Kimmel, Weygandt, Kieso: Tools For Business Decision Making, 3rd Ed

Financial Accounting:
Tools for Business Decision Making, 3rd Ed.
Kimmel, Weygandt, Kieso
S
EL
1
Chapter 3
Chapter 3
The Accounting
Information System
After studying Chapter 3, you should be
able to:
 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.
3
Chapter 3
The Accounting
Information System
After studying Chapter 3, you should
be able to:
 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.
4
The Accounting
Information System
The system of:

•collecting and processing transaction
data and
•communicating financial information
to decision makers.
5
Accounting Transactions...
 are economic events that
must be recorded in the
financial statements
because they affect
 assets,
 liabilities
 and/or stockholders’
equity.
6
Transaction Analysis
determines the impact
of the tranaction on
the balance sheet.
7
Accounting Analysis...
analyze the effect of business

transactions on the basic accounting
equation:
Assets = Liabilities + Stockholders’ Equity
8
The Accounting Equation...
Must always balance.
9
Is the financial position (assets, liabilities, and
stockholders’ equity) of the company changed?
Let’s Practice
Assets = Liabilities Stockholders' Equity Type of Transaction
Accounts Accoiunts Notes Unearned Common Retained
Cash + Receivable + Supplies + License + Equipment + Land = Payable + Payable + Revenue Stock + Earnings
(a) 95,000 95,000
a) On July 1, Cash of $95,000 was invested in

the business in exchange for $95,000 worth of
common stock.
(a) 95,000 95,000
(b) (60,000) 60,000
b) Peoples, Inc., acquired land by paying

$60,000 cash to Nashtown, Inc.
(a) 95,000 95,000
(b) (60,000) 60,000
(c) 600 600
c) Peoples, Inc., purchased an estimated three

month supply of office supplies on account. The
company will pay $600 for these supplies later.
(a) 95,000 95,000
(b) (60,000) 60,000
(c) 600 600
(d) 800 800 Service Revenue
d) Peoples, Inc., received $800 for services

performed.
(a) 95,000 95,000
(b) (60,000) 60,000
(c) 600 600
(e) 2,000 2,000 Service Revenue
e) Peoples, Inc., performed services for $2,000.

The company will be paid later in the month.
(a) 95,000 95,000
(b) (60,000) 60,000
(c) 600 600
(f)
f) Peoples, Inc., received confirmation that a major

corporation has selected their corporation to
perform major consulting work. The work will
start January 1 of next year.
No Transaction
(a) 95,000 95,000
(b) (60,000) 60,000
(c) 600 600
(f)
(g) 6,000 6,000
g) Peoples, Inc., purchased office equipment for

$6,000. The Company signed a 2-year note with
ACME Office Equipment Company.
(a) 95,000 95,000
(b) (60,000) 60,000
(c) 600 600
(f)
(g) 6,000 6,000
(h) (1,800) 1,800
h) Peoples, Inc., paid $1,800 for a 1-year license

to operate as a business. The license expires
June 30th of next year.
(a) 95,000 95,000
(b) (60,000) 60,000
(c) 600 600
(f)
(g) 6,000 6,000
(h) (1,800) 1,800
(I) 800 (800)
i) Peoples, Inc., collected $800 of the money

owed from (e).
(a) 95,000 95,000
(b) (60,000) 60,000
(c) 600 600
(f)
(g) 6,000 6,000
(h) (1,800) 1,800
(I) 800 (800)
(j) (400) (400)
j)Peoples, Inc., paid $400 of the amount it owed

from (c).
(a) 95,000 95,000
(b) (60,000) 60,000
(c) 600 600
(f)
(g) 6,000 6,000
(h) (1,800) 1,800
(I) 800 (800)
(j) (400) (400)
(k) (600) (600) Salaries Expense
k) An employee has worked and earned $600

which was paid during the month.
(a) 95,000 95,000
(b) (60,000) 60,000
(c) 600 600
(f)
(g) 6,000 6,000
(h) (1,800) 1,800
(I) 800 (800)
(j) (400) (400)
(l) 5,000 5,000
l) Peoples, Inc., received a $5,000 retainer to

handle a tax audit that the company will start
next month.
(a) 95,000 95,000
(b) (60,000) 60,000
(c) 600 600
(f)
(g) 6,000 6,000
(h) (1,800) 1,800
(I) 800 (800)
(j) (400) (400)
(l) 5,000 5,000
(m) (500) (500) Rent Expense
m) Peoples, Inc., paid $500 for rent during the

month.
(a) 95,000 95,000
(b) (60,000) 60,000
(c) 600 600
(f)
(g) 6,000 6,000
(h) (1,800) 1,800
(I) 800 (800)
(j) (400) (400)
(l) 5,000 5,000
(n) (700) (700) Dividends
n) Dividends of $700 were paid during the

month.
(a) 95,000 95,000
(b) (60,000) 60,000
(c) 600 600
(f)
(g) 6,000 6,000
(h) (1,800) 1,800
(I) 800 (800)
(j) (400) (400)
(l) 5,000 5,000
(n) (700) (700) Dividends
Total 37,600 1,200 600 1,800 6,000 60,000 200 6,000 5,000 95,000 1,000
107,200 107,200
This is a tabular summary.

Account...
an individual accounting record of
increases and decreases in a
specific Asset, Liability, or
Stockholders’ Equity item.
27
Chart of Accounts...
Is a list of a company’s accounts.

