Chapter 3: The Accounting Information SystemChapter 3: The Accounting Information System- Accounting Information System: system of collecting and processing transaction data and communicating financial information to decision makers. - Accounting Transactions: are economic events that require recording in the financial statements. o Not all activities represent transactions. o Assets, liabilities, or stockholders’ equity items change as a result of some economic event. o Dual effect on the accounting equation. - Analyzing Transactions: the process of identifying the specific effects of economic events on the accounting equation. o Basic Accounting Equation: Assets = Liabilities + Stockholders’ Equity.o- The Account: record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. o Debit = “Left”o Credit = “Right”- Double-Entry System: o Each transaction must affect two or more accounts to keep the basic accounting equation in balance. o Recording done by debiting at least one account and crediting another. o DEBITS must equal CREDITS.- If Debits are greater than Credits, the account will have a debit balance. - If Credits are greater than Debits, the account will have a credit balance.2- Procedures for Assets and Liabilities:o Assets: debits should exceed credits. o Liabilities: credits should exceed debits. o The normal balance is the side where increases in the account are recorded. - Procedures for Stockholders’ Equity: o Investments by stockholders and revenues increase stockholders’ equity (credit).o Dividends and expenses decrease stockholder’s equity (debit).o The normal balance is whatever makes the account bigger. - Procedures for Revenue and Expense: o The purpose of earning revenues is to benefit the stockholders.o The effect of debits and credits on the revenue accounts is the same as their effect on stockholders’ equity. o Expenses have the opposite effect: expenses decrease stockholders’ equity. - Stockholders’ Equity Relationships: 3o- The Journal: o Book of original entry. o Transactions recorded in chronological order. o Contributions to the recording process:1. Discloses the complete effects of a transaction.2. Provides a chronological record of transactions.43. Helps to prevent or locate errors because the debit and credit amounts can be easily compared. - Journalizing: entering transaction data in the journal. - Ledger: is comprised of the entire group of accounts maintained by a company.- Chart of Accounts: listing of accounts used by a company to record transactions. - Posting: the process of transferring journal entry amounts to ledger accounts. - Trial Balance: o A list of accounts and their balances at a given time.o Accounts are listed in the order in which they appear in the ledger. o Purpose is to prove that debits equal credits. o May also uncover errors in journalizing and posting.o Useful in the preparation of financial statements. - Limitations of a Trial Balance: 1. A transaction is not journalized. 2. A correct journal entry is not posted. 3. A journal entry is posted twice.54. Incorrect accounts are used in journalizing or posting.5. Offsetting errors are made in recording the amount of a transaction.