Accounting 2001 Chapter 3 Class Notes Identify the basic steps in the recording process 1 Analyze the effect of business transactions on the basic accounting equation 2 Explain what an account is and how it helps in the recording process 3 Define debits and credits and how they are used to record transactions 4 5 Explain what a journal is and how it helps in the recording process 6 Explain what a ledger is and how it helps in the recording process 7 Explain what posting is and how it helps in the recording process 8 Explain the purposes of a trial balance The Accounting Information System is a system of 1 Collecting 2 Processing transaction data and 3 Communicating financial information to decision makers Transactions are economic events that require recording in the financial statements Assets liabilities or stockholders equity items change as a result of some economic event There is a dual effect on the accounting equation External Internal V Net Income Page 1 of 8 Accounting 2001 Chapter 3 Class Notes Accounting Transactions 1 On October 1 cash of 10 000 is invested in Sierra Corporation by investors in exchange for 10 000 of common stock 2 On October 1 Sierra borrowed 5 000 from Castle Bank by signing a 3 month 12 5 000 note payable 3 On October 2 Sierra purchased equipment by paying 5 000 cash to Superior Equipment Sales Co 4 On October 2 Sierra received a 1 200 cash advance from R Knox a client 5 On October 3 Sierra received 10 000 in cash from Copa Company for guide services performed 6 On October 3 Sierra Corporation paid its office rent for the month of October in cash 900 7 On October 4 Sierra paid 600 for a one year insurance policy that will expire next year on September 30 8 On October 5 Sierra purchased supplies on account from Aero Supply for 2 500 9 On October 20 Sierra paid a 500 dividend 10 Employees have worked two weeks earning 4 000 in salaries which were paid on October 26 1 2 3 4 5 6 7 8 9 10 10 000 5 000 5 000 1 200 10 000 900 600 500 4000 15 200 plus 5 000 5 000 10 000 1 200 600 2 500 2 500 2 500 pl 600 pl 5 000 pl 5 000 pl 2500 plu 1 200 pl 10 000 pl 10000 mi 23 300 10 000 900 4000 4900 mi 500 500 Page 2 of 8 Accounting 2001 Chapter 3 Class Notes Record of increases and decreases in a specific asset liability equity revenue or expense item The Account Debit left Credit right system Double entry Each transaction must affect at least two accounts to keep the basic accounting equation in balance Recording done by debit at least one account and credit another DEBITS must equal CREDITS Debit and Credit Procedures 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 Page 3 of 8 Accounting 2001 Chapter 3 Class Notes Assets Debits should be greater than credits normal balance debits Liabilities Credits should be greater than debits normal balance credits The normal balance is on the increase side Steps in the Recording Process Source documents such as a sales slip a check a bill or a cash register tape provide evidence of the transaction The Journal Book of original entry Transactions recorded in chronological order Contributions to the recording process 1 Discloses the complete effects of a transaction 2 Provides a chronological record of transactions Helps to prevent or locate errors because the debit and credit amounts can be easily compared Page 4 of 8 Accounting 2001 Chapter 3 Class Notes Journalizing Example Presented below is information related to Sierra Corporation 10 1 Sierra issued common stock in exchange for 10 000 cash 10 1 Sierra borrowed 5 000 by signing a note 10 2 Sierra purchased office equipment for 5 000 3 Steps 1 Which accounts 2 What type of accounts 3 Increases or decreases Date 1 Oct Cash common stock 1 Oct Cash notes payable 2 Oct Equipment Cash General Journal Account Debit Credit 10 000 5 000 5 000 10 000 5 000 5 000 Additional Steps in the Recording Process The ledger contains the entire group of accounts maintained by a company The listing of accounts used by a company to record transactions is called the chart of accounts Page 5 of 8 Accounting 2001 Chapter 3 Class Notes The process of transferring amounts from the journal to the ledger accounts is called posting A ledger is also commonly shown in T format Cash Common Stock The Trial Balance A list of accounts and their balances at a given time Page 6 of 8 Accounting 2001 Chapter 3 Class Notes Purpose is to prove that debits credits Illustration 3 34 Limitations of a Trial Balance The trial balance may balance even when 1 a transaction is not recorded 2 a correct journal entry is not posted 3 a journal entry is posted twice 4 Incorrect accounts are used in journalizing or posting or 5 offsetting errors are made in recording the amount of a transaction International Financial Reporting Standards IFRS Transaction analysis is the same under IFRS and GAAP however different standards sometimes impact how transactions are recorded European companies rely less on and more on than U S companies The double entry system is the basis of accounting systems worldwide Page 7 of 8 Accounting 2001 Chapter 3 Class Notes A trial balance under IFRS follows the same format as shown in the textbook Class Problems 1 E3 2 2 P3 4A 3 P3 6A Page 8 of 8