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Financial Accounting:
Tools for Business Decision Making

Kimmel, Weygandt, Kieso

S
EL

1

Chapter 3

Chapter 3
The Accounting
Information System
After studying Chapter 3, you should be
able to:
 Analyze the effect of business transactions on the basic
accounting equation.
 Explain what an account is and how it helps in the recording
process.

 Define debits and credits and explain how they are used to record
business transactions.
 Identify the basic steps in the recording process.

3

Chapter 3
The Accounting
Information System
After studying Chapter 3, you should
be able to:
 Explain what a journal is and how it helps in the
recording process.
 Explain what a ledger is and how it helps in the
recording process.
 Explain what posting is and how it helps in the
recording process.
 Explain the purposes of a trial balance.
4


The Accounting
Information System
The system of:
•collecting and processing transaction
data and
•communicating financial information
to interested parties.
5

The Accounting
Information System
Analyze the effect of business
transactions on the basic accounting
equation:
Assets = Liabilities + Stockholders’ Equity

6

The Accounting
Information System

The Accounting Equation must
always balance.

7

The Accounting
Information System
 Accounting transactions
are events that must be
recorded in the Financial
Statements.

8

The Accounting
Information System
 Transactions are
events that must be
recorded in the
Financial Statements

 Transaction Analysis
determines the impact
on the Balance Sheet.
9

Page 99 in book

Is the financial position (assets, liabilities, and
stockholders’ equity) of the company changed?

Let’s Practice

Transaction Analysis

a) On July 1, Cash of $95,000 was invested in
the business in exchange for $95,000 worth of
common stock.

Assets


(a)

Accounts
Cash +
Receivable + Supplies + License + Equipment + Land
95,000

=

Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000

a) On July 1, Cash of $95,000 was invested in

the business in exchange for $95,000 worth of
common stock.

b) Peoples, Inc., acquired land by paying
$60,000 cash to Nashtown, Inc

Assets

(a)
(b)

Accounts
Cash +
Receivable + Supplies + License + Equipment + Land
95,000
(60,000)
60,000

=


Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000

b) Peoples, Inc., acquired land by paying
$60,000 cash to Nashtown, Inc

c) Peoples, Inc., purchased an estimated three
month supply of office supplies on account.
The company will pay $600 for these supplies
later.

Assets


(a)
(b)
(c)

Accounts
Cash +
Receivable + Supplies + License + Equipment + Land
95,000
(60,000)
60,000
600

=

Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained

= Payable + Payable + Revenue Stock +
Earnings
95,000
600

c) Peoples, Inc., purchased an estimated three
month supply of office supplies on account. The
company will pay $600 for these supplies later.

d) Peoples, Inc., received $800 for
services performed.

Assets

(a)
(b)
(c)
(d)

Accounts

Cash +
Receivable + Supplies + License + Equipment + Land
95,000
(60,000)
60,000
600
800

=

Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000
600

800 Service Revenue

d) Peoples, Inc., received $800 for services
performed.

e) Peoples, Inc., performed services for $2,000.
The company will be paid later in the month.

Assets

(a)
(b)
(c)
(d)
(e)

Accounts
Cash +
Receivable + Supplies + License + Equipment + Land
95,000
(60,000)
60,000
600
800
2,000

=

Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000
600
800 Service Revenue
2,000 Service Revenue

e) Peoples, Inc., performed services for $2,000.
The company will be paid later in the month.

f) Peoples, Inc., received confirmation that a major
corporation has selected their corporation to
perform major consulting work. The work will
start January 1 of next year.

Assets

(a)
(b)
(c)
(d)
(e)
(f)

=

Accounts
Cash +
Receivable + Supplies + License + Equipment + Land
95,000
(60,000)
60,000
600
800
2,000

Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000
600
800 Service Revenue
2,000 Service Revenue

f) Peoples, Inc., received confirmation that a major
corporation has selected their corporation to
perform major consulting work. The work will
start January 1 of next year.
NO TRANSACTION

g) Peoples, Inc., purchased office equipment for
$6,000. The Company signed a 2-year note with
ACME Office Equipment Company.