ASSETS
Cash
Accounts Receivable
Advertising Supplies
Prepaid Insurance
Office Equipment
Accumulated Depreciation -
Office Equipment
28
Account
Three parts :
1) the Title of the account
2) a left or Debit side
3) a right or Credit side
29
The T Account
TITLE
DEBIT CREDIT
30
Total the Entries to
Each Side
TITLE
Debit Credit
Total Debits Total Credits
31
Tabular Summary Account Form
Balancing an Account
Illustration 3-6
Normal Balances
Illustration 3-8 Illustration 3-10
NEW ART 33
Normal Balances
Illustration 3-11
Illustration 3-13
NEW ART 34
Illustration 3-14
Normal Balances
NEW ART 35
Each Side
TITLE
Debit Credit
If the greater sum is on the left,

the account has a Debit Balance.
36
Each Side
TITLE
Debit Credit
If the greater sum is on the right,

the account has a Credit Balance.
37
Whichever side you
increase is the
normal balance!
Debits
Increase assets
and expenses
Decrease
liabilities,
common stock
and revenues
39
Credits
Decrease assets
and expenses
Increase liabilities,
common stock and
revenues
40
Illustration 3-16
Analyze each Enter each Transfer journal

transaction transaction in a information to
journal ledger accounts41
The Recording Process
 Analyze each transaction
 Enter information in a journal
 Transfer the information to the
appropriate accounts
42
The Journal...
is an accounting record where the

transactions are recorded in chronological
order.
43
Journals
Types of Journals
 Cash receipts
 Cash disbursements
 Sales
 Purchases
 General
44
Journals
Journals aid 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. 45
GENERAL JOURNAL
Date Account Titles and Explanations Debit Credit

2004
Oct. 1 Cash
10,000 Common Stock
10,000 (Invested cash in business)
1 Cash 5,000
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)
The General Ledger
•the entire group of accounts maintained
by a company
•contains all the asset, liability, and
stockholders’ equity accounts
47
The General Ledger
48
The Ledger
The entries from the journal are posted

to the ledger,usually in summary form,
except for the general journal.
49
Posting
Transferring information from

the journals to the general ledger
accounts
50
Posting Entries
GENERAL JOURNAL
Account Titles and Explanations
2004
Oct. 1 Cash
10,000 Common Stock
10,000
Account CASH Acct 1010
Date re Balance
debit credit debit credit
f
Account COMMON STOCK Acct 3010

Dat
re Balance
e debit credit debit credit
f
Posting Entries
GENERAL JOURNAL
2004
Oct. 1 Cash
10,000 Common Stock
10,000
Date re Balance
gj debit credit debit credit
Oct 1 f 10,000 10,000
1
Dat
re Balance
gj
f
Oct 1 10,000 10,000
1
Posting Entries
GENERAL JOURNAL
2004
Oct. 1 Cash
10,000 Common Stock
10,000
Date re Balance
gj debit credit debit credit
Oct 1 f 10,000 10,000
1
Dat
re Balance
gj
f
Oct 1 10,000 10,000
1
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
54
statements.
Sierra Corporation
Trial Balance
October 31, 2004
Debit Credit
Cash $15,200
Advertising Supplies 2,500
Prepaid Insurance 600
Office Equipment 5,000
Notes Payable $ 5,000
Accounts Payable 2,500
Unearned Service Revenue 1,200
Common Stock 10,000
Dividends 500
Service Revenue 10,000
Salaries Expense 4,000
Rent Expense 900
$28,700 $28,700
Assets = Liabilities + Stockholders' Equity Type of Transaction
Accounts Prepaid Office Accounts Notes Unearned Common Retained

(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
Total
Chapter 3 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 1 st of next year.
(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.

COPYRIGHT
Copyright ©2004, John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility
for errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.

Kimmel, Weygandt, Kieso: Tools For Business Decision Making, 3rd Ed

Uploaded by

Copyright:

Available Formats

Kimmel, Weygandt, Kieso: Tools For Business Decision Making, 3rd Ed

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Kimmel, Weygandt, Kieso: Tools For Business Decision Making, 3rd Ed

Uploaded by

Copyright:

Available Formats

Financial Accounting:

Tools for Business Decision Making, 3rd Ed.

Kimmel, Weygandt, Kieso

The system of:

analyze the effect of business

Must always balance.

a) On July 1, Cash of $95,000 was invested in

b) Peoples, Inc., acquired land by paying

c) Peoples, Inc., purchased an estimated three

d) Peoples, Inc., received $800 for services

e) Peoples, Inc., performed services for $2,000.

f) Peoples, Inc., received confirmation that a major

g) Peoples, Inc., purchased office equipment for

h) Peoples, Inc., paid $1,800 for a 1-year license

i) Peoples, Inc., collected $800 of the money

j)Peoples, Inc., paid $400 of the amount it owed

k) An employee has worked and earned $600

l) Peoples, Inc., received a $5,000 retainer to

m) Peoples, Inc., paid $500 for rent during the

n) Dividends of $700 were paid during the

This is a tabular summary.

Is a list of a company’s accounts.

Illustration 3-8 Illustration 3-10

If the greater sum is on the left,

If the greater sum is on the right,

Analyze each Enter each Transfer journal

is an accounting record where the

Journals aid the recording process by:

Date Account Titles and Explanations Debit Credit

The entries from the journal are posted

Transferring information from

Account COMMON STOCK Acct 3010

Accounts Prepaid Office Accounts Notes Unearned Common Retained

(d) Peoples, Inc. received $800 for accounting services performed.

(n) Dividends of $700 were paid during the month.

You might also like