CHAPTER THREE THE ACCOUNTING INFORMATION SYSTEM. An individual accounting record of increases and decreases to any specific Asset Liability Stockholders’

CHAPTER THREE

THE ACCOUNTING INFORMATION SYSTEM

An individual accounting record of increases and decreases to any specific

• Asset

• Liability

• Stockholders’ Equity

• Revenue

• Expense

The Account...

The Ledger Card

Account: Cash Account # 101PostRef

9/1 /09 20,000 20,0009/2 /09 1,000 19,0009/3 /09 10,000 9,0009/4 /09 1,200 7,800

9/20 /09 700 7,1009/30 /09 5,000 12,100

BalanceDebit CreditDate Item Debit Credit

Using AccountsUsing AccountsAccounts provide an efficient method to

categorize transactions.It is the location where we record activity

and maintain a running balance for any particular item.

Each account is maintained on its own ledger card.

All of the ledger cards combined become the General Ledger.

Where all activity and the resulting balances are kept for everything we want to

keep track of.

AccountsAccounts

General Ledger

Put all of the ledger cards together.

Account: Cash Account # 101PostRef

9/1 /09 20,000 20,0009/2 /09 1,000 19,0009/3 /09 10,000 9,0009/4 /09 1,200 7,800

9/20 /09 700 7,1009/30 /09 5,000 12,100


Accounts Receivable

Office Supplies

Equipment

Accounts Payable

Wages Payable

Chart of Accounts...

is a list of a company’s accounts.

Jim’s LemonadeChart of Accounts

101 - Cash105 - Accts Receivable110 - Office Supplies150 - Equipment201 - Accounts Payable210 - Wages Payable305 - Common Stock320 - Retained Earnings401 - Sales - Lemonade 410 - Sales – Catering501 - Lemon Expense505 - Insurance Expense510 - Office Expense

Basic Steps in the Recording Process.

1.1. AnalyzeAnalyze

2.2. JournalizeJournalize

3.3. PostPost

When a transaction occurs:

Recording Process Step 1

Analyze Analyze each each

transactiotransaction and n and

effect on effect on accountsaccounts

If you don’t understand what happenedIf you don’t understand what happened

(the transaction)(the transaction)

you you cannot account for it!cannot account for it!

So. . . This is a pretty good place to start

!!!

Accounting Transactions...

are economic events that must be recorded in the financial statements because they affect assets liabilities and/or stockholders’ equity

Transaction Analysis

The process of identifying the The process of identifying the specific effects of economic events specific effects of economic events on the accounting equation.on the accounting equation.

Each transaction has a dual Each transaction has a dual (double-sided) effect on the (double-sided) effect on the accounting equation.accounting equation.

Recording Process Step 2

Enter transaction information in a Enter transaction information in a journal, a process called journal, a process called

journalizingjournalizing

The Journal...

is an accounting record where the transactions are recorded in

chronological order.

Recording Process Step 3Recording Process Step 3

Copy (post) the journal information Copy (post) the journal information to the appropriate accounts in the to the appropriate accounts in the

ledgerledger

“T” Accounts

Debit Credit

SHAPEDLIKE a “T”

“T” Accounts

Debit Credit

Debit means Left

Credit meansRight

“T” Accounts

Dr. Cr.

Abbreviation for Debit

Abbreviation for Credit

“T” Accounts

Dr. Cr.

CASHACCOUNT NAME

The Ledger Card

Account: Cash Account # 101___

PostRef

9/1 /06 20,000 20,0009/2 /06 1,000 19,0009/3 /06 10,000 9,0009/4 /06 1,200 7,800

9/20 /06 700 7,1009/30 /06 5,000 12,100


The T Account

Cash

Every Account has:

An Increase Side, and

A Decrease Side But, Some Accounts

Increase on the Debit Side

And, Some Accounts Increase on the Credit Side

7 RULES OF

DEBITS AND CREDITS

RULE #1

ASSET ACCOUNTS

Dr. Cr.

+

Increase on Debit Side

Decrease on Credit Side

EXAMPLE:

PURCHASED OFFICE SUPPLIES FOR $800 CASH

STEP #1

Name the accounts affected:

CASH OFFICE SUPPLIES

STEP #2

Determine Classification of Accounts

CASH

ASSETOFFICE

SUPPLIES

ASSET

STEP #3

Now that we know the classification, we can identify increase and decrease sides.

CASH

DR. CR.+

OFFICE SUPPLIES

DR. CR.+

Did Office Supplies Increase or Decreasein this transaction?


INCREASED

OFFICE SUPPLIESDR. CR.

$800+

What about Cash? Increase or Decreasein this transaction?