(a)
(b)
(c)
(d)
(e)
(f)
(g)

Cash +
95,000
(60,000)

Assets
Accounts
Receivable + Supplies + License + Equipment + Land

=

Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000

60,000
600

600

800

800 Service Revenue
2,000 Service Revenue

2,000
6,000

6,000

g) Peoples, Inc., purchased office equipment for
$6,000. The Company signed a 2-year note with
ACME Office Equipment Company.

h) Peoples, Inc., paid $1,800 for a 1-year
license to operate as a business. The license
expires June 30th of next year.

Assets

(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)

=

Accounts
Cash +
Receivable + Supplies + License + Equipment + Land
95,000
(60,000)
60,000
600
800
2,000
6,000
(1,800)

Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000
600
800 Service Revenue
2,000 Service Revenue
6,000

1,800

h) Peoples, Inc., paid $1,800 for a 1-year license
to operate as a business. The license expires
June 30th of next year.

i) Peoples, Inc., collected $800 of the money
owed from (e).

Assets

(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(I)

=

Accounts
Cash +
Receivable + Supplies + License + Equipment + Land
95,000
(60,000)
60,000
600
800
2,000
6,000
(1,800)
800

Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000
600
800 Service Revenue
2,000 Service Revenue
6,000

1,800
(800)

i) Peoples, Inc., collected $800 of the money
owed from (e).

j)

Peoples, Inc., paid $400 of the amount it owed
from (c).

(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(I)
(j)

Cash +
95,000
(60,000)

Assets
Accounts
Receivable + Supplies + License + Equipment + Land

=

Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000

60,000
600

600

800

800 Service Revenue
2,000 Service Revenue

2,000
6,000
(1,800)
800
(400)

j)

6,000

1,800
(800)
(400)

Peoples, Inc., paid $400 of the amount it owed
from (c).

k) An employee has worked and earned $600
which was paid during the month.

(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(I)
(j)
(k)

Cash +
95,000
(60,000)

Assets
Accounts
Receivable + Supplies + License + Equipment + Land

=

Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000

60,000
600

600

800

800 Service Revenue
2,000 Service Revenue

2,000
6,000
(1,800)
800
(400)
(600)

6,000

1,800
(800)
(400)
(600) Salaries Expense

k) An employee has worked and earned $600
which was paid during the month.

l) Peoples, Inc., received a $5,000 retainer to
handle a tax audit that the company will start
next month.

(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(I)
(j)
(k)
(l)

Cash +
95,000
(60,000)

Assets
Accounts
Receivable + Supplies + License + Equipment + Land

=

Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000

60,000
600

600

800

800 Service Revenue
2,000 Service Revenue

2,000
6,000
(1,800)
800
(400)
(600)
5,000

6,000

1,800
(800)
(400)
(600) Salaries Expense
5,000

l) Peoples, Inc., received a $5,000 retainer to
handle a tax audit that the company will start
next month.

m) Peoples, Inc., paid $500 for rent during the
month.

(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(I)
(j)
(k)
(l)
(m)

Cash +
95,000
(60,000)

Assets
Accounts
Receivable + Supplies + License + Equipment + Land

=

Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000

60,000
600

600

800

800 Service Revenue
2,000 Service Revenue

2,000
6,000
(1,800)
800
(400)
(600)
5,000
(500)

6,000

1,800
(800)
(400)
(600) Salaries Expense
5,000
(500) Rent Expense

m) Peoples, Inc., paid $500 for rent during the
month.

n) Dividends of $700 were paid during the
month.

