Copyright 2006 Pearson Education Canada Inc. 3-1

Copyright 2006 Pearson Education Canada Inc. 3-1

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Outline Accounting as an Information

System Business Transactions The Accounting Cycle Rules of Debit and Credit The Journal Transactional Analysis The General Journal: Illustration

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Accounting as an Information System

INPUT ---- PROCESS ---- OUTPUT

SOURCE ACCOUNTING INFORMATION

DOCUMENTS CYCLE TO

MANAGEMENT Business Transactions Financial Statements

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Business Transactions

Raw Material of the accounting process

Like crude oil or food supplies, transactions must be processed in order to get the end product

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The Accounting Cycle

Processing of the accounting raw material (business transactions) in order to get the final product-Information to Management in the form of Financial Statements

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The Accounting Cycle

The accounting cycle: first 3 steps Identification of Business Transactions Journalizing-recording the business

transactions in chronological order in a Journal

Posting to the General Ledger

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The Accounting Cycle

STEP ONEIDENTIFYING BUSINESS

TRANSACTIONS

STEP TWOJOURNALIZING

STEP THREEPOSTING

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Identifying Business Transactions: Step 1

Identification of Business Transactions

Values Received=Values Given

VR=VG Debits = Credits Dr= Cr

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Rules of Debits and Credits

DEBIT CREDIT

ASSETS INCREASE DECREASE

LIABILITIES DECREASE INCREASE

OWNERS’ EQUITY DECREASE INCREASE

REVENUE DECREASE INCREASE

EXPENSE INCREASE

DECREASE

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Journalizing: Step 2

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The Journal A book of original entry

Transactions are recorded in chronological order

Used to complete Step 2 of the Accounting Cycle

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The General Journal

Date Account Names Ref Dr Cr

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Recording Transactions in the General Journal – Step 2 of the Accounting Cycle

1. Mr. Carlton invests $30,000 in a new travel agency

2. The business borrows $50,000 at 8% APR

3. First month rent is paid, $1,000.

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Transactional Analysis

1. Value Received by the Travel Agency is $30,000 in Cash- Debit Cash; Value Given by the Travel Agency is ownership interest in the amount of $30,000- Credit M. Carlton, Capital

2. Value Received is $50,000 in Cash- Debit Cash; Value given is the promise to pay $50,000 in the future- Credit notes payable

3. Value Received is the use of the premises rented worth $1,000- Debit Rent Expense; Value Given is a payment of $1,000 in Cash- Credit Cash

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The General Journal: Illustration

Date Account Names Ref Dr. Cr.

Sep. 1 Cash 30,000- M.Carlton, Capital 30,000- Owner’s investment

Sep. 2 Cash 50,000- Notes Payable 50,000- Company borrows money at 12% APR

Sep. 3 Rent Expense 1,000- Cash 1,000- Rent is paid