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Chapter 3

Chapter 3 Lecture Notes

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University of Ottawa
Lamia Chourou

Chapter 3 ­ The Accounting Information System Learning Objectives • Analyze business transactions. • Journalize the transactions. • Post to the general ledger accounts. • Prepare a trial balance. The Recording Process 1. Analyze business transactions 2. Journalize the transactions 3. Post to general ledger accounts 4. Prepare a trial balance Transaction Analysis • Accounting transactions occur when assets, liabilities, or shareholders’ equity items change as a  result of some economic event • Transaction analysis: o First step in the recording process o Identify how the transaction is going to impact the accounting equation  The accounting equation must always balance: • Assets = Liabilities + Shareholders’ Equity o ^A ^L o ^A ^SE o ^A vA o vA vL o vA vSE o vA ^A Transaction Assets = Liabilities + Shareholders’ Equity 1. Issue of common  +Cash NE +Common shares shares for cash 2. Issue of note payable +Cash +Notes payable NE 3. Purchase of  ­Cash / +Equipment NE NE equipment in cash 4. Receipt of cash in  +Cash +Unearned revenue NE advance from customers 5. Payment of rent in  ­Cash NE +Rent expense cash (­Retained earnings) 6. Prepaid insurance in  ­Cash / +Prepaid  NE NE cash insurance 7. Purchase of supplies  +Supplies +Accounts payable NE on account 8. Service performed on  +Accounts receivable NE +Revenue account (+Retained earnings) 9. Payment of salaries ­Cash NE +Salaries expense (­Retained earnings) 10. Payment of  ­Cash NE +Dividends dividends (­Retained earnings) 11. Collection of  +Cash / ­Accounts  NE NE account receivable Exercise Shareholders’ Equity Retained Earnings Transaction Assets Liabilities Common  + ­ ­ Shares Revenues Expenses Dividends +$250 1. +$250 Accounts  NE NE NE NE Supplies payable +500 +500 2. Accounts  NE NE Service  NE NE receivable revenue ­300 +300 3. NE NE NE Operating  NE Cash expenses +5,000 4. +5,000 NE Common  NE NE NE Cash shares 5. ­400 NE NE NE NE +400 Cash Dividends +500 Cash / ­500  6. Accounts  NE NE NE NE NE Receivable ­250 ­250 7. Cash Accounts  NE NE NE NE payable ­100 Cash / +100 8. Prepaid  NE NE NE NE NE insurance +300 +300 9. Cash Unearned  NE NE NE NE revenue ­300 +300 10. NE Unearned  NE Service  NE NE revenue revenue Debits and Credits • An account is an individual accounting record of increases and decreases in a specific asset, liability,  or shareholders’ equity item • The normal balance of an account is always on its increase side The Journal • Second step in the recording process • The journal has a place to record the debit and credit effects on specific accounts for each transaction • Transactions are 
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