Chapter 02
The Accounting Information
System
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Roles of Financial Accounting
o Measure business activities of the company.
o Communicate those measurements to external
parties for decision-making purposes.
2-2
Part A
Measuring Business Activities
2-3
LO1 Identify the Basic Steps in
Measuring External Transactions
o Most business enterprises use a computerized
accounting system due to the sheer volume of
data they must process.
o Computerized data processing is fast, accurate,
and affordable.
o Knowledge of manual accounting information
system will provide an essential understanding of
the basic model that underlies the computerized
programs.
2-4
Classification of Business Activities
TRANSACTIONS
EXTERNAL
TRANSACTIONS
With a separate
economic entity
INTERNAL
TRANSACTIONS
Do not
include
With
in the
a separate
company
economic entity
2-5
Measuring External Transactions
2-6
LO2 Analyze the Impact of External
Transactions on the Accounting Equation
Each transaction will have a dual effect. If an
economic event increases one side of the
equation, then it also increases the other side
of the equation by the same amount.
Assets
(resources)
=
Liabilities
+
Stockholders' Equity
(claims to resources)
2-7
Ask yourself these questions…
1. “What is one account in the accounting equation
affected by the transaction? Does that account
increase or decrease?”
2. “What is a second account in the accounting
equation affected by the transaction? Did that
account increase or decrease?”
3. ”Do assets still equal liabilities plus stockholders’
equity?”
2-8
External Transactions of Eagle Golf
Academy
Transaction Date
Type of
External Transactions in January Activity
(1)
Jan. 1
Sell shares of common stock for
Financing
$25,000 to obtain the funds necessary
to start the business.
(2)
Jan. 1
Borrow $10,000 from the local bank
Financing
and sign a note promising to repay the
full amount of the debt in three years.
(3)
Jan. 1
Purchase equipment necessary for
giving golf training, $24,000.
Investing
(4)
Jan. 1
Pay one year of rent in advance,
$6,000 ($500 per month).
Operating
(5)
Jan. 6
Purchase supplies on account, $2,300. Operating
2-9
External Transactions of Eagle Golf
Academy (Contd.)
Transaction Date
(6)
(7)
(8)
(9)
(10)
Type of
External Transactions in January Activity
Jan. 12 Provide golf training to customers for
cash, $3,600.
Jan. 17 Provide golf training to customers on
account, $2,500.
Jan. 23 Receive cash in advance for 10 golf
training sessions to be given in the
future, $600.
Jan. 28 Pay salaries to employees, $2,800.
Jan. 30 Pay cash dividends of $200 to
shareholders.
Operating
Operating
Operating
Operating
Financing
2-10
Transaction(1): Issue Common Stock
To generate cash from external sources, Eagle
sells shares of common stock for $25,000.
Eagle Golf Academy
Investors
Stock certificate
It’s time to ask the three questions we asked earlier:
o
What is one account in the accounting equation affected by the
transaction? Does that account increase or decrease?
Answer: Cash. Cash is a resource owned by the company, which
makes it an asset. The company receives cash from you, so cash
and total assets increase by $25,000.
2-11
Transaction(1): Issue Common Stock
2. What is a second account in the accounting equation affected
by the transaction? Does that account increase or decrease?
Answer: Common stock. Common stock is a stockholders’
equity account. Issuing common stock to you in exchange for
your $25,000 increases the amount of common stock owned
by stockholders, so common stock and total stockholders’
equity both increase.
Assets
Cash
=
+$25,000 =
Liabilities
+
Stockholders' Equity
Common Stock
+$25,000
2-12
Transaction(1): Issue Common Stock
3. Do assets equal liabilities plus stockholders’ equity?
Answer: Yes.
Assets
Cash
=
+$25,000 =
Liabilities
+
Stockholders' Equity
Common Stock
+$25,000
Note: The accounting equation balances. If one side of the equation
increases, so does the other side. We can use this same series of
questions to understand the effect of any business transaction.
