Financial Accounting:
Tools for Business Decision Making
Kimmel, Weygandt, Kieso, Trenholm
1
Chapter 3
The Accounting
Information System
After studying Chapter 3, you should be
able to:
1. Analyse 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.
2
Chapter 3
The Accounting
Information System
After studying Chapter 3, you should be
able to:
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.
3
The Accounting
Information System
The system of
Collecting and processing transaction
data
Communicating financial information to
interested parties
4
Accounting Equation
Assets = Liabilities + Shareholders’
Equity
The accounting equation must
always balance
5
Accounting Transactions
Transactions are
events that must be
recorded in the
financial statements
Transaction
analysis determines
impact on the
accounting equation
6
Illustration 3-1
Is the financial position (assets, liabilities, and
shareholders’ equity) of the company changed?
Account
An individual accounting record of
increases and decreases in a specific
Asset, Liability, or Shareholders’
Equity item
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Account
Three parts
1) the title of the account
2) a left or debit side
3) a right or credit side
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The T-Account
TITLE
DEBIT CREDIT
10
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
11
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
12
Whichever side
you increase is
the normal side!
Normal Balances
Shares
14
Normal Balances
15
Expanded Accounting
Equation
Illustration 3-15
16
Recording Process
Analyse each
transaction
Enter each
transaction in a
journal
Transfer journal
information to
17
ledger accounts
Journal
Accounting record where the
transactions are recorded in
chronological order
Types of journals
Cash receipts
Cash disbursements
Sales
Purchases
General
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Journals
Journals aid in 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
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GENERAL JOURNAL
Date
Account Titles and Explanations
2001
Oct. 1 Cash
Common Shares
(Invested cash in business)
1 Cash
Notes Payable
(Issued 3-month, 12% note payable for cash)
2 Office Equipment
Cash
(Purchased office equipment for cash)
Illustration 3-17
Debit Credit
10,000
10,000
5,000
5,000
5,000
5,000
General Ledger
Entire group of accounts maintained
by a company
Contains all the asset, liability, and
shareholders’ equity accounts
21
Illustration 3-18
The General Ledger
22
Posting
Transferring information from the
journals to the general ledger
accounts
23
Posting Entries
GENERAL JOURNAL
Account Titles and Explanations
2001
Oct. 1 Cash
Common Shares
10,000
10,000
Account CASH
Date
Oct 1
ref
gj 1
debit credit
10,000
Account COMMON SHARES
Date
ref
debit
Oct 1
gj 1
Acct 1010
Balance
debit
credit
10,000
Acct 3010
Balance
credit debit
credit
10,000
10,000
Trial Balance
List of all the accounts and their
balances at a given time
Serves to prove the mathematical
equality of debits and credits after
posting
Aids in the preparation of
financial statements
25
SIERRA CORPORATION
Trial Balance
Illustration 3-33
October 31, 2001
Cash
Advertising Supplies
Prepaid Insurance
Office Equipment
Notes Payable
Accounts Payable
Unearned Service Revenue
Common Shares
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
Decision Checkpoints
Has an accounting transaction
occurred?
How do you determine that debits
equal credits?
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COPYRIGHT
Copyright © 2001 John Wiley & Sons Canada, Ltd. All
rights reserved. Reproduction or translation of this
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these programs or from the use of the information
contained herein.
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