3-1 THE ACCOUNTING INFORMATION SYSTEM 3-2 Financial Accounting, Seventh Edition Learning Learning Objectives Objectives After studying this chapter, you should be able to: 3-3 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 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 Classify cash activities as operating, investing, or financing Preview of Chapter Financial Accounting Seventh Edition Kimmel Weygandt Kieso 3-4 The The Accounting Accounting Information Information System System Accounting Information System System of ► collecting and ► processing transaction data and ► communicating financial information to decision makers Most businesses use computerized accounting (EDP) systems 3-5 LO Analyze the effect of business transactions on the basic accounting equation Accounting Accounting Transactions Transactions Transactions are economic events that require recording in the financial statements 3-6 Not all activities represent transactions Assets, liabilities, or stockholders’ equity items change as a result of some economic event Dual effect on the accounting equation LO Analyze the effect of business transactions on the basic accounting equation Accounting Accounting Transactions Transactions Question: Are the following events recorded in the accounting records? Event Criterion Purchase computer Discuss guided trip options with potential customer Illustration 3-1 Pay rent Is the financial position (assets, liabilities, or stockholders’ equity) of the company changed? Record/ Don’t Record 3-7 LO Analyze the effect of business transactions on the basic accounting equation Accounting Accounting Transactions Transactions Analyzing Transactions The process of identifying the specific effects of economic events on the accounting equation Basic Accounting Equation Assets 3-8 = Liabilities + Stockholders’ Equity LO Analyze the effect of business transactions on the basic accounting equation Accounting Accounting Transactions Transactions Analyzing Transactions Illustration 3-2 Expanded accounting equation 3-9 LO Analyze the effect of business transactions on the basic accounting equation Accounting Accounting Transactions Transactions Event (1) On October 1, cash of $10,000 is invested in Sierra Corporation by investors in exchange for $10,000 of common stock 3-10 +10,000 +10,000 LO Analyze the effect of business transactions on the basic accounting equation Selected transactions from the journal of Faital Inc during its first month of operations are presented below Post these transactions to T-accounts 3-62 LO Explain what posting is and how it helps in the recording process The The Trial Trial Balance Balance Trial Balance 3-63 A list of accounts and their balances at a given time Accounts are listed in the order in which they appear in the ledger Purpose is to prove that debits equal credits May also uncover errors in journalizing and posting Useful in the preparation of financial statements LO Explain the purposes of a trial balance The The Trial Trial Balance Balance Illustration 3-34 Equal 3-64 LO The The Trial Trial Balance Balance Limitations of a Trial Balance The trial balance may balance even when a transaction is not journalized, a correct journal entry is not posted, a journal entry is posted twice, incorrect accounts are used in journalizing or posting, or Ethics Note An error is the result of an unintentional mistake It is neither ethical nor unethical An irregularity is an intentional misstatement, which is viewed as unethical offsetting errors are made in recording the amount of a transaction 3-65 LO Explain the purposes of a trial balance The The Trial Trial Balance Balance Review Question A trial balance will not balance if: a 3-66 a correct journal entry is posted twice b the purchase of supplies on account is debited to Supplies and credited to Cash c a $100 cash dividends is debited to the Dividends account for $1,000 and credited to Cash for $100 d a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash for $45 LO Explain the purposes of a trial balance The Cash account and the related cash transactions indicate why cash changed during October To make this information useful for analysis it is summarized in a statement of cash flows The statement of cash flows classifies each transaction as an operating activity, an investing activity, or a financing activity Sierra Corporation’s: 3-67 Operating activities involve providing guide services Investing activities include the purchase or sale of long-lived assets used in operating the business, or the purchase or sale of investment securities Financing activities are borrowing money, issuing shares of stock, and paying dividends LO Classify cash activities as operating, investing, or financing Key Points 3-68 Transaction analysis is the same under IFRS and GAAP however different standards sometimes impact how transactions are recorded European companies rely less on historical cost and more on fair value than U.S companies The double-entry system is the basis of accounting systems worldwide Both the IASB and FASB go beyond the basic definitions provided in this textbook for the key elements of financial statements, that is, assets, liabilities, equity, revenues, and expenses LO 10 Compare the procedures for the recording process under GAAP and IFRS Key Points 3-69 A trial balance under IFRS follows the same format as shown in the textbook As shown in the textbook, dollars signs are typically used only in the trial balance and the financial statements The same practice is followed under IFRS, using the currency of the country in which the reporting company is headquartered LO 10 Compare the procedures for the recording process under GAAP and IFRS Key Points 3-70 In deciding whether the United States should adopt IFRS, some of the issues the SEC said should be considered are: ► Whether IFRS is sufficiently developed and consistent in application ► Whether the IASB is sufficiently independent ► Whether IFRS is established for the benefit of investors LO 10 Compare the procedures for the recording process under GAAP and IFRS Key Points 3-71 Some of the issues the SEC said should be considered