(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(I)
(j)
(k)
(l)
(m)
(n)

Cash +
95,000
(60,000)

Assets
Accounts
Receivable + Supplies + License + Equipment + Land

=

Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000

60,000
600

600

800

800 Service Revenue
2,000 Service Revenue

2,000
6,000
(1,800)
800
(400)
(600)
5,000
(500)
(700)

6,000

1,800
(800)
(400)
(600) Salaries Expense
5,000
(500) Rent Expense
(700) Dividends

n) Dividends of $700 were paid during the
month.

(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(I)
(j)
(k)
(l)
(m)
(n)
Total

Cash +
95,000
(60,000)

Assets
Accounts
Receivable + Supplies + License + Equipment + Land

=

Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000

60,000
600

600

800

800 Service Revenue
2,000 Service Revenue

2,000
6,000
(1,800)
800
(400)
(600)
5,000
(500)
(700)
37,600

6,000

1,800
(800)
(400)
(600) Salaries Expense
5,000

1,200

600

1,800

6,000

60,000

200

6,000

5,000

95,000

(500) Rent Expense
(700) Dividends
1,000

(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(I)
(j)
(k)
(l)
(m)
(n)
Total

Cash +
95,000
(60,000)

Assets
Accounts
Receivable + Supplies + License + Equipment + Land

=

Liabilities
Stockholders' Equity
Type of Transaction
Accoiunts Notes
Unearned Common
Retained
= Payable + Payable + Revenue Stock +
Earnings
95,000

60,000
600

600

800

800 Service Revenue
2,000 Service Revenue

2,000
6,000
(1,800)
800
(400)
(600)
5,000
(500)
(700)
37,600

6,000

1,800
(800)
(400)
(600) Salaries Expense
5,000

1,200

600

1,800

107,200

6,000

60,000

200

6,000

5,000

107,200

95,000

(500) Rent Expense
(700) Dividends
1,000

Account...
an individual accounting record of
increases and decreases in a
specific Asset, Liability, or
Stockholders’ Equity item.

42

Account
Three parts :
1) the Title of the account
2) a left or Debit side
3) a right or Credit side
43

The T Account
TITLE
DEBIT CREDIT

44

Total the Entries to Each
Side
TITLE
Debit

Credit

Total Debits Total Credits

45

Tabular Summary

Account Form

Page 105 in book

Balancing an Account

Pages 106-107 in book

Normal Balances

47

Pages 107-108 in book

Normal Balances

48

Total the Entries to Each
Side
TITLE
Debit

Credit

Total Debits Total Credits

If the greater sum is on the left,
the account has a Debit Balance
49

Total the Entries to Each
Side
TITLE
Debit

Credit

Total Debits Total Credits

If the greater sum is on the right,
the account has a Credit Balance
50

Whichever side
you increase is
the normal side!

Debits
Increase assets
and expenses
Decrease
liabilities,
common stock
and revenues
52

Credits
Decrease assets
and expenses
Increase liabilities,
common stock and
revenues

53

Pages 109-110 in book

Analyze each
transaction

Enter each
transaction in a
journal

Transfer journal
information to
ledger accounts54

The Recording Process
 Analyze each transaction
 Enter information in a journal
 Transfer the information to the
appropriate accounts

55

The Journal...
is an accounting record where the
transactions are recorded in chronological
order.

56

Journals
Types of Journals






Cash receipts
Cash disbursements
Sales
Purchases
General
57

Journals
Journals aid the recording
process by:
 Disclosing in one place the complete
effect of a transaction;
 Providing a chronological record of
transactions;
 Helping prevent or locate errors because
debit and credit amounts can be easily
compared.
58

GENERAL JOURNAL
Date

Account Titles and Explanations

Page 111 in book

Debit Credit

1998
Oct. 1 Cash
10,000
10,000
1 Cash

Common Stock
(Invested cash in business)
5,000

Notes Payable
5,000
(Issued 3-month, 12% note payable for cash)
2 Office Equipment
5,000
Cash
5,000
(Purchased office equipment for cash)

The General Ledger
•the entire group of accounts maintained
by a company
•contains all the asset, liability, and
stockholders’ equity accounts

60

Page 113 in book

The General Ledger
61

The Ledger
The entries from the journal are posted
to the ledger,usually in summary form,
except for the general journal.

