MODULE II

Accounting Information System & Analyzing Business Transactions

Lesson 1 Introduction of AIS

2 Steps in journalizing transaction

3 Normal Balance

4 Basic Equation

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MODULE 2

Introduction of AIS

 INTRODUCTION

This module discuss the overview of accounting information system with all the
types of books of accounts, including also is the discussion of steps in
accounting cycle, normal balances and basic equations

OBJECTIVES

After reading this module you should be able to:

1. Know the overview of accounting information system;

2. Learn steps in accounting cycle ;
3. Know the normal balances with their respective rules; and
4. Learn the basic equations.

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Lesson 1

 Introduction of Accounting Information

System
Accounting Information System is the means by which a reporting entity records
and stores the financial and managerial information from its transactions or
economic events so that it can retrieve and report the information in an accounting
statement.

Bookkeeping System

1. Bookkeeping defined: Bookkeeping is the systematic and chronological

recording of transactions and events in books of account. It is also
known as the recording phase of accounting.

2. Systems of Bookkeeping

Double Entry Bookkeeping - A system of bookkeeping which views a

transaction as having two-fold effect on accounting values, ( a value
received and a value parted with and which reflects these two-fold effects
in the accounting record.

Single Entry Bookkeeping – A system of bookkeeping whereby, as a general

rule only cash and personal accounts are recognized.
1) Day book or General Journal – records transactions in
chronological order and in narrative form.
2) Cash book and Subsidiary Ledgers ( Debtors and creditors)
o Cash book records all transactions affecting cash. No account
titles are maintained
o The subsidiary ledgers record transactions with debtors and
creditors

Distinctions between Double Entry and Single Entry

Double - Entry Single - Entry
a) Principles involved:
1. Duality Recognizes only one phase of a
2. Equilibrium (or equality) transaction

b) Transactions and events recorded

Records every type of Records only transactions
accountable event involving cash and personal
(“transactions approach”) accounts

c) Accounts recognized
Assets, Liabilities Equity Cash, Accounts Receivable
Revenue & Expenses . Accounts Payable and Equity

d) Books Used :
Journal and Ledger Cash book, subsidiary ledger

e) Financial Statement Preparation:

Financial statements are prepared Income (Loss)
determined using the
using a systematic processing of data; Net Assets Method,
sometimes known as
known as the accounting process. Analysis Approach /
Residual Approach
Income (Loss) is computed using the or Indirect Approach
Direct Matching Approach
Or Transactions Approach

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f) Financial Statements:
- Statement of Financial Position Statement of Assets,
Liabilities
- Statement of Comprehensive Income and Net Worth (SALN)
- Statement of Cash Flows Summary of Changes in
Equity
- Statement of Changes in Equity
- Notes to Financial Statements

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Lesson 2

 Steps in the Accounting Cycle

Steps in the Accounting Cycle

1. Identifying and Analyzing transactions and events to be recorded - Gathering

of information from source documents and determining the impact of the
transaction or event on the financial position using the equation “Assets
equals Liabilities + Owners’ equity”
2. Journalizing the transactions and events
3. Posting peso amounts and other information from the journal to the ledger.
4. Preparing the unadjusted trial balance as proof of the equality of debits and
in the ledger and to serve as a basis for adjusting entries.
5. Journalizing and posting the adjusting entries to take up accruals, expiration
of deferrals, estimations and other events often not signaled by new source
documents
6. Preparing the adjusted trial balance (or preparing the worksheet) to check
the equality of debits and credits after adjustments and to facilitate the
preparation of financial statements.
7. Preparing the financial statements which are the means by which the
processed information is communicated to external decision-makers
8. Closing the books which involves journalizing and posting closing entries and
ruling and balancing real accounts in the ledger.
9. Taking a post closing trial balance - this is done to prove equality of debits and
credits in the ledger after the closing process.
10. Preparing, entering and posting of reversing entries - this is done to facilitate
the recording of certain transactions in the succeeding accounting period.

1. IDENTIFYING AND ANALYZING TRANSACTIONS AND EVENTS

- the process of selecting a transaction or event and analyzing its impact on the
financial position.

2. JOURNAL - a formal record or book of original entry where transactions are

recorded for the first time.

Types of Journals:
a) simple journal - a book of original entry used to record all transactions
b) special journal - multi-column book to record transactions of a similar
nature

VOUCHER SYSTEM – a special method of accounting for business

transactions which involves the payment of cash immediately or in the future.

It is one of the means of establishing internal control over the

expenditures of the business.

A voucher is a document that carries the authorization to pay cash either

immediately or in a future date, and to journalize the transaction. Thus, one of
the most important parts of a voucher is the signature(s) of the authorizing
officials of the economic entity

Books of Accounts Used:

1. voucher register - records vouchers issued
2. check register - records all sales of merchandise
3. sales register - records all sales of merchandise
4. cash receipts journal - records all receipts of cash
5. general journal - records transactions not accommodated in special journal

3. POSTING
Purpose: it serves to classify the effects of transactions on specific asset, liability,
proprietorship, revenue and expense accounts.

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Kinds of Ledger
a. general ledger - contains all accounts appearing in the financial
statements.
b. private ledger - contains confidential information of accounts
c. subsidiary ledger - a supporting ledger consisting of a group of accounts
of similar nature, the total of which is in agreement with a controlling account in the
general ledger.