are: ► The issues involved in educating investors about IFRS ► The impact of a switch to IFRS on U.S laws and regulations ► The impact on companies including changes to their accounting systems, contractual arrangements, corporate governance, and litigation ► The issues involved in educating accountants, so they can prepare statements under IFRS LO 10 Compare the procedures for the recording process under GAAP and IFRS Looking to the Future The basic recording process shown in this textbook is followed by companies across the globe It is unlikely to change in the future The definitional structure of assets, liabilities, equity, revenues, and expenses may change over time as the IASB and FASB evaluate their overall conceptual framework for establishing accounting standards 3-72 LO 10 Compare the procedures for the recording process under GAAP and IFRS IFRS Practice Which statement is correct regarding IFRS? a) IFRS reverses the rules of debits and credits, that is, debits are on the right and credits are on the left b) IFRS uses the same process for recording transactions as GAAP c) The chart of accounts under IFRS is different because revenues follow assets d) None of the above statements are correct 3-73 LO 10 Compare the procedures for the recording process under GAAP and IFRS IFRS Practice A trial balance: a) is the same under IFRS and GAAP b) proves that transactions are recorded correctly c) proves that all transactions have been recorded d) will not balance if a correct journal entry is posted twice 3-74 LO 10 Compare the procedures for the recording process under GAAP and IFRS IFRS Practice One difference between IFRS and GAAP is that: a) GAAP uses accrual-accounting concepts and IFRS uses primarily the cash basis of accounting b) IFRS uses a different posting process than GAAP c) IFRS uses more fair value measurements than GAAP d) the limitations of a trial balance are different between IFRS and GAAP 3-75 LO 10 Compare the procedures for the recording process under GAAP and IFRS Copyright Copyright “Copyright © 2013 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.” 3-76 [...]... +5,000 LO 1 Analyze the effect of business transactions on the basic accounting equation Accounting Accounting Transactions Transactions Event (4) On October 2, Sierra received a $1,200 cash advance from R Knox, a client 1 +10,000 2 3 +5,000 -5,000 4 +1,200 3-13 +10,000 +5,000 +5,000 +1,200 LO 1 Analyze the effect of business transactions on the basic accounting equation Accounting Accounting Transactions... received $10,000 in cash from Copa Company for guide services performed 1 +10,000 2 3 +5,000 -5,000 4 +1,200 5 +10,000 3-14 +10,000 +5,000 +5,000 +1,200 +10,000 LO 1 Analyze the effect of business transactions on the basic accounting equation Accounting Accounting Transactions Transactions Event (6) On October 3, Sierra Corporation paid its office rent for the month of October in cash, $900 1 +10,000... Analyze the effect of business transactions on the basic accounting equation Accounting Accounting Transactions Transactions Event (7) On October 4, Sierra paid $600 for a one-year insurance policy that will expire next year on September 30 1 +10,000 2 3 +5,000 -5,000 4 +1,200 5 +10,000 6 -900 7 -600 3-16 +10,000 +5,000 +5,000 +1,200 +10,000 -900 +600 LO 1 Analyze the effect of business transactions on the. .. basic accounting equation Accounting Accounting Transactions Transactions Event (8) On October 5, Sierra purchased an estimated three months of supplies on account from Aero Supply for $2,500 1 +10,000 2 3 +5,000 -5,000 4 +1,200 5 +10,000 6 -900 7 -600 8 3-17 +10,000 +5,000 +5,000 +1,200 +10,000 -900 +600 +2,500 +2,500 LO 1 Analyze the effect of business transactions on the basic accounting equation Accounting. .. explain they are used to record business transactions 3-35 Steps Steps in in the the Recording Recording Process Process Illustration 3-17 Analyze each transaction Enter transaction in a journal Transfer journal information to ledger accounts Source documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction 3-36 LO 4 Identify the basic steps in the recording... Accounting Accounting Transactions Transactions Event (9) On October 9, Sierra hired four new employees to begin work on October 15 1 +10,000 2 3 +5,000 -5,000 4 +1,200 5 +10,000 6 -900 7 -600 8 +10,000 +5,000 +5,000 +1,200 +10,000 -900 +600 +2,500 +2,500 An accounting transaction has not occurred 3-18 LO 1 Analyze the effect of business transactions on the basic accounting equation Accounting Accounting... Analyze the effect of business transactions on the basic accounting equation Accounting Accounting Transactions Transactions Event (11) Employees have worked two weeks, earning $4,000 in salaries, which were paid on October 26 1 +10,000 2 3 +5,000 -5,000 4 +1,200 5 +10,000 6 -900 7 -600 8 10 500 11 3-20 +10,000 +5,000 +5,000 +1,200 +10,000 -900 +600 +2,500 -500 -4,000 +2,500 -4,000 3-21 The The Account... Account can be illustrated in a T-Account form 3-22 LO 2 Explain what an account is and how it helps in the recording process The The Account Account Debit and Credit Procedures Double-entry system 3-23 Each transaction must affect two or more accounts to keep the basic accounting equation in balance Recording done by debiting at least one account and crediting another DEBITS must equal CREDITS LO... explain they are used to record business transactions Procedures Procedures for for Stockholders’ Stockholders’ Equity Equity 3-27 Investments by stockholders and revenues increase stockholders’ equity (credit) Dividends and expenses decrease stockholder’s equity (debit) LO 3 Define debits and credits and explain they are used to record business transactions Procedures Procedures for for Revenue... Revenue Revenue and and Expense Expense 3-28 The purpose of earning revenues is to benefit the stockholders The effect of debits and credits on revenue accounts is the same as their effect on stockholders’ equity Expenses have the opposite effect: expenses decrease stockholders’ equity LO 3 Define debits and credits and explain they are used to record business transactions Stockholders’ Stockholders’