62

Posting
Transferring information from the
journals to the general ledger
accounts

63

Posting Entries
GENERAL JOURNAL
Account Titles and Explanations
1998
Oct. 1 Cash
10,000

Common Stock
10,000

Account CASH
Date

ref

debit

Account COMMON STOCK
Dat
e
ref
debit

credit

Acct 1010
Balance
debit
credit

credit

Acct 3010
Balance
debit
credit

Posting Entries
GENERAL JOURNAL
Account Titles and Explanations
1998
Oct. 1 Cash
10,000

Common Stock
10,000

Account CASH
Date
Oct 1

ref
gj
1

debit credit
10,000

Account COMMON STOCK
Dat
e
ref
debit
gj
Oct 1
1

Acct 1010
Balance
debit
credit
10,000

Acct 3010
Balance
credit debit
credit
10,000
10,000

Posting Entries
GENERAL JOURNAL
Account Titles and Explanations
1998
Oct. 1 Cash
10,000

Common Stock
10,000

Account CASH
Date
Oct 1

ref
gj
1

debit credit
10,000

Account COMMON STOCK
Dat
e
ref
debit
gj
Oct 1
1

Acct 1010
Balance
debit
credit
10,000

Acct 3010
Balance
credit debit
credit
10,000
10,000

Trial Balance
A list of all the accounts and their balances at
a given time.
It serves to prove the
mathematical
equality of debits and
credits after posting.
It aids in the
preparation of financial
statements.

67

Sierra Corporation

Page 122 in book

Trial Balance
October 31, 1998
Cash
Advertising Supplies
Prepaid Insurance
Office Equipment
Notes Payable
Accounts Payable
Unearned Service Revenue
Common Stock
Dividends
Service Revenue
Salaries Expense
Rent Expense

Debit Credit
$15,200
2,500
600
5,000
$ 5,000
2,500
1,200
10,000
500
10,000
4,000
900
$28,700 $28,700

COP Y R I GHT
Copyright © 1999, John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
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Request for further information should be addressed to the
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programs or from the use of the information contained herein.

Assets

Cash +
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
Total

Accounts
Receivable + Supplies +

Prepaid Office
License + Equipment + Land

=

Liabilities +

Stockholders' Equity

Accounts Notes
Unearned Common Retained
= Payable + Payable + Revenue Stock + Earnings

Type of Transaction

Chapter 3

Transactions

(a)

On J uly 1, Cash of $95,000 was invested in the business in exchange for $95,000 worth of
common stock.

(b)

Peoples, Inc. acquired land by paying $60,000 cash to Nashtown, Inc.

(c)

Peoples, Inc. purchased an estimated three-month supply of office supplies on account.
The company will pay $600 for these supplies later.

(d)

Peoples, Inc. received $800 for accounting services performed.

(e)

Peoples, Inc. performed consulting services for $2,000. The company will be paid later in
the month.

(f)

Peoples, Inc. received confirmation that a major corporation has selected their corporation
to performmajor consulting work. The work will start J anuary 1st of next year.

(g)

Peoples, Inc. purchased office equipment for $6000. The company signed a 2-year note
with ACME Office Equipment Company.

(h)

Peoples, Inc. paid $1800 for a 1-year license to operate as a business. The license
expires J une 30th of next year.

(i)

Peoples, Inc. collected $800 of the money owed from(e).

(j)

Peoples, Inc. paid $400 of the amount it owed from(c).

(k)

An employee has worked and earned $600 which was paid during the month.

(l)

Peoples, Inc. received a $5000 retainer to handle a tax audit that the company will start to
work on next month.

(m)

Peoples, Inc. paid $500 for rent during the month.

(n)

Dividends of $700 were paid during the month.