Accounts - are accounting devices used to summarize change in asset, liability

or proprietorship

4-6 PREPARING THE TRIAL BALANCE -

Types of Trial Balance As to time of preparation and contents

1. Periodic or Unadjusted Trial Balance - this is prepared before the
preparation
of adjusting entries.
Contents ; Real, Nominal and Mixed accounts
2. Adjusted Trial Balance - one prepared after adjusting entries.
Contents : Real and Nominal accounts.
3. Post-closing Trial Balance - one prepared after the closing process.
Contents: Real accounts only.

Examples of ERRORS REVEALED BY A TRIAL BALANCE:

1. Error of Transplacement 3. Error in posting one side of an entry
2. Error of Transposition 4. Omission in posting one side of an
entry

Examples of ERRORS NOT REVEALED BY A TRIAL BALANCE:

1. Wrong computation
2. Wrong classification of account (wrong account used)
3. Double-posting both sides of an entry
4. Omission in posting both sides of an entry
5. Omission in journalizing a transaction.

PREPARATION OF ADJUSTING ENTRIES - These are entries made at the

accounting period to update or bring to their correct balances certain asset,
liability, revenue or expense accounts.

PREPARING A WORKSHEET

A worksheet is an analytical device used in accounting to facilitate

the gathering of data for adjustment, the preparation of financial
statements, and closing entries

7. PREPARING FINANCIAL STATEMENTS

Financial statements are the means by which the information

accumulated and processed in financial accounting is periodically
communicated to the users.

8. CLOSING THE BOOKS

Closing the books is the process of preparing closing entries and ruling
and balancing real accounts.

9. PREPARING THE POST-CLOSING TRIAL BALANCE

Contents : Real accounts only

10.REVERSING ENTRIES
Reversing entries are entries made on the first day of the succeeding
accounting period to reverse certain adjusting entries done in an
immediately preceding period.

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Lesson 3

 Normal Balance

The accounting equation is divided into two sides ( left and right) which
are accounted to always maintain a balance amount. In other words, if the SFP
is constructed immediately after each transaction, it should always be that the
total assets must be equal to the totals of the aggregate liabilities and owner’s
equity.

Debit : means the value received

Credit: means the value parted with

Normal Balance of Statement of Financial Positions

1. Assets: are initially recorded on the debit side of the equation. To debit an
asset is to increase an asset. To credit an asset is to decrease it.
2. Liabilities : are initially recorded on the credit side. To credit a liability is
to increase it.
3. Capital : same as liabilities, that is initially recorded on the credit side. To
credit a capital is to increase it.

Normal Balance of Statement of Comprehensive Income

1. Expenses: are initially recorded on the debit side of the equation. To debit
an expense is to increase an expense. To credit an expense is to decrease it.

2. Revenues: are initially recorded on the credit side. To credit a revenue is to

increase revenue account.

The rules of Debit and Credit:

Rule 1: Assets: Debit to increase the amount of asset, Credit to decrease its
amount

Rule 2: Liability: Credit to increase the amount of liability. Debit to decrease

its amount.

Rule 3: Capital: Credit to increase the amount of liability. Debit to decrease its
amount.

Rule 4: Revenue: Credit to increase the amount of liability. Debit to decrease

its amount.

Rule 5: Expenses: Debit to increase the amount of asset, Credit to decrease its
amount

Summary of Debit and Credit Analysis

Accounting Elements
Debit Credit
Increase Decreases
in: in:
Assets Assets
Expenses Expenses
Losses Losses

Decreases Increase
in: in:
Liabilities Liabilities

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Capital Capital
Revenue Revenue
Profit Profit

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Lesson 4

 Basic Equation

The recording of business transactions is based on the basic accounting

equation. This accounting equation is derived from the dual concept of
accounting which states that in every debit there must be a corresponding
credit or vice versa.

The accounting equation is an accounting formula expressing the

equality of asset and equity (liabilities and capital) in every business
transaction.

This equation is made up of the elements of comprising the statement of

Financial Position as expressed in the following formula:

ASSETS = LIABILITIES + CAPITAL

Accordingly, this idea results to a modified accounting equation express as

follows:

CAPITAL = ASSETS – LIABILITIES

This modified basic accounting equation implies that the capital would only be
the residual value of assets after the creditors have secured their claims over
the assets of the enterprises.

Another modified accounting equation could be expressed as follows:

LIABILITIES = ASSETS – CAPITAL

This accounting formula means that the creditors’ claim over the assets of the
enterprises is determined when the owner’s interest is deducted from the total
assets of the enterprises.

Analyzing and Accounting for Business Transactions

- This process of analyzing accounting transactions comprises the
determination of accounting elements affected and their effects in the
accounting equation, the choice of the appropriate account title to be
debited and credit, and the computation of the correct amount to be
recorded in the books of accounts.

Usually, accountants mentally answer the following questions:

Question 1: What is the value received? (Debit)

Question 2: What is the value parted with? (Credit)
Question 3: What accounting elements are affected? ( Assets, Liabilities, or
Owner’s Equity)
Question 4: What are their affects to the affected accounting elements?
Question 5: What appropriate account title will describe the effect of
transactions?
Question 6: How much is the amount to be recorded for a particular account
title?

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