Chapter 3: The Accounting Information System

Where is the first place every transaction is recorded? In the basic accounting equation In the journal In the ledger In the respective accounts

In the journal

The journal makes three significant contributions to the recording process:

1. It discloses in one place the complete effect of a transaction. 2. It provides a chronological record of transactions. 3. It helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared.

A collection of a company's entire group of accounts is called a

ledger

4. Oct. 2 Received $1,200 cash in advance from customer. Classify cash activities as operating, investing, or financing.

operating

5. Oct. 3 Received $10,000 cash for services performed. Classify cash activities as operating, investing, or financing.

operating

6. Oct. 3 Paid $900 cash for October rent. Classify cash activities as operating, investing, or financing.

operating

7. Oct. 4 Paid $600 cash for one-year insurance policy. Classify cash activities as operating, investing, or financing.

operating

Accounting Information System (AIS)

The system of collecting and processing transaction data and communicating financial information to decision-makers Factors that shape an accounting information system include the nature of the company's business, the types of transactions, the size of the company, the volume of data, and the information demands of management and others.

Define debits and credits and explain how they are used to record business transactions.

The terms debit and credit are synonymous with left and right. Assets, dividends, and expenses are increased by debits and decreased by credits. Liabilities, common stock, retained earnings, and revenues are increased by credits and decreased by debits.

Analyze the effect of business transactions on the basic accounting equation.

Each business transaction must have a dual effect on the accounting equation. For example, if an individual asset is increased, there must be a corresponding (a) decrease in another asset, or (b) increase in a specific liability, or (c) increase in stockholders' equity.

What incentives might employees have had to overstate the value of these investment securities on the company's financial statements?

One reason that they may have been reluctant to record the losses is out of fear that the company's shareholders and clients would panic if they saw the magnitude of the losses. However, personal self-interest might have been equally to blame—the bonuses of the traders were tied to the value of the investment securities

Classify cash activities as operating, investing, or financing.

Operating activities are the types of activities the company performs to generate profits. Investing activities relate to the purchase or sale of long-lived assets used in operating the business, or to the purchase or sale of investment securities (stock and bonds of other companies). Financing activities are borrowing money, issuing shares of stock, and paying dividends.

Trial Balance

a list of accounts and their balances at a given time A company usually prepares a trial balance at the end of an accounting period. The accounts are listed in the order in which they appear in the ledger. Debit balances are listed in the left column and credit balances in the right column. The totals of the two columns must be equal.

an individual accounting record of increases and decreases in a specific asset, liability, stockholders' equity, revenue, or expense item is a(n)

account

Investing Activities

activities include the purchase or sale of long-lived assets used in operating the business, or the purchase or sale of investment securities (stocks and bonds of companies other than Sierra 3. Oct. 2 Purchased equipment for $5,000 cash.

account

an individual accounting record of increases and decreases in a specific asset, liability, stockholders' equity, revenue, or expense item

Chart of Accounts (COA)

an ordered listing of accounts that comprise a company's general ledger

3.14: The first step in transferring journal entry amounts to ledger accounts involves A entering in the appropriate ledger account the date, journal page, and credit amount shown in the journal B writing in the journal the account number to which the credit amount was posted C writing in the journal the account number to which the debit amount was posted D entering in the appropriate ledger account the date, journal page, and debit/credit amount shown in the journal

entering in the appropriate ledger account the date, journal page, and debit/credit amount shown in the journal

ledger

entire group of accounts maintained by a company is referred to collectively The ledger provides the balance in each of the accounts as well as keeps track of changes in these balances.

1. Oct. 1 Issued stock for $10,000 cash. Classify cash activities as operating, investing, or financing.

financing

2. Oct. 1 Issued note payable for $5,000 cash. Classify cash activities as operating, investing, or financing.

financing

8. Oct. 20 Paid $500 cash dividend to stockholders. Classify cash activities as operating, investing, or financing.

financing

activities involve stockholders' equity and paying dividends.

financing

During 2014, Gibson Company assets decreased $50,000 and its liabilities decreased $90,000. Its stockholders' equity decreased $40,000. increased $140,000. decreased $140,000. increased $40,000.

increased $40,000.

3. Oct. 2 Purchased equipment for $5,000 cash. Classify cash activities as operating, investing, or financing.

investing

9. Oct. 26 Paid $4,000 cash salaries. Classify cash activities as operating, investing, or financing.

operating

Accumulating the effects of journalized transactions in the individual accounts is the main purpose of the procedure called

posting

Financing Activities

primary types of financing activities are borrowing money, issuing shares of stock, and paying dividends. 1. Oct. 1 Issued stock for $10,000 cash. 2. Oct. 1 Issued note payable for $5,000 cash. 8. Oct. 20 Paid $500 cash dividend to stockholders.

Transaction analysis

process of identifying the specific effects of economic events on the accounting equation

Factors that shape an accounting information system include

the nature of the company's business, the types of transactions, the size of the company, the volume of data, and the information demands of management and others.

Accounts are listed on the trial balance in the order that they appear in the ledger. chronological order. alphabetical order. the order in which they are posted.

the order that they appear in the ledger.