2-13
Transaction(2): Borrow from the Bank
Seeking cash from another external source, Eagle borrows
$10,000 from the bank and signs a note for it.
Eagle Golf Academy
Assets
Cash
=
Bank
Liabilities
+$10,000 = Notes Payable
+ Stockholders' Equity
+$10,000
2-14
Summary of Initial Financing
Transactions Eagle Gold Academy
The effects of the two financing activities we’ve analyzed
are summarized below
Assets
=
Liabilities
+
Stockholders' Equity
Financing Activities:
(1) Cash
(2) Cash
Total
+$25,000
+$10,000
Notes Payable
$35,000 =
Common Stock
+$10,000
$10,000 +
+$25,000
$25,000
2-15
Transaction(3): Purchase Equipment
Purchase equipment with cash, $24,000.
Eagle Golf Academy
Assets
Equipment
Cash
=
Supplier
Liabilities
+
Stockholders' Equity
+$24,000
-$24,000
2-16
Summary of Initial Financing and Investing
Transactions of Eagle Golf Academy
Assets
=
Liabilities
+
Stockholders' Equity
Financing Activities:
(1)
(2)
Cash
Cash
+$25,000
+$10,000 Notes Payable
$35,000 =
Common Stock
+$25,000
+$10,000
$10,000 +
$25,000
$10,000 +
$25,000
Investing Activities:
(3)
Equipment +$24,000
Cash
-$24,000
Total
$35,000 =
2-17
Transactions(4) and(5): Incur Costs for
Rent and Supplies
Pay one year of rent in advance, $6,000.
Rental space
Eagle Golf Academy
Assets
Prepaid Rent
Cash
Landlord
=
Liabilities
+
Stockholders' Equity
+$6,000
-$6,000
2-18
Transactions(4) and(5): Incur Costs for
Rent and Supplies
Purchase of supplies on account, $2,300.
Eagle Golf Academy
Assets
Supplies
Supplier
=
Liabilities
+$2,300 = Account Payable
+ Stockholders' Equity
+$2,300
2-19
Effects of transactions on the Expanded
Accounting Equation
Assets = Liabilities +
Stockholders' Equity
Common Stock +
Basic
Accounting
Equation
Retained Earnings
Expanded
Revenues − Expenses – Dividends
Net Income
2-20
Transations(6) and (7): Provide
Services to Customers
Providing service to customers for cash causes both assets
and stockholders’ equity to increase.
Training
Eagle Golf Academy
Assets
Cash
Customers
= Liabilities +
+$3,600 =
Stockholders' Equity
Common Stock +
Retained Earnings
+$3,600
Revenues − Expenses – Dividends
Service
Revenue
Revenue
Net
Income
Retained
Earnings
Stockholders’
Equity
2-21
Transations(6) and (7): Provide
Services to Customers
Similarly, providing service to customers on account causes
both assets and stockholders’ equity to increase
Training
Eagle Golf Academy
Assets
Accounts
Recievable
= Liabilities +
+$2,500 =
Customers
Stockholders' Equity
Common Stock +
Retained Earnings
+$2,500
Revenues − Expenses – Dividends
Service
Revenue
2-22
Transaction(8): Receive Cash in
Advance from Customer
Receive cash in advance from customers, $600.
