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AccountingBuilding Business Skills

Paul D. Kimmel

Chapter Two:The Accounting Information System

PowerPoint presentation by Christine LangridgeSwinburne University of Technology, Lilydale

©2003 John Wiley & Sons Australia, Ltd

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Learning Objectives

• Analyse the effect of accountingtransactions and events on the basicaccounting equation.

• Explain what an account is and how ithelps in the recording process.

• Define debits and credits and explainhow they are used to record accountingtransactions.

• Identify the basic steps in the recordingprocess.

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Learning Objectives

• Explain what a journal is and how ithelps in the recording process.

• Explain what a general ledger is andhow it helps in the recording process.

• Explain what posting is and how it helpsin the recording process.

• Explain the purposes of a trial balance.

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Accounting Information System

The system of:• collecting and processing transaction data

and• communicating financial information to

interested parties

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Accounting transactions & events

• transactions are events that must be recorded inthe Financial Statements

• analyse the effect of business transactionson the basic accounting equation

The Accounting Equation must always balance

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Transaction analysis

• Issue of shares for $10,000

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Transaction analysis

• Borrowings of $5,000 from ANZ Bank

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Transaction analysis

• Purchase of office equipment for $5,000cash

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Transaction analysis

• Receipt of $1,200 cash in advance fromcustomer

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Transaction analysis

• Renders services for $10,000 cash

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Transaction analysis

• Payment of rent $900

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Transaction analysis

• Payment of insurance $600

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Transaction analysis

• Purchases of supplies on credit

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Transaction analysis

• Payment of dividend $500

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Transaction analysis

• Payment of employee salaries $4,000

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Transaction analysis

Summary• Analyse transaction in terms of effect on

Assets, Liabilities & Owner’s Equity• Two sides of the equation must always be

equal (Assets = Liabilities + Owner’s Equity)• Note cause of change in Owner’s Equity

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The Account

an individual accounting record of increases and decreases in a specific Asset, Liability, or Stockholders’ Equity item

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Debit & Credit procedures

Double entry system:• each transaction affects at least two

accounts• total debits must equal total credits

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Debit & Credit procedures

Dr/Cr procedures for assets & liabilities

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Debit & Credit procedures

Dr/Cr procedures for Owner’s Equity:

• Share Capital

• Retained Profits

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Debit & Credit procedures(cont.)

• Dividends

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Debit & Credit procedures

Dr/Cr procedures for Revenue & Expenses:

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Shareholder’s Equity Relationships

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Accounting Equation expanded

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Recording Process Steps

• analyse transaction and effect onaccounts

• enter transaction information in a journal• transfer journal information to accounts

in the Ledger

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The Journal

• a chronological record of all transactions• complete effect of a transaction disclosed

in one place• helps prevent errors as debit & credit

amounts are easily compared

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The General Journal

Reference: Wong Pty. Ltd.: 1st three transactions

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Chart of Accounts

• a listing of all accounts and associatedaccount numbers for a business

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The General Ledger

• contains all Asset, Liability and Owner’sEquity accounts

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Posting

• transfer of information from Journals tothe General Ledger

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Posting transactions - steps

• In ledger account to be debited record:Date of transactionEnter name of ledger account to be credited(cross-reference)Enter amountTick account number in General Journal toshow the entry has been posted

Repeat process for credit side of the entry

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Recording Process Illustrated

• Shares issued for cash

Reference: Wong Pty. Ltd.

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Recording Process Illustrated(cont.)

Reference: Wong Pty. Ltd.

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Recording Process Illustrated

• Loan of $5,000 from ANZ Bank

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Recording Process Illustrated(cont.)

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Recording Process Illustrated

• Office equipment purchased for cash

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Recording Process Illustrated(cont.)

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Balancing the accounts

Example: Cash ledger

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The Trial Balance

• a list of all the accounts and theirbalances at a given time listed in order asthey appear in General Ledger

• proves the mathematical equality ofdebits and credits after posting

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Preparing a Trial Balance

• List account numbers, titles andbalances

• Total debit and credit columns• Verify equality of debit and credit

columns

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Trial Balance – Wong Pty. Ltd

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Trial Balance - limitations

Errors not detected in a Trial Balance• transaction not journalised• correct journal entry not posted• journal entry posted twice• incorrect accounts used in

journalising/posting• offsetting errors made in recording

amount