Operating Activities

the types of activities the company performs to generate profits. Sierra Corporation is an outdoor guide business, so its operating activities involve providing guide services. 4. Oct. 2 Received $1,200 cash in advance from customer. 5. Oct. 3 Received $10,000 cash for services performed. 6. Oct. 3 Paid $900 cash for October rent. 7. Oct. 4 Paid $600 cash for one-year insurance policy. 9. Oct. 26 Paid $4,000 cash salaries.

General ledger accounts and balances are listed in a

trial balance

Which of these statements about a journal is false? (a) It contains only revenue and expense accounts. (b) It provides a chronological record of transactions. (c) It helps to locate errors because the debit and credit amounts for each entry can be readily compared. (d) It discloses in one place the complete effect of a transaction.

(a) It contains only revenue and expense accounts.

During 2014, Gibson Company assets decreased $50,000 and its liabilities decreased $90,000. Its stockholders' equity therefore: (a) increased $40,000. (b) decreased $140,000. (c) decreased $40,000. (d) increased $140,000.

(a) increased $40,000. -50,000 = -90,000 + (40,000 )

A trial balance: (a) is a list of accounts with their balances at a given time. (b) proves that proper account titles were used. (c) will not balance if a correct journal entry is posted twice. (d) proves that all transactions have been recorded.

(a) is a list of accounts with their balances at a given time.

Payment of a dividend decreases cash; decreases retained earnings. decreases cash; increases stockholders' equity. increases retained earnings; increases expenses. increases expenses; decreases cash.

decreases cash; decreases retained earnings.

A trial balance: (a) is the same under IFRS and GAAP. (b) proves that transactions are recorded correctly. (c) proves that all transactions have been recorded. (d) will not balance if a correct journal entry is posted twice.

(a) is the same under IFRS and GAAP.

Which statement about an account is true? (a) In its simplest form, an account consists of two parts. (b) An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders' equity items. (c) There are separate accounts for specific assets and liabilities but only one account for stockholders' equity items. (d) The left side of an account is the credit or decrease side.

(b) An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders' equity items.

Which of the following events is not recorded in the accounting records? (a) Equipment is purchased on account. (b) An employee is terminated. (c) A cash investment is made into the business. (d) Company pays dividend to stockholders.

(b) An employee is terminated.

1. Which statement is correct regarding IFRS? (a) IFRS reverses the rules of debits and credits; that is, debits are on the right and credits are on the left. (b) IFRS uses the same process for recording transactions as GAAP. (c) The chart of accounts under IFRS is different because revenues follow assets. (d) None of the above statements are correct.

(b) IFRS uses the same process for recording transactions as GAAP.

Which is not part of the recording process? (a) Analyzing transactions. (b) Preparing a trial balance. (c) Entering transactions in a journal. (d) Posting transactions.

(b) Preparing a trial balance

Genesis Company buys a $900 machine on credit. This transaction will affect the: (a) income statement only. (b) balance sheet only. (c) income statement and retained earnings statement only. (d) income statement, retained earnings statement, and balance sheet.

(b) balance sheet only.

The effects on the basic accounting equation of performing services for cash are to: (a) increase assets and decrease stockholders' equity. (b) increase assets and increase stockholders' equity. (c) increase assets and increase liabilities. (d) increase liabilities and increase stockholders' equity.

(b) increase assets and increase stockholders' equity.

One difference between IFRS and GAAP is that: (a) GAAP uses accrual-accounting concepts and IFRS uses primarily the cash basis of accounting. (b) IFRS uses a different posting process than GAAP. (c) IFRS uses more fair value measurements than GAAP. (d) the limitations of a trial balance are different between IFRS and GAAP.

(c) IFRS uses more fair value measurements than GAAP.

A trial balance will not balance if: (a) a correct journal entry is posted twice. (b) the purchase of supplies on account is debited to Supplies and credited to Cash. (c) a $100 cash dividend is debited to Dividends for $1,000 and credited to Cash for $100. (d) a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash for $45.

(c) a $100 cash dividend is debited to Dividends for $1,000 and credited to Cash for $100.

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.

(c) increase assets and decrease liabilities.

A ledger: (a) contains only asset and liability accounts. (b) should show accounts in alphabetical order. (c) is a collection of the entire group of accounts maintained by a company. (d) provides a chronological record of transactions.

(c) is a collection of the entire group of accounts maintained by a company.

Which accounts normally have debit balances? (a) Assets, expenses, and revenues. (b) Assets, expenses, and retained earnings. (c) Assets, liabilities, and dividends. (d) Assets, dividends, and expenses.

(d) Assets, dividends, and expenses.

The general policy for using proper currency signs (dollar, yen, pound, etc.) is the same for both IFRS and this textbook. This policy is as follows: (a) Currency signs only appear in ledgers and journal entries. (b) Currency signs are only shown in the trial balance. (c) Currency signs are shown for all compound journal entries. (d) Currency signs are shown in trial balances and financial statements.

(d) Currency signs are shown in trial balances and financial statements.

