Financial accounting tools for business decision making 9 KIeso ppt ch03

Analyze business transactions Journalize PostTrial Balance Adjusting Entries Adjusted Trial Balance Financial StatementsClosing Entries Post-Closing Trial Balance Most businesses use c

Financial Accounting: Tools for Business

Decision Making

Ninth Edition

Kimmel ● Weygandt ● Kieso

Chapter 3

The Accounting Information System

This slide deck contains animations Please disable animations if they COBY HARMONPrepared by

Chapter Outline

Learning Objectives

basic accounting equation

to record business transactions

Learning Objective 1

Analyse the Effect of Business

Transactions on the Basic Accounting

Equation

Using the Accounting Equation to

Analyze Transactions

• System of

decision-makers

Accounting Information System

Accounting information systems rely on a process

referred to as the accounting cycle

Analyze business

transactions Journalize PostTrial Balance Adjusting Entries

Adjusted Trial Balance Financial StatementsClosing Entries Post-Closing Trial Balance

Most businesses use computerized accounting systems.

Accounting Transactions

Transactions

• Are economic events that require recording in the

financial statements

• Not all activities require transactions

• Assets, liabilities, or stockholders’ equity items change

as a result of an economic event

• Have a dual effect on the accounting equation

Identify Accounting Transactions

Are the following events recorded in the accounting

Discuss guided trip options with potential

customer Pay rent

Is the financial position (assets, liabilities, or stockholders’

equity) of the company changed?

Analyzing Transactions

• The process of identifying the specific effects of

economic events on the accounting equation

Basic Accounting Equation

Assets = Liabilities + Stockholders’

Equity

Stockholders’

Equity

• Accounting equation must always balance

• Each transaction has a dual effect on the equation

• If an asset is increased, there must be a corresponding

 Increase in a specific liability, or

 Increase in stockholders’ equity

Accounting Equation Effects

Expanded Accounting Equation

Assets = Liabilities + Stockholder’s Equity

Common Stock +

Retained Earnings

Assets Liabilities Stockholders’ Equity

Event 1 On October 1, cash of $10,000 is invested in Sierra Corporation

by investors in exchange for $10,000 of common stock.

Analyzing Transactions (1 of 11)

Assets Liabilities Stockholders’ Equity

Event 2 On October 1, Sierra borrowed $5,000 from Castle Bank by

signing a 3-month, 12%, $5,000 note payable.

Assets Liabilities Stockholders’ Equity

Event 3 On October 2, Sierra purchased equipment by paying $5,000

cash to Superior Equipment Sales Co.

Assets Liabilities Stockholders’ Equity

Assets Liabilities Stockholders’ Equity

Event 5 On October 3, Sierra received $10,000 in cash from Copa

Company for guide services performed.

Assets Liabilities Stockholders’ Equity

Event 6 On October 3, Sierra Corporation paid its office rent for the

month of October in cash, $900.

Assets Liabilities Stockholders’ Equity

Event 7 On October 4, Sierra paid $600 for a one-year insurance policy

that will expire next year on September 30.

Analyzing Transactions (8 of 11)

Event 8 On October 5, Sierra purchased an estimated three months of

supplies on account from Aero Supply for $2,500.

Assets Liabilities Stockholders’ Equity

Assets Liabilities Stockholders’ Equity

Assets Liabilities Stockholders’ Equity

Event 11 Employees have worked two weeks, earning $4,000 in salaries,

which were paid on October 26.

Do It! 1: Transaction Analysis

A tabular analysis of the transactions for the month of August is shown

below Describe each transaction.

1 Company issued shares of stock for $25,000 cash.

2 Company purchased $7,000 of equipment on account.

3 Company received $8,000 cash in exchange for services performed.

4 Company paid $850 for this month’s rent.

Service Rev Rent Exp.

Learning Objective 2

Explain How Accounts, Debits, and

Credits Are Used to Record Business

Transactions

Accounts, Debits, and Credits

Debit and Credit Procedures

• Double-entry system

• Each transaction must affect two or more

accounts to keep the basic accounting equation in balance

credit

• DEBITS must equal CREDITS

Debit and Credit Procedures (1 of 2)

Debit and Credit Procedures (2 of 2)

If Credits are greater than Debits, the account will have a credit balance.

