ch 3 - Chapter 3 THE ACCOUNTING INFORMATION SYSTEM 1...

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Unformatted text preview: Chapter 3 THE ACCOUNTING INFORMATION SYSTEM 1 Transaction Analysis Transaction Analysis: the process of identifying the Transaction Analysis: specific effects of economic events on the accounting equation. what accounts change (if any) and do they increase or decrease Each transaction changes at least 2 accounts in the accounting equation. 2 Transaction Analysis So when you are analyzing a transaction, you must look for all accounts that change For example, cash cannot be the only thing that changes. It must be cash and another account such as rent expense or supplies. or if the company earns revenues did it collect cash as payment or does the customer owe the company money (accounts receivable)? 3 The Accounting Information System The system of collecting and processing transaction data and communicating financial information to decision makers. 4 1 11 Accounting Transactions... are economic events that must be recorded in the financial statements because they affect assets, liabilities and/or stockholders' equity. includes revenues, expenses & dividends 5 Accounting Transactions... 6 Accounting Analysis... Analyze the effect of business transactions on the basic accounting equation: Assets = Liabilities + Stockholders' Equity Must always balance. 7 Transaction Analysis If an individual asset is increased, there must be a corresponding: Decrease in another asset, or Increase in a specific liability, or Increase in stockholders' equity 8 Transaction Analysis Two or more items can be affected Example: purchase computer for $10,000 by paying $6,000 in cash and signing a note for $4,000 9 Let's Practice! Let's practice transaction analysis with Sierra Corporation. . . 10 Event 1 Investment of Cash by Stockholders Oct. 1 Owner invested $10,000 Cash in business in exchange for $10,000 of Sierra Corporation Common Stock 11 Event 2 Note Issued in Exchange for Cash Oct. 1 Sierra issued a 3month, 12%, $5,000 Note Payable to Castle Bank in exchange for cash. 12 Event 3 Purchase of Office Equipment for Cash Oct. 2 Sierra acquired office equipment by paying $5,000 cash to Superior Sales Co. 13 Event 4 Receipt of Cash in Advance from Customer Oct. 2 Sierra received a $1,200 cash advance from R. Knox, a client. 14 The General Ledger 15 2 11 The Account... An individual accounting record of increases and decreases in a specific Asset, Liability, or Stockholders' Equity item. 16 The Account Three parts : 1) the Title of the account 2) a left or Debit side 3) a right or Credit side 17 3 11 Debits and Credits Debit means left Debit means left thus, entry on left side is debiting Credit means right thus, entry on right side is crediting Normal balance is the side the increase Normal balance is the side the increase happens on. 18 Examples 19 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 20 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 21 Whichever side you increase is the normal balance! 22 Normal Balances Normal for Assets and Liabilities 23 Normal Balances for Stockholders' Equity 24 Normal Balances for Expenses and Revenues 25 Expansion of Basic Equation 26 Review What is the normal balance for the following accounts? Cash Debit or Credit? Accounts Payable Accounts Receivable Service Revenue Common Stock Salaries Expense 27 Review What is the normal balance for the following accounts? Dividends Building Taxes Payable Unearned Revenues Prepaid Insurance Rent Expense 28 Review Is it better to have a credit balance or debit balance in an account? What does it mean if cash has a credit balance in accounting information? 29 4 11 Basic Steps in the Recording Process. 1.Analyze 2.Journalize 3.Post 30 The Journal... is an accounting record where the transactions are recorded in chronological order. 31 5 11 Recording Process Step 1 Analyze each transaction and effect on accounts 32 Recording Process Step 2 Enter transaction information in a journal, a process called journalizing 33 GENERAL JOURNAL Date 2007 Oct. 1 Cash 10,000 10,000 1 Cash Common Stock (Invested cash in business) 5,000 Account Titles and Explanations 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) Recording Process Step 3 Transfer (post) the journal information to the appropriate accounts in the ledger 35 Let's Review Using Sierra's Transactions Cash 10,000 What is the normal balance for the following accounts? Common Stock 10,000 Oct. 1 Owner invested $10,000 Cash in business in exchange for $10,000 of Sierra Corporation Common Stock 36 Let's Review Using Sierra's Transactions Cash 10,000 5,000 bal 15,000 Note Payable 5,000 Oct. 1 Sierra issued a 3month, 12%, $5,000 Note Payable to Castle Bank. 37 Let's Review Using Sierra's Transactions Office Equipment 5,000 Cash 10,000 5,000 5,000 bal 10,000 Oct. 2 Sierra acquired office equipment by paying $5,000 cash to Superior Sales Co. 38 6 11 The General Ledger 6 all the individual accounts maintained by a company contains all the asset, liability, and stockholders' equity accounts 39 Chart of Accounts... is a list of a company's accounts. 40 7 11 Posting Transferring information from the journals to the general ledger accounts 41 Posting Entries GENERAL JOURNAL Account Titles and Explanations 2007 Oct. 1 Cash 10,000 Common Stock 10,000 Cash debit credit 10,000 Common Stock debit credit 10,000 8 11 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. 43 Sierra Corporation Trial Balance October 31, 2007 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 Purpose of the trial balance Shows that total debits equals total credits Shows ending balance in each account as of date of the trial balance What is it used for.... to prepare financial statements 45 Let's Review Cash Debit Cash Sales Advance deposits Sale of Stock Things that increase Accounts payable Purchase without payment Things that increase Credit Paying bills Paying off bill Things that Things that decrease decrease 46 Let's Review How does net Income Change? Selling more products/service increases net income Paying more expenses decreases net income How does the change in net income change Retained Earnings? An increase net income Increases retained earnings A decrease net income Decreases retained earnings 47 Which of these is not considered a financial statement? A. Income Statement B. Statement of Retained Earnings C. Balance Sheet D. Trial Balance 48 ...
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