Financial Accounting: Tools for Business Decision Making

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Financial AccountingTools for Business Decision
Making
Kimmel, Weygandt, Kieso
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Chapter 3
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Chapter 3The AccountingInformation 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.

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Chapter 3The AccountingInformation 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.

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The Accounting Information System

• The system of
• collecting and processing transaction data and
• communicating financial information to interested
  parties.

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The Accounting Information System
Analyze the effect of business transactions on
the basic accounting equation
Assets Liabilities Stockholders Equity
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The Accounting Information System
The Accounting Equation must always balance.
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The Accounting Information System

• Accounting transactions are events that must be
  recorded in the Financial Statements.

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The Accounting Information System

• Transactions are events that must be recorded in
  the Financial Statements
• Transaction Analysis determines the impact on the
  Balance Sheet.

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Page 99 in book
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Lets Practice Transaction Analysis
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a) On July 1, Cash of 95,000 was invested in the
business in exchange for 95,000 worth of common
stock.
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a) On July 1, Cash of 95,000 was invested in the
business in exchange for 95,000 worth of common
stock.
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b) Peoples, Inc., acquired land by paying 60,000
cash to Nashtown, Inc
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b) Peoples, Inc., acquired land by paying 60,000
cash to Nashtown, Inc
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c) Peoples, Inc., purchased an estimated three
month supply of office supplies on account. The
company will pay 600 for these supplies later.
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c) Peoples, Inc., purchased an estimated three
month supply of office supplies on account. The
company will pay 600 for these supplies later.
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d) Peoples, Inc., received 800 for services
performed.
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d) Peoples, Inc., received 800 for services
performed.
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e) Peoples, Inc., performed services for 2,000.
The company will be paid later in the month.
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e) Peoples, Inc., performed services for 2,000.
The company will be paid later in the month.
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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.
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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
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g) Peoples, Inc., purchased office equipment for
6,000. The Company signed a 2-year note with
ACME Office Equipment Company.
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g) Peoples, Inc., purchased office equipment for
6,000. The Company signed a 2-year note with
ACME Office Equipment Company.
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h) Peoples, Inc., paid 1,800 for a 1-year
license to operate as a business. The license
expires June 30th of next year.
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h) Peoples, Inc., paid 1,800 for a 1-year
license to operate as a business. The license
expires June 30th of next year.
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i) Peoples, Inc., collected 800 of the money
owed from (e).
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i) Peoples, Inc., collected 800 of the money
owed from (e).
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j) Peoples, Inc., paid 400 of the amount it owed
from (c).
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j) Peoples, Inc., paid 400 of the amount it owed
from (c).
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k) An employee has worked and earned 600 which
was paid during the month.
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k) An employee has worked and earned 600 which
was paid during the month.
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l) Peoples, Inc., received a 5,000 retainer to
handle a tax audit that the company will start
next month.
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l) Peoples, Inc., received a 5,000 retainer to
handle a tax audit that the company will start
next month.
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m) Peoples, Inc., paid 500 for rent during the
month.
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m) Peoples, Inc., paid 500 for rent during the
month.
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n) Dividends of 700 were paid during the month.
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n) Dividends of 700 were paid during the month.
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107,200
107,200
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Account...
an individual accounting record of increases and
decreases in a specific Asset, Liability, or
Stockholders 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
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Total the Entries to Each Side
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Tabular Summary
Account Form
Balancing an Account
Page 105 in book
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Pages 106-107 in book
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Pages 107-108 in book
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Total the Entries to Each Side
If the greater sum is on the left, the account
has a Debit Balance
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Total the Entries to Each Side
If the greater sum is on the right, the account
has a Credit Balance
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Whichever side you increase is the normal side!
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Debits
Increase assets and expenses Decrease
liabilities, common stock and revenues
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Credits
Decrease assets and expenses Increase
liabilities, common stock and revenues
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Pages 109-110 in book
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The Recording Process

• Analyze each transaction
• Enter information in a journal
• Transfer the information to the appropriate
  accounts

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The Journal...
is an accounting record where the transactions
are recorded in chronological order.
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Journals
Types of Journals

• Cash receipts
• Cash disbursements
• Sales
• Purchases
• General

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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.

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Page 111 in book
Date
Debit Credit
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)



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The General Ledger

• the entire group of accounts maintained by a
  company
• contains all the asset, liability, and
  stockholders equity accounts

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The General Ledger
Page 113 in book
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The Ledger
The entries from the journal are posted to the
ledger,usually in summary form, except for the
general journal.
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Posting
Transferring information from the journals to the
general ledger accounts
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Posting Entries
Balance
debit
credit
debit
credit
ref
Account COMMON STOCK
Acct 3010
Date
Balance
debit
credit
debit
credit
ref
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Posting Entries
Balance
debit
credit
debit
credit
ref
gj 1
Oct 1
10,000
10,000
Account COMMON STOCK
Acct 3010
Date
Balance
debit
credit
debit
credit
ref
Oct 1
gj 1
10,000
10,000
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Posting Entries
Balance
debit
credit
debit
credit
ref
gj 1
Oct 1
10,000
10,000
Account COMMON STOCK
Acct 3010
Date
Balance
debit
credit
debit
credit
ref
Oct 1
gj 1
10,000
10,000
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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 statements.
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Sierra Corporation Trial Balance October 31, 1998
Page 122 in book
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
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