CHAPTER 3 Notes(2) - CHAPTER 3 The Accounting Information...

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CHAPTER 3 The Accounting Information System Study Objectives 1. Analyze the effect of business transactions on the basic accounting equation. 2. Explain what an account is and how it helps in the recording process. 3. Define debits and credits and explain how they are used to record business transactions. 4. Identify the basic steps in the recording process. 5. Explain what a journal is and how it helps in the recording process. 6. Explain what a ledger is and how it helps in the recording process. 7. Explain what posting is and how it helps in the recording process. 8. Explain the purposes of a trial balance.
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Study Objective 1 - Analyze the Effect of Business Transactions on the Basic Accounting Equation Accounting Information System collects and processes transactions. communicates financial information to decision makers. Factors that shape the Accounting Information System include: nature of the company’s business types of transactions company size information demands of management and others. Most businesses use computerized accounting systems (electronic data processing – EDP – systems). Accounting Transactions economic events that require recording in the financial statements occur when assets, liabilities, or stockholders’ equity items change as a result of some economic event Transaction analysis - the process of identifying the specific effects of economic events on the accounting equation Illustration of transaction analysis: These are the transactions that led to the financial statements shown in Chapter 1. 1. On October 1 the owner invested $10,000 cash in the business, in exchange for $10,000 of Sierra Corporation common stock. Both Cash (an asset) and Common Stock (a component of Stockholders’ Equity) increase by $10,000. 2. On October 1 Sierra issued a 3-month, 12%, $5,000 note payable to Castle Bank. This transaction results in an equal increase in assets and liabilities: Cash (an asset) increases $5,000 and Notes Payable (a liability) increases $5,000. 3. On October 2, Sierra acquired office equipment by paying $5,000 cash to Superior Sales Co. An equal increase and decrease in Sierra’s assets occur. Cash decreases by $5,000 and Office Equipment increases by $5,000.
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4. On October 2 Sierra received a $1,200 cash advance from R. Knox, a client, for advertising services that are expected to be completed by December 31. Both Cash and Unearned Service Revenue (a liability) increase by $1,200 . 5. On October 3 Sierra received $10,000 cash from Copa Company for advertising services performed. Sierra received an asset (cash) in exchange for services (revenue). Revenue increases stockholders' equity. Both assets and stockholders' equity would increase. Cash is increased $10,000 and Retained Earnings (Service Revenue) is increased $10,000. 6. On October 3
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CHAPTER 3 Notes(2) - CHAPTER 3 The Accounting Information...

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