchart depicts the relationship among

the inputs, processes, and outputs of an AIS. The
system flowchart begins by identifying the inputs to
the system. Each input is followed by a process,
i.e., the steps performed on the data. The process is
followed by outputs—the resulting new
information. In other words, it’s the same basic
input – process – output pattern that we saw in the
document flowchart.
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PROGRAM FLOWCHARTS
• Program flowcharts illustrate the sequence of

logical operations performed by a computer in
executing a program. They also follow an input –
process – output pattern. The program flowchart
details the logic of processes performed by the
computer and becomes the programmer’s blueprint
for writing the actual computer program.
SUMMARY
• We’ve learned about graphical forms of

documentation, particularly:
– Data flow diagrams
– Flowcharts
• We’ve learned why these tools are important to
accountants and how they are employed.
• We’ve learned basic guidelines for creating data
flow diagrams and flowcharts.
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MULTIPLE CHOICE
1. The narratives, diagrams, charts, and other written

materials that explain how a system works are
collectively called
a) documentation.
b) data flows.
c) flowcharts.
d) schema.
2. One popular means of documenting a system is to

develop diagrams, flowcharts, tables, and other
graphical representations of information. These are
often supplemented by
a) product specifications.
b) narrative descriptions.
c) logic charts.
d) oral descriptions from management.
3. The graphic description of the flow of data within an

organization is called a
a) systems flowchart.
b) data flow diagram.
c) context diagram.
d) document flowchart.
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4. A graphical representation of the flow of documents

and information between departments or areas of
responsibility within an organization is called
a) a data flow diagram.
b) a document flowchart.
c) a system flowchart.
d) a program flowchart.
5. A graphical representation of the relationship among
the input, processing and output in an information
system is called
6. A graphical description of the sequence of logical

operations that a computer performs is called
7. SAS No. 94 requires that independent auditors be able
to
a) draw computerized flowcharts.
b) prepare flowcharts and decision tables before
conducting an audit.
c) understand a client's system of internal controls
before conducting an audit.
d) prepare and understand any type of system
documentation.
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CHAPTER 6
8. The passage of the Sarbanes Oxley Act

a) Made documentation skills even more important.
b) Requires public companies to prepare an annual
internal control report.
c) Means that auditors must be able to prepare,
evaluate and read documentation tools such as
flowcharts.
d) All of the above.
9. Which of the following is not a true statement?

a) Documentation tools save an organization both time
and money.
b) Documentation tools are used extensively in the
systems development process.
c) Data flow diagrams and flowcharts are the two most
frequently used systems development
documentation tools.
d) Data flow diagrams and flowcharts are difficult to
prepare and revise using software packages.
10. A data flow diagram

a) is a graphical description of the source and
destination of data that shows how data flow within
an organization.
b) is a graphical description of the flow of documents
and information between departments or areas of
responsibility.
c) is a graphical description of the relationship among
the input, processing, and output in an information
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CHAPTER 6
system.
d) is a graphical description of the sequence of logical
operations that a computer performs as it executes a
program.
11. In a DFD, a square box represents

a) data sources and destinations.
b) data flows.
c) transformation processes.
d) data stores.
12. In a DFD, a "data sink" is also known as

a) data stores.
b) transformation processes.
c) data flows.
d) data destinations.
13. In a DFD, an arrow represents

b) the direction of data flows.
d) data stores.
14. In a DFD, a circle represents

b) the direction of data flows.
d) data stores.
Page 221

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Suez Canal University

Prof.Dr. Huda Mohamed Mohamed Dr. Hussien Mohamed Soliman

Dr. Rania Hamada Abd alftah Dr. Mohamed Ibrahim Aboelela

 The main elements:

Accounting is a service activity .Its function is to

So the main concern of accounting is on the needs of

2-Accounting and Book-keeping

The difference between accounting and Book-keeping is:

Bookkeeping is only part of Accounting (the record-

It is a process of detailed recording of all financial

Accounting: is a system of recording and reporting

So it uses book- keeping records to prepare financial

3-The role of an accountant:

Is to record, classify, and summarize economic events

 Accountants are employed in three main fields:

Public Accountant is individual who offer his

- Management advisory services.

- Accounting services & Bookkeeping.

General Accounting. - Cost Accounting.

- budgeting. - Information Systems Design.

- Internal Auditing. - Tax Accounting.

Accounting for the government:

- Does not usually involve Accounting for profit.

- Indispensable to the government which controls vast

- Government hire accountants to prepare reports and

4-The users of accounting:

 The users of accounting can be divided into three

 Outsiders who have direct financial interest:

The main function of accounting is to measure and

- Present or Potential Investors.

- Present or Potential Creditors (Banks).

1-The basic forms of business (Business Organization):

 There are three basic forms of business:

-A Single Proprietorship is a business formed and

-The owner liable for all obligations of it and its not a

-The owner receives all profits or losses (the risk is

-The life of Proprietorship limited by desire or death

-It is formed and owned by two or more as a partners.

-A partnership is not a separate legal entity.

-The partners share profits & losses of the partnership

-The partnership must be dissolved if the ownership

- Partners share skills, ideas and experience.

- Ability to raise more capital.

- Partners can help each other in decision making.

- Losses are shared.

- Profits are shared.

- Disagreements could happen.

- Lake of continuity of existence.

- It is a separate legal entity from its owners.

- The owners are called stockholders or shareholders.

- The ownership is presented by shares or stock.

-Shares or Stock may be sold and transferred.

-A board of director runs the Corporation for the

- The life of the Corporation is unlimited because

1- The accounting process does not include:

4- What is the purpose of book –keeping?

B- Complete the following statements by filling in the

2-__________________ is individual who offer his

c- What is the difference between accounting and