DECREASED

CASH

DR. CR.

$800+

RULE #2

IN EVERY TRANSACTION DEBITS MUST EQUAL

CREDITS

DEBITS = CREDITS

DR.

CASH

+$800

CR.

OFFICE SUPPLIES

DR. CR.

$800+

RULE #3

LIABILITY ACCOUNTS

Dr. Cr.

+

Decrease onDebit Side

Increase on Credit Side

EXAMPLE:

PURCHASED EQUIPMENT ON ACCOUNT FOR $3,000.

STEP #1

Name the accounts affected:

EQUIPMENT

ACCOUNTS PAYABLE

STEP #2

Determine Classification of Accounts:

EQUIPMENT

ACCOUNTS PAYABLE

ASSET

LIABILITY

STEP #3


EQUIPMENT

DR. CR.

+

ACCOUNTS PAYABLE

DR. CR.

+

Did Equipment Increase or Decrease in this transaction?


INCREASED

EQUIPMENTDR. CR.

$3000+

Accounts Payable? Increase or Decreasein this transaction?


INCREASED

ACCOUNTS PAYBLE

DR. CR.

$3000+

DEBITS = CREDITS

DR.

ACCOUNTS PAYABLE

+$3000

CR.

EQUIPMENT

DR. CR.

$3000+

RULE #4

CAPITAL ACCOUNT

Dr. Cr.

+

Decrease onDebit Side

Increase onCredit Side

JUST LIKE LIABILITY ACCOUNTS

EXAMPLE:

MARY ADAMS, THE OWNER, INVESTED $25,000 IN THE BUSINESS

STEPS #1 & 2

Name and classify the accounts affected:

M. ADAMS, CAPITAL CASH

DR. CR. DR. CR.

OWNER’S EQUITY ASSET

STEP #3


CASH

DR. CR.+

M. ADAMS, CAPITAL

DR. CR.+

INCREASED OR DECREASED?

CASH

DR. CR.+

M. ADAMS, CAPITAL

DR. CR.+

INCREASED INCREASED

$25,000 $25,000

DEBITS = CREDITS

DR.

M. ADAMS, CAPITAL

+$25,000

CR.

CASH

DR. CR.+

$25,000

RULE #5

DIVIDEND / DRAWING ACCOUNT

Dr. Cr.+

Increase on theDebit Side

Decrease on theCredit Side

JUST LIKEASSET ACCOUNTS

EXAMPLE:

MARY WITHDREW $1,500 FOR PERSONAL EXPENSES

STEPS #1 & #2


M. ADAMS, DRAWING CASH

DR. CR. DR. CR.

OWNER’S EQUITY ASSET


CASH

DR. CR.

+

M. ADAMS, DRAWING

DR. CR.

INCREASED DECREASED

$1,500 $1,500+

DEBITS = CREDITS

DR.

M. ADAMS, DRAWING

$1,500

CR.

CASH

DR. CR.

$1,500+ +

RULE #6

REVENUE ACCOUNTS

Dr. Cr.Decrease onDebit Side

Increase onCredit Side

JUST LIKE LIABILITY & CAPITAL

ACCOUNTS

+

EXAMPLE:

MARY PERFORMED SERVICES AND RECEIVED $4,500 IN CASH

STEPS #1 & #2


CONSULTING FEES CASH

DR. CR. DR. CR.

REVENUE ASSET

STEP #3


CASH

DR. CR.

CONSULTING FEES

DR. CR.+ +


CASH

DR. CR.

CONSULTING FEES

DR. CR.

INCREASED INCREASED

$4,500 $4,500+ +

DEBITS = CREDITS

DR.

CONSULTING FEES

$4,500

CR.

CASH

DR. CR.

$4,500+ +

EXAMPLE:

MARY PERFORMED $6,000 OF SERVICES ON ACCOUNT

DEBITS = CREDITS

DR.

CONSULT. FEES

$6,000

CR.

ACCOUNTS RECEIVABLE

DR. CR.

$6,000

ACCOUNTS RECEIVABLEINSTEAD OF

CASH

+ +

RULE #7

EXPENSE ACCOUNTS

Dr. Cr.Increase on the

Debit SideDecrease on the

Credit Side

JUST LIKEASSET ACCOUNTS

+

EXAMPLE

MARY ADAMS PAID HER ASSISTANT $750 IN WAGES

STEPS #1 & #2


WAGES EXPENSE CASH

DR. CR. DR. CR.

EXPENSE ASSET

STEP #3


CASH

DR. CR.

WAGES EXPENSE

DR. CR.+ +


CASH

DR. CR.

WAGES EXPENSE

DR. CR.

