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Lecture 4

ACCT2220 Lecture 4: Chapter 3.docx

Course Code
ACCT 2220
Michele Bowring

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Chapter 3: the accounting information system
Accounting transactions:
Accounting information system: the system of collecting and processing transaction data and communicating financial
information to decision makers
Accounting info systems vary widely. Some factors that shape these systems are the type of business and its transactions,
the size of the company, the amount of data, and the information that management and others need.
An accounting information system begins with determining what relevant transaction data should be collected and
Not all events are recorded and reported as accounting transactions. Only those events cause changes in assets, liabilities
or shareholders equity should be recorded
Accounting transaction: occurs when assets, liabilities or shareholders’ equity items change as a result of an economic
Analyzing transactions:
oTwo or more items could be affected when analyzing the accounting equation
oInvestments by shareholders are not recorded as revenue but as common shares of the corporation
Summary of transactions:
oThe transactions illustrates that:
1. Each transaction must be analyzed for its effect on 3 primary components of the accounting equation (Assets,
liabilities and shareholders’ equity)
2. The two sides of the equation must always be equal
The account:
Account: is an individual accounting record of increases and decreases in a specific asset, liability or shareholders’ equity
An account consists of 3 parts:
1. The title of the account
2. A left or debit side
3. A right or credit side
Because the alignment of these parts of an account resembles the letter T, it is referred to as a T account
The actual account form used in practice looks different from the above T account
Debits and credits:
oDebit: means left abbreviated as “DR.”
oCredit: means right abbreviated as “CR.”

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oDebits and credit are merely directional signals used in the recording process to describe where entries are made in the
oDebiting: the act of entry on the left side of the account
oCrediting: the act of making an entry on the right side of the account
oWhen the totals of the two sides are compared, an account will have a debit balance if the total of the debit amounts
recorded exceeds the total of the credit amounts recorded
oAn account will have a credit balance if the credit amounts exceed the debits
oWhen we record transactions, 2 or more accounts are affected and their balances change. We use debits and credits to
explain the effects of these changes
oAt all times, the debit movement in the accounts must equal the credit movement in the accounts
oThe equality of debits and credits is the basis for the double-entry accounting system in which the dual (2 sided) effect
of each transaction is recorded in appropriate accounts
oThe system provides a logical method for recording transactions and ensuring that amounts are recorded accurately
oIf every transaction is recorded with equal debits and credits then the sum of all the debits to the accounts must equal
the sum of all the credits
oAssets (debits/ credits) = Liabilities +(credits/debits) shareholders’ equity
oBeginning on the left hand side of the accounting equation (asset accounts), we can see that increases in asset accounts
are recorded by debits.
oThe converse is also true: decreases in asset accounts are recorded by credits. If we cross to the right-hand side of the
equation, it must follow that increases and decreases in liabilities and shareholders’ equity have to be recorded
opposite from increases and decreases in assets. Thus, increases in liabilities and shareholders’ equity are recorded by
credits and decreases by debits
oWE will supply debit and credit procedures to T accounts for each component of the accounting equation- assets,
liabilities and shareholders’ equity
oAssets and liabilities:
Asset accounts normally show debit (left-side) balances: increases in assets must be entered on the left or debit
side of a T account while decreases in assets must be entered on the right or credit side.
Debits to a specific asset account should exceed credits to that account, which results in a normal debit balance
Knowing an account’s normal balance may help when you are tying to identify errors.
Because assets are on the opposite side of the accounting equation from liabilities, increases and decreases in
assets are recorded opposite from increases and decreases in liabilities.
Consequently, liability accounts normally show credit (right-side) balances. Increases in liability accounts must
be entered on the right or credit side of a T account while decreases in liability accounts must be entered on the
left/ debit side
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