Accounting 2000 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 fprocessing TRANSACTIONS data and 2 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 Page 1 of 7 Accounting 2000 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 ASSETS LIABILITIES STOCKHOLDERS EQUITY Retained Earnings Supplies Equipment Prepaid Insurance Notes Payable Accounts Payable Unearned Revenue Revenue Expenses Dividends Common Stock 10 000 Cash 1 10 000 2 5 000 3 5 000 4 1 200 5 10 000 6 900 7 600 8 9 500 10 4 000 5 000 5 000 1 200 2 500 600 2 500 10 000 900 4 000 4 900 500 500 15 200 2 500 600 5 000 5 000 2 500 1 200 10 000 10 000 Page 2 of 7 Accounting 2000 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 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 in each transaction 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 7 Accounting 2000 Chapter 3 Class Notes Assets Debits should be GREATER than credits Liabilities Credits should be GREATER than debits The normal balance is on the INCREASED 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 7 Accounting 2000 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 General Journal Account Debit 10 000 Credit Date 1 Oct cash common stock 1 Oct cash notes payable 2 Oct equipment cash 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 7 Accounting 2000 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 Common Stock 10 000 Cash 10 000 The Trial Balance A list of accounts and their balances at a given time Purpose is to prove that debits EQUALS credits Illustration 3 34 Page 6 of 7 Accounting 2000 Chapter 3 Class Notes 1 a transaction is not JOURNALIZED 2 a correct journal entry is not POSTED 3 a journal entry is posted TWICE 4 UNCORRECT accounts are used in journalizing or posting or 5 offsetting ERRORS are made in recording the amount of a transaction Class Problems 1 E3 2 2 P3 4A 3 P3 6A Page 7 of 7