Transaction #3 8,000

Account Name Debit / Dr Credit / Cr

Procedures for Assets and Liabilities

• Asset accounts → Debits should exceed credits

• Liability accounts → Credits should exceed debits

HELPFUL HINT

The normal balance is the side where increases in the account are recorded.

Procedures for Stockholders’ Equity (1 of 3)

• Investments by stockholders

and revenues earned increase

stockholders’ equity accounts

as credits

Procedures for Stockholders’ Equity (2 of 3)

• Dividends and expenses incurred

decrease stockholder’s equity

with debits

Procedures for Stockholders’ Equity (3 of 3)

• Revenues increase stockholders’ equity

• Expenses decrease stockholders’ equity

same as their respective effects on stockholders’

equity

Investor Insight Chicago Cubs

Advertising Ballpark maintenance

Financial Statement Relationships

Debit/Credit Rules

Normal Balance Debit

Normal Balance Debit Normal Balance Normal Balance Credit Credit

Summary of Debit/Credit Rules (1 of 2)

Balance Sheet Income

Statement Asset = Liability

Summary of Debit/Credit Rules (2 of 2)

Relationship among the assets, liabilities and

Summary of Debit/Credit Rules (1 of 4)

Review Question

Debits:

a increase both assets and liabilities

b decrease both assets and liabilities

c increase assets and decrease liabilities

d decrease assets and increase liabilities

Summary of Debit/Credit Rules (2 of 4)

Review Question

Debits:

a increase both assets and liabilities

b decrease both assets and liabilities

c increase assets and decrease liabilities

d decrease assets and increase liabilities

Summary of Debit/Credit Rules (3 of 4)

Review Question

Accounts that normally have debit balances are:

a assets, expenses, and revenues

b assets, expenses, and equity

c assets, liabilities, and dividends

d assets, dividends, and expenses

Summary of Debit/Credit Rules (5 of 6)

Review Question

Accounts that normally have debit balances are:

a assets, expenses, and revenues

b assets, expenses, and equity

c assets, liabilities, and dividends

d assets, dividends, and expenses

Learning Objective 3

Indicate How a Journal is Used in the

Recording Process

TThe Recording Process (1 of 2)

Steps to record:

1 Analyze each transaction in terms of its effect on the

accounts

2 Enter the transaction information in a journal.

3 Transfer the journal information to the appropriate

accounts in the ledger

Analyze business transactions Journalize the

transaction Post to ledger accounts

The General Journal

• Transactions are recorded in chronological order in a

journal before they are transferred to the accounts

it

1 Discloses the complete effect of a transaction

2 Provides a chronological record of transactions

3 Helps to prevent or locate errors because the

debit and credit amounts can be readily compared

• The process of entering transaction data in the journal

Illustration: Presented below is information related to

Journalize Stock Issued for Cash

October 1, Sierra issued common stock in exchange for

$10,000 cash.

Assets = Liabilities + Stockholders’ Equity

Journalize Borrowing Cash with a Note

October 1, Sierra borrowed $5,000 by signing a note.

Assets = Liabilities + Stockholders’ Equity

Cash = Payable Notes +$5,000 = +$5,000

Journalize Purchase of Equipment

October 2, Sierra purchased equipment for $5,000.

Assets = Liabilities + Stockholders’ Equity Cash + Equipment =

Summary of Journal Entries

Notes Payable 5,000 (Issued 3-month, 12% note payable for

Do It! 3: Journal Entries (1 of 2)

The following events occurred during the first month of business

of Hair It Is Inc., Kate Browne’s beauty salon:

1 Issued common stock to shareholders in exchange for

$20,000 cash.

2 Purchased $4,800 of equipment on account (to be paid in 30

days).

3 Interviewed three people for the position of stylist.

The three activities are recorded as presented on the next slide

Do It! 3: Journal Entries (2 of 2)

1 Issued common stock in exchange for $20,000 cash.

3 Interviewed three people for the position of stylist.

No entry because no transaction occurred.

