CHAPTER 7

THE ACCOUNTING
INFORMATION SYSTEM

THE FOUR STEPS IN THE

ACCOUNTING CYCLE
1 Analyze transactions
2 Record the effect of transactions in a
journal entry
3 Summarize the effects of
transactions
a Post journal entries to the ledger
b Prepare a trial balance
2

THE FOUR STEPS IN THE

ACCOUNTING CYCLE
4 Prepare reports
a Make adjusting entries
b Prepare financial statements
c Close the books

TRANSACTION ANALYSIS
USING DEBITS AND CREDITS
Recall the accounting equation:

Assets = Liabilities + Owners

Owners Equity

DEBITS AND CREDITS FOR

BALANCE SHEET ACCOUNTS
All increases in
All increases in
assets are
liabilities and
represented as
equities are
debits (left side of
represented as
the account)
credits (right side
of the account)

DEBITS AND CREDITS FOR

REVENUES, EXPENSES,
AND DIVIDENDS
Revenues increase with credits
Expenses increase with debits
The dividends account is
increased with a debit

DEBITS AND CREDITS

FOR ALL ACCOUNTS
Assets
Dr.

Cr.

= Liabilities +
Dr.
-

Owners
Owners
Equity
Dr.
-

Cr.
+

PaidPaid-in
Capital
Dr.
-

Cr.
+

Retained
Earnings
Dr.
-

Cr.
+

Expenses
Dr.
+

Cr.
+

Revenues
Dr.
-

Cr.
-

Cr.
+

Dividends
Dr.
+

Cr.
-

RECORDING THE EFFECTS

OF TRANSACTIONS
The journal is a
book in which all
transactions are
recorded in
chronological
order

Each journal
entry has its debit
amounts equal to
its credit amounts
to ensure that the
accounting
equation remains
in balance
8

RECORDING THE EFFECTS

OF TRANSACTIONS
A journal entry involves a threestep process:
1 Identify which accounts are involved
2 For each account, determine if it is
increased or decreased
3 For each account, determine by how
much it changed
9

RECORDING THE EFFECTS

OF TRANSACTIONS
The account debited is always
listed first, followed by the account
credited
Also, the credit entry is indented
Some selected transactions from
Veda Landscape Solutions are
presented next as examples
10

Transaction 1
Investment of $700,000 cash into
the business for 10,000 shares of
stock.
Cash
?

700,000
700,000
11

Transaction 2
Borrowed $300,000 cash from the
bank.
Cash
300,000
Bank Loan Payable
300,000

12

Transaction 3
Purchased land costing $50,000 and
buildings costing $400,000. Paid
$100,000 in cash and signed a
mortgage for the balance.
Land
50,000
Buildings
400,000
Cash
Mortgage Payable

100,000
350,000
13

Transaction 4
Purchased equipment for $650,000
in cash.
Equipment
Cash

650,000
650,000

14

Transaction 7
Purchased inventory costing
$90,000 for $10,000 in cash and the
remaining $80,000 on account.
Inventory
90,000
Cash
Accounts Payable

10,000
80,000
15

Transaction 8
Paid $15,000 cash for an insurance
policy.
Prepaid Insurance
Cash

15,000
15,000

16

Transaction 10
Sold inventory costing $800,000 to
customers for $1,100,000. the
customers paid $200,000 in cash and
the remaining $900,000 was put on the
customers accounts.
Cash
200,000
Accounts Receivable 900,000
Sales
Cost of Goods Sold
Inventory

1,100,000

800,000

800,000
17

Transaction 11
Performed landscaping consulting
services and billed clients
$200,000 for these services.
Accounts Receivable 200,000
Consulting Revenue
200,000

18

Transaction 14
Collected $820,000 cash from
customers as payment on their
accounts.
Cash
820,000
Accounts Receivable
820,000

19

Transaction 15
Paid $1,200,000 in cash to
suppliers as payment on account.

Accounts Payable 1,200,000

Cash
1,200,000

20

Transaction 18
Paid cash of $150,000 for
advertising, utilities, and office
supplies.
Selling, General, and
Administrative Expense
Cash

150,000
150,000

21

Transaction 23
Paid cash dividends of $5,000.

Dividends
Cash

5,000
5,000
22