INCREASED DECREASED

$750 $750+ +

DEBITS = CREDITS

DR.

CASH

$750

CR.

WAGES EXPENSE

DR. CR.

$750+ +

Whichever side you increase is the

NORMAL balance!

By: Kyle Umbarger & Carl Phelps

Expansion of Basic Equation

Assets Liabilities EquityRetained Earnings

Revenue DividendsExpenses

Dr Cr

+ -

Dr Cr

+ -Dr Cr

+ -

Dr Cr

- +Dr Cr

- +Dr Cr

- +

Dr Cr

- +

Accounting Education Drives = Large Rich EnterprisesAssets Expenses Dividends Liabilities Revenues Equity

ReviewReview

What is the normal balance for the What is the normal balance for the following accounts?following accounts?

CashCash

Service RevenueService Revenue

Accounts ReceivableAccounts Receivable

Accounts PayableAccounts Payable

Common StockCommon Stock

Salaries ExpenseSalaries Expense

DebitDebit

CreditCredit

DebitDebit

CreditCredit

CreditCredit

DebitDebit

ReviewReview

What is the normal balance for the What is the normal balance for the following accounts?following accounts?

DividendsDividends

Unearned RevenusUnearned Revenus

Taxes PayableTaxes Payable

BuildingBuilding

Prepaid InsurancePrepaid Insurance

Rent ExpenseRent Expense

DebitDebit

DebitDebit

CreditCredit

CreditCredit

DebitDebit

DebitDebit

Date Debit Credit

GENERAL JOURNAL

Account Titles and Explanations

Oct. 1 Cash 10,000 Common Stock 10,000 Issued common stock for cash

Cash 5,000 Notes Payable 5,000 Issued 3-month, 12% note payable for cash

Office Equipment 5,000 Cash 5,000 Purchased office equipment for cash

Oct. 1 Cash 10,000 Common Stock 10,000

Issued common stock for cash

GENERAL JOURNAL

BalanceAcct 1010 Account CASH

Date

Acct 3010 Account COMMON STOCKDate Balance

Debit

Debit

Credit

Credit

Debit

Debit

Credit

Credit

ref

ref

Posting Entries

Oct. 1 Cash 10,000 Common Stock 10,000

Issued common stock for cash

GENERAL JOURNAL

Posting Entries

BalanceAcct 1010 Account CASH

Date

Acct 3010 Account COMMON STOCKDate Balance

Debit

Debit

Credit

Credit

Debit

Debit

Credit

Credit

ref

ref

Oct 1

Oct 1

gj 1

gj 1

10,000 10,000

10,00010,000

TRIAL BALANCE

List of all accounts with a balanceIncluding their balancesTotal all debits and all creditsProve debits equal creditsUsed as an aid in preparing financial

statements

Jessica Jane’s Campus DeliveryTrial BalanceJune 30, 20--

Account Title Debit Balance Credit Balance

HEADING should include:Name of the CompanyTitle of Document “Trial Balance”Date of the Trial Balance


Account Title Debit Balance Credit BalanceCashAccounts ReceivableSuppliesPrepaid InsuranceDelivery Equipment

370 00650 00

200 003600 00

80 00

All Asset accountslisted first



Accounts Payable

370 00650 00

200 003600 00

1800 00

80 00

Liabilities areshown next



Accounts PayableJessica Jane, CapitalJessica Jane, Drawing

370 00650 00

200 003600 00

1800 002000 00

80 00

150 00

Now the Owner’s Equity Accounts



Accounts PayableJessica Jane, CapitalJessica Jane, DrawingDelivery Fees

370 00650 00

200 003600 00

1800 002000 00

80 00

150 002150 00

Then the Revenue Account



Accounts PayableJessica Jane, CapitalJessica Jane, DrawingDelivery FeesWages ExpenseRent ExpenseTelephone Expense

370 00650 00

200 003600 00

1800 002000 00

80 00

150 002150 00

650 00200 0050 00

Finally, the Expenses



Accounts PayableJessica Jane, CapitalJessica Jane, DrawingDelivery FeesWages ExpenseRent ExpenseTelephone Expense

370 00650 00

200 003600 00

1800 002000 00

80 00

150 002150 00

650 00200 0050 00

5950 00 5950 00

It Balances!!!Debits = Credits

Chapter 3 Sample Transactions

(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.

(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 perform major consulting work. The work will start January 1st of next year.

Chapter 3 Sample Transactions

(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 June 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.

Documents

CHAPTER THREE THE ACCOUNTING INFORMATION SYSTEM. An individual accounting record of increases and decreases to any specific Asset Liability Stockholders’