Learning Objective 4

Explain How a Ledger and Posting Help

in the Recording Process

The Accounting Cycle

Analyze business

transactions Journalize the transaction Post to ledger

Adjusted Trial Balance Financial StatementsClosing Entries Post-Closing Trial Balance

The Ledger

The ledger is comprised of the entire group of accounts maintained by a company

Chart of Accounts Accounts in Red are used in this chapter.

Accounts Receivable Retained Earnings

Interest Payable Rent Expense

Unearned Service Revenue Insurance Expense

Salaries and Wages Payable Interest Expense

Depreciation Expense

The Posting Process

Date Account Titles and Explanations Ref Debit Credit

(Issued stock for cash)

Post the amount of the debit

entry to the debit side of the

account being debited.

Post the amount of the credit entry to the credit side of the account being credited.

Posting (1 of 2)

Review Question

Posting:

a normally occurs before journalizing

b transfers ledger transaction data to the journal

c is an optional step in the recording process

d transfers journal entries to ledger accounts

Posting (1 of 2)

Review Question

Posting:

a normally occurs before journalizing

b transfers ledger transaction data to the journal

c is an optional step in the recording process

d transfers journal entries to ledger accounts

Recording Process Illustrated (1 of 12)

Steps in the Recording Process

1 Determine what type of account is involved

2 Determine what items increased or decreased and

by how much

3 Translate the increases and decreases into debits

and credits

Recording Process Illustrated (2 of 12)

Recording Process Illustrated (3 of 12)

Recording Process Illustrated (4 of 12)

Recording Process Illustrated (5 of 12)

Recording Process Illustrated (6 of 12)

Recording Process Illustrated (7 of 12)

Recording Process Illustrated (8 of 12)

Recording Process Illustrated (9 of 12)

Recording Process Illustrated (10 of 12)

Recording Process Illustrated (11 of 12)

Recording Process Illustrated (12 of 12)

Notes Payable 5,000 (Issued 3-month, 12% note payable for

3 Rent Expense 900

(Paid cash for October office rent)

Posting Summary

General

Ledger

Learning Objective 5

Prepare a Trial Balance

Prepare a Trial Balance

The Accounting Cycle

Analyze business

transactions Journalize the transaction Post Prepare a Trial

Adjusted Trial Balance Financial StatementsClosing Entries Post-Closing Trial Balance

Nature of a Trial Balance

• A list of accounts and their balances at a given time

in the ledger

• Assets, liabilities, stockholders’ equity, revenues, and expenses

• Purpose is to prove that debits equal credits

Trial Balance Sierra Corporation

Trial Balance October 31, 2022

Debit Credit

Cash $ 15,200 Supplies2,500 Prepaid Insurance 600 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 and Wages Expense 4,000 Rent Expense 900

Totals $ 28,700 $ 28,700

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

• offsetting errors are made in recording the amount

of a transaction

Do It! 5: Trial Balance (1 of 2)

The following accounts come from the ledger of SnowGo

Notes Payable (due in

3 months) 19,000 Utilities Expense 3,000 Prepaid Insurance 6,000

Prepare a trial balance in good form.

SnowGo Corporation

Trial Balance December 31, 2022

Learning Objective 6

Compare the Procedures for the

Recording Process under GAAP and

IFRS

• Transaction analysis is the same under IFRS and

GAAP

• Both the IASB and the FASB go beyond the basic

definitions provided in the textbook for the key

elements of financial statements, that is assets,

liabilities, equity, revenues, and expenses

• The implications of the expanded definitions are discussed

in more advanced accounting courses.

A Look at I F R S (1 of 3)

• Dollar signs are typically used only in the trial balance and the financial statements

• The same practice is followed under I FRS, using

the currency of the country where the reporting company is headquartered

• A trial balance under IFRS follows the same format as shown in the text

A Look at I F R S (2 of 3)

• IFRS relies less on historical cost and more on fair

value than do FASB standards

• Internal controls are a system of checks and balances

designed to prevent and detect fraud and errors

• Most public U.S companies have these systems in place.

• Many non-U.S companies have never completely

documented the controls nor had an independent auditor attest to their effectiveness.

A Look at I F R S (3 of 3)

Copyright © 2019 John Wiley & Sons, Inc.

All rights reserved Reproduction or translation of this work beyond that permitted in

Section 117 of the 1976 United States 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.