Training
Eagle Golf Academy
Assets
Cash
= Liabilities +
+$600 = Unearned
Revenue
+$600
Customers
Stockholders' Equity
Common Stock +
Retained Earnings
Revenues − Expenses – Dividends
2-23
Transaction(9): Incur Cost for Salaries
Pay salaries to workers, $2,800
Labor
Eagle Golf Academy
Assets
Cash
Employee
= Liabilities +
-$2,800 =
Stockholders' Equity
Common Stock +
Retained Earnings
-$2,800
Revenues − Expenses – Dividends
Salaries
Expense
Expense
Net
Income
Retained
Earnings
Stockholders’
Equity
2-24
Transaction (10): Pay Dividends
Pay dividends to stockholders, $200
Reduced Claims to
Company’s Resources
Eagle Golf Academy
Assets
Cash
Investors
= Liabilities +
-$200 =
Stockholders' Equity
Common Stock +
Retained Earnings
-$200
Revenues − Expenses – Dividends
Dividends
Dividends
Retained
Earnings
Stockholders’
Equity
2-25
Summary of All Ten External
Transactions of Eagle Golf Academy
Assets
+
Liabilities
=
Stockholders’ Equity
Financing Activities:
(1) Cash 
(2) Cash 
Subtotal
$25,000
$10,000
$35,000
Notes Payable

Common Stock

$25,000
=
$10,000
$10,000
+
$25,000
=
$10,000
+
$25,000
Investing Activities:
(3) Equipment 
Cash 
Subtotal
Operating Activities:
(4) Prepaid Rent 
Cash 
(5) Supplies 
(6) Cash 
(7) Accounts Receivable 
(8) Cash 
(9) Cash 
$24,000
-$24,000
$35,000
Subtotal
$6,000
-$6,000
$2,300
$3,600
$2,500
$600
-$2,800
$41,200
Financing Activity:
(10) Cash 
Total
-$200
$41,000
Accounts Payable
Unearned Revenue
=
=


$2,300
Service Revenue
Service Revenue


Salaries Expense

$600
$12,900
$12,900
+
+
Dividends

$3,600
$2,500
-$2,800
$28,300
-$200
$28,100
2-26
PART B
Debits and Credits
2-27
LO3 Assess Whether the Impact of External
Transactions Results in a Debit or Credit to an
Account Balance
Debit and Credit Effects on Accounts in the Accounting
Equation
Assets
Debit Credit
= Liabilities + Stockholders' Equity
Debit Credit
Debit
Credit
2-28
Ask yourself these questions…
1. “Is there an increase or decrease in the first
account involved in the transaction? Should I
record that increase or decrease with a debit or a
credit?”
2. “Is there an increase or decrease in the second
account involved in the transaction? Should I
record that increase or decrease with a debit or a
credit?”
3. “Do total debits equal total credits?”
2-29
Recall Our Example
Eagle issues common stock for cash of $25,000 in
transaction (1).
Assets
Cash
+$25,000 =
Cash
Debit
25,000
=
Liabilities
+
Stockholders' Equity
Common
Stock
+$25,000
Common Stock
Credit
Debit
Credit
25,000
2-30
Recall Our Example
The bank borrowing of $10,000 in transaction (2) has the
following effects:
Assets
Cash
Liabilities
+$10,000 = Notes
Payable
Cash
Debit
10,000
=
+
Stockholders' Equity
+$10,000
Notes Payable
Credit
Debit
Credit
10,000
2-31
Debit and Credit Effects on Accounts in
the Expanded Accounting Equation
Assets
Debit
Credit
=
Liabilities
Debit
+
Stockholders' Equity
Credit
Debit
Common Stock
Debit
+ Retained Earnings
Credit
Revenues
Debit
Credit
Credit
Debit
-
Credit
Expenses
Debit
Net Income
Credit
-
Dividends
Debit
Credit
2-32
LO4 Record Transactions Using
Debits and Credits
A journal provides a chronological record of all transactions
affecting a firm.
January 1
Cash (+A ) .....................................................
Common Stock (+SE ) ...........................
(Issue common stock for cash)
January 1
Cash (+A ) .....................................................
Notes Payable (+L ) ...............................
(Borrow by signing long-term note)
Debit
Credit
25,000
25,000
Debit
Credit
10,000
10,000
2-33
LO5 Post Transactions to T-accounts in
the General Ledger
o The process of transferring the debit and credit
information from the journal to individual
accounts in the general ledger is called posting.
o A T-account is a simplified form of a general
ledger account with space at the top for the
account title and two sides for recording debits
and credits.
