StudyGuideChap03

StudyGuideChap03 - CHAPTER 3 The Accounting Information System Study Objectives Analyze the effect of business transactions on the basic accounting

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2-1 CHAPTER 3 The Accounting Information System Study Objectives 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. 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.

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2-2 Chapter Outline Study Objective 1 - Analyze the Effect of Business Transactions on the Basic Accounting Equation 1. Transactions a. events that must be recorded in the financial statements. b. events can be divided into two types: i. External events occur between the company and some outside party. If an external event involves an exchange of assets, liabilities, or stockholders' equity between a company and an outside party it is a transaction and must be recorded. ii. Internal events are economic events that occur entirely within one company. Internal events are considered transactions if the event results in a financial impact that you can measure with reasonable accuracy. 2. Transaction analysis - the process of considering the transaction or event that has taken place and identifying how the transaction is going to impact the balance sheet equation. Consider the following Facts: 1. 10/1/x1 Owner invests \$10,000 cash in the business, in exchange for \$10,000 of Sierra Corporation common stock. Both Cash and Common Stock would increase by \$10,000 Cash 10,000 Common Stock @ 1\$ par 10,000 Owner invests cash in business in return for C/S N o t e t h a t c o m m o n s t o c k i s a l w a y s r e c o rded at the number of shares issued x par value 2. 10/1/x1 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 Cash 5,000 Notes Payable 5,000 Issued a 3-month 12% note payable to Castle Bank 3. 10/2/x1 Sierra acquired office equipment by paying \$5,000 cash to Superior Sales Co. An equal increase and decrease in Sierra’s assets occur. Cash would decrease by \$5,000 and Office Equipment would increase by \$5,000. Office Equipment 5,000 Cash 5,000 4. 10/2/x1 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, would increase by \$1,200. Cash 5,000 Unearned Service Revenue 5,000 5. 10/3/x1 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 Service Revenue (which will be
2-3 closed to Retained Earnings) is increased \$10,000 Cash 10,000 Service Revenue 10,000 6. 10/3/x1 Sierra paid its office rent for the month of October in cash, \$900. Both Cash and Stockholders'

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This note was uploaded on 04/04/2010 for the course ACCOUTING ACCOUNTING taught by Professor Paigee.gee during the Fall '07 term at N.C. State.

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StudyGuideChap03 - CHAPTER 3 The Accounting Information System Study Objectives Analyze the effect of business transactions on the basic accounting

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