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Chapter 3

Chapter 3 Notes

Financial Accounting
Course Code
Liang Chen

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Chapter 3 / 01
Chen, Liang
MGTB05, Lec. 03
Chapter 3: The Accounting Information System
Accounting Transactions
- The system of collecting and processing transaction data and collecting financial
information to decision ± makers is known as the accounting information system.
- Depending on the size of the business, not every business may need a formal system
- The accounting information system begins with determining what transaction data should
be collected and processed. Not all events recorded are reported as accounting
transactions (e.g. hiring a new employee)
change as a result of some economic event
Analyzing Transactions
- For each accounting transaction, at least two accounts must be affected (double ± sided)
- Transaction 1:
1. On October 6, Sierra paid $600 for a one ± year insurance policy effective
October 1 that expires next year on September 30.
Prepaid Insurance (current asset account) 900
Cash (current asset account) 900
You record prepaid insurance in the asset account since this payment is for more
than the current month. Payments of expenses that will benefit more than one
accounting period are identified as prepaid expenses or prepayments
- Transaction 2:
1. On October 2, Sierra paid $900 cash for its office rent for the month of October.
Rent Expense (expense account) 900
Cash (current asset account) 900
Rent would be an expense since its payment is only good for the month
- Transaction 3:
1. On October 2, Sierra received a $1,200 cash advance from R. Knox, a client, for
advertising services that are expected to be completed before November 15.
Cash (current asset account) 1,200
Unearned Service Revenue (current liability) 1,200
Since you have not provided the service, this would be a liability rather than
revenue account
The Account
- An account is an individual accounting record of increases and decreases in a specific
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- An account has three parts: (1) the title of the account, (2) a left or debit side, and (3) a
right or credit side. Because the alignment of these parts of a account resemble the letter
T, it is referred to as a T account
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