ACCOUNT TITLE
DEBIT
CREDIT
2-34
Post Transactions to T-accounts in the
General Ledger
Cash
Debit
Total
Debits
(Increases)
$39,200
Ending
Balance
(1)
(2)
Credit
25,000
10,000
(6)
(8)
(3)
(4)
24,000
6,000
(9)
(10)
2,800
200
3,600
600
Bal.
Total
Credits
(Decreases)
$33,000
6,200
2-35
Summary of the Measurement Process
2-36
Summary of External Transactions
Recorded for Eagle Golf Academy
January 1
Cash (+A ) .....................................................
Common Stock (+SE ) ...........................
(Issue common stock for cash)
Debit
Credit
25,000
25,000
January 1
Cash (+A ) .....................................................
Notes Payable (+L ) ...............................
(Borrow by signing long-term note)
10,000
10,000
January 1
Equipment (+A ) ............................................
Cash (-A ) ...............................................
(Purchase equipment for cash)
24,000
24,000
January 1
Prepaid Rent (+A ) .........................................
Cash (−A ) ................................................
(Prepay rent for cash)
6,000
6,000
January 6
Supplies (+A ) ................................................
Accounts Payable (+L ) .............................
(Purchase supplies on account)
2,300
2,300
2-37
Summary of External Transactions
Recorded for Eagle Golf Academy (Contd.)
January 12
Cash (+A ) .......................................................
Service Revenue (+R, +SE ) ....................
(Provide training to customers for cash)
Debit
Credit
3,600
3,600
January 17
Accounts Receivable (+A ) ..............................
Service Revenue (+R, +SE ) ....................
(Provide training to customers on account)
2,500
2,500
January 23
Cash (+A ) .......................................................
Unearned Revenue (+L ) ...........................
(Receive cash in advance from customers)
600
600
January 28
Salaries Expense (+E, −SE ) ..........................
Cash (−A ) .................................................
(Pay work ers’ salaries)
2,800
2,800
January 30
Dividends (+D, −SE ) ......................................
Cash (−A ) .................................................
(Pay cash dividends)
200
200
2-38
Posting External Transactions of Eagle Golf
Academy to General Ledger Accounts
Assets
=
Accounts
Cash
Receivable
(1) 25,000 (3) 24,000 (7)
2,500
(2) 10,000 (4)
6,000
(6)
3,600 (9)
2,800 Bal. 2,500
(8)
600 (10)
200
Bal. 6,200
(5)
Supplies
2,300
Prepaid
Rent
(4)
6,000
Bal.
2,300
Bal.
(3)
Equipment
24,000
Bal. 24,000
6,000
+
Stockholders' Equity
Accounts
Payable
(5)
2,300
Bal.
Common
Stock
(1) 25,000
2,300
0
Bal. 25,000
Unearned
Revenue
(8)
600
600
Service
Revenue
(6)
(7)
Bal.
Notes
Payable
(2) 10,000
(10)
Dividends
200
Bal. 10,000
Bal.
Bal.
Retained
Earnings
3,600 (9)
2,500
6,100 Bal.
0
Salaries
Expense
2,800
2,800
200
2-39
LO6 Prepare a Trial Balance
o
A trial balance is a list of all accounts and their balances
at a particular date, showing that total debits equal total
credits.
o
Another purpose of the trial balance is to assist us in
preparing adjusting entries (for internal transactions).
o
It is not a published financial statement to be used by
external parties, there is no required order for listing
accounts in the trial balance.
o
The trial balance is used for internal purposes only and
provides a check on the equality of the debits and credits.
2-40
Trial Balance of Eagle Golf Academy
Eagle Golf Academy
Trial Balance
January 31
Account Title
Debit
Cash
$6,200
Accounts Receivable
2,500
Supplies
2,300
Prepaid Rent
6,000
Equipment
24,000
Accounts Payable
Unearned Revenue
Notes Payable
Common Stock
Retained Earnings
Dividends
200
Service Revenue
Salaries Expense
2,800
Totals
$44,000
Credit
$2,300
600
10,000
25,000
0
6,100
$44,000
2-41
End of chapter 02
2-42