Paying an account payable with cash affects the components of the accounting equation in the following way: (a) Decreases stockholders' equity and decreases liabilities. (b) Increases assets and decreases liabilities. (c) Decreases assets and increases stockholders' equity. (d) Decreases assets and decreases liabilities.

(d) Decreases assets and decreases liabilities.

A revenue account: (a) is increased by debits. (b) is decreased by credits. (c) has a normal balance of a debit. (d) is increased by credits.

(d) is increased by credits.

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.

(d) transfers journal entries to ledger accounts.

Note the following features of the journal entries. (4)

1. The date of the transaction is entered in the Date column. 2. The account to be debited is entered first at the left. The account to be credited is then entered on the next line, indented under the line above. The indentation differentiates debits from credits and decreases the possibility of switching the debit and credit amounts. 3. The amounts for the debits are recorded in the Debit (left) column, and the amounts for the credits are recorded in the Credit (right) column. 4. A brief explanation of the transaction is given.

Q 3.32: The purchase of office equipment for $22,000 would appear in what section of the statement of cash flows? A investing activities B in the notes to the statement of cash flows C operating activities D financing activities

A investing activities

In order for these companies to prepare and issue financial statements, their accounting equations (debits and credits) must have been in balance at year-end. How could these errors or misstatements have occurred?

A company's accounting equation (its books) can be in balance yet its financial statements have errors or misstatements because of the following: entire transactions were not recorded; transactions were recorded at wrong amounts; transactions were recorded in the wrong accounts; transactions were recorded in the wrong accounting period. Audits of financial statements uncover some, but obviously not all, errors or misstatements.

general ledger contains

A general ledger contains all the assets, liabilities, stockholders' equity, revenue, and expense accounts, as shown in Illustration 3-19. Whenever we use the term ledger in this textbook without additional specification, it will mean the general ledger.

Explain the purposes of a trial balance.

A trial balance is a list of accounts and their balances at a given time. The primary purpose of the trial balance is to prove the mathematical equality of debits and credits after posting. A trial balance also uncovers errors in journalizing and posting and is useful in preparing financial statements.

An individual accounting record of increases and decreases in specific asset, liability, and stockholders' equity items is

Account

An account is a part of the financial information system and is described by all except which one of the following? An account consists of three parts. An account is a source document. An account has a title. An account has a debit and credit side.

An account is a source document.

Explain what an account is and how it helps in the recording process.

An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders' equity items.

Error vs Irregularity

An error is the result of an unintentional mistake. It is neither ethical nor unethical. An irregularity is an intentional misstatement, which is viewed as unethical.

Account

An individual accounting record of increases and decreases in specific asset, liability, and stockholders' equity items is

Which of the following is the correct sequence of events? None of the answer choices provides the correct sequence Analyze a transaction; post it to the ledger; record it in the journal Record a transaction in the journal; analyze the transaction; post it to the ledger Analyze a transaction; record it in the journal; post it to the ledger

Analyze a transaction; record it in the journal; post it to the ledger

the order of presentation in the trial balance is:

Assets Liabilities Stockholders' equity Revenues Expenses

Q 3.79: Which of the following would probably be listed first in the chart of accounts? A : Notes Payable B : Accumulated Depreciation—Buildings C : Dividends D : Insurance Expense

B : Accumulated Depreciation—Buildings

Q 3.29: Which of the following are considered financing activities? Select all that apply. A : purchase of long-term investments B : issuing shares of stock C : purchase of equipment D : borrowing money

B issuing shares of stock D borrowing money

Which of the following is not one of the primary types of the financing activities in the statement of cash flows? Paying dividends Buying equipment Borrowing money Issuing shares of stock

Buying equipment

3.26: The first step in the recording process is to A : prepare financial statements. B : file the source documents. C : analyze the transactions to see how they affect accounts. D : post the transactions to the ledger.

C analyze the transactions to see how they affect accounts.

Q 3.16: What is a list of accounts and their balances at a given time called? A journal B income statement C trial balance D posting

C trial balance

Q 3.68: Keeping in one place all information about changes in specific accounting balances is the purpose of the A revenue account. B journal. C balance sheet. D ledger.

D ledger

Explain what posting is and how it helps in the recording process.

Posting is the procedure of transferring journal entries to the ledger accounts. This phase of the recording process accumulates the effects of journalized transactions in the individual accounts.

Identify the basic steps in the recording process.

The basic steps in the recording process are (a) analyze each transaction in terms of its effect on the accounts, (b) enter the transaction information in a journal, and (c) transfer the journal information to the appropriate accounts in the ledger.

Explain what a ledger is and how it helps in the recording process.

The entire group of accounts maintained by a company is referred to collectively as a ledger. The ledger provides the balance in each of the accounts as well as keeps track of changes in these balances.

Explain what a journal is and how it helps in the recording process.

The initial accounting record of a transaction is entered in a journal before the data are entered in the accounts. A journal (a) discloses in one place the complete effect of a transaction, (b) provides a chronological record of transactions, and (c) prevents or locates errors because the debit and credit amounts for each entry can be readily compared.