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CHAPTER 3
The Accounting Information System
Learning Objectives
1. Analyze the effect of business transactions on the basic accounting equation.
2. Explain how accounts, debits, and credits are used to record business transactions.
3. Indicate how a journal is used in the recording process.
4. Explain how a ledger and posting help in the recording process.
5. Prepare a trial balance.
Summary of Questions by Learning Objectives and Bloom’s Taxonomy
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Questions
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Brief Exercises
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Do It! Exercises
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Exercises
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Problems: Set A
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ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
1A
Analyze transactions and compute net income.
Moderate
40–50
2A
Analyze transactions and prepare financial statements.
Moderate
40–50
3A
Analyze transactions and prepare an income statement,
retained earnings statement, and balance sheet.
Moderate
50–60
4A
Journalize a series of transactions.
Simple
20–30
5A
Journalize transactions, post, and prepare a trial balance.
Simple
30–40
6A
Journalize transactions, post, and prepare a trial balance.
Moderate
40–50
7A
Prepare a correct trial balance.
Moderate
30–40
8A
Journalize transactions, post, and prepare a trial balance.
Moderate
40–50
9A
Journalize transactions, post, and prepare a trial balance.
Moderate
40–50
10A
Journalize transactions, post, and prepare trial balance.
Moderate
40–50
11A
Analyze errors and their effects on the trial balance.
Moderate
30–40
ANSWERS TO QUESTIONS
1. The system of collecting and processing transaction data and communicating financial informa-
tion to decision makers is known as the accounting information system.
LO 1 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting
2. Yes, a business can enter into a transaction in which only the left side of the accounting equation
is affected. An example would be a transaction where an increase in one asset is offset by a
decrease in another asset. An increase in the equipment account which is offset by a decrease in
the cash account is a specific example.
LO 1 BT: K Diff: M TOT: 2 min. AACSB: None AICPA FC: Reporting
3. Accounting transactions are the economic events of the company recorded by accountants because
they affect the basic accounting equation.
(a) The death of a major stockholder of the company is not an accounting transaction as it does not
affect the basic accounting equation.
(b) Supplies purchased on account is an accounting transaction because it affects the basic
accounting equation.
(c) An employee being fired is not an accounting transaction as it does not affect the basic
accounting equation.
(d) Paying a cash dividend to stockholders is an accounting transaction as it does affect the
basic accounting equation.
LO 1 BT: C Diff: M TOT: 3 min. AACSB: None AICPA FC: Reporting
4. (a) Decrease assets and decrease stockholders’ equity.
(b) Increase assets and decrease assets.
(c) Increase assets and increase stockholders’ equity.
(d) Decrease assets and decrease liabilities.
LO 1 BT: AP Diff: M TOT: 3 min. AACSB: Analytic AICPA FC: Reporting
5. An account consists of three parts: (a) the title, (b) the left or debit side, and (c) the right or credit
side. Because the alignment of these parts resembles the letter T, it is referred to as a T account.
LO 2 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting
6. Disagree. The terms debit and credit are synonymous with left and right, respectively.
LO 2 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting
7. Barry is incorrect. The double-entry system merely records the dual (two-sided) effect of a transaction
on the accounting equation. A transaction is not recorded twice; it is recorded once, and must
affect two or more accounts to keep the basic accounting equation in balance. In other words, for
each transaction, debits must equal credits.
LO 2 BT: C Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting
8. Misty is incorrect. A debit balance only means that debit amounts exceed credit amounts in an
account. Conversely, a credit balance only means that credit amounts are greater than debit amounts
in an account. Thus, a debit or credit balance is neither favorable or unfavorable.
LO 2 BT: C Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting
9. (a) Asset accounts are increased by debits and decreased by credits.
(b) Liability accounts are decreased by debits and increased by credits.
(c) The common stock account is decreased by debits and increased by credits.
LO 2 BT: K Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting
10. (a) Accounts Receivable—debit balance.
(b) Cash—debit balance.
(c) Dividends—debit balance.
(d) Accounts Payable—credit balance.
(e) Service Revenue—credit balance.
(f) Salaries and Wages Expense—debit balance.
(g) Common Stock—credit balance.
LO 2 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting
11. (a) Accounts Receivable—asset—debit balance.
(b) Accounts Payable—liability—credit balance.
(c) Equipment—asset—debit balance.
(d) Dividends—stockholders’ equity—debit balance.
(e) Supplies—asset—debit balance.
LO 2 BT: K Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting
12. (a) Debit Supplies and credit Accounts Payable.
(b) Debit Cash and credit Notes Payable.
(c) Debit Salaries and Wages Expense and credit Cash.
LO 2 BT: AP Diff: M TOT: 2 min. AACSB: Analytic AICPA FC: Reporting
13. (a) Cash—both debit and credit entries.
(b) Accounts Receivable—both debit and credit entries.
(c) Dividends—debit entries only.
(d) Accounts Payable—both debit and credit entries.
(e) Salaries and Wages Expense—debit entries only.
(f) Service Revenue—credit entries only.
LO 2 BT: K Diff: M TOT: 2 min. AACSB: None AICPA FC: Reporting
14. Normal balances for accounts in Apple’s financial statements: Accounts Receivable—debit;
Accounts Payable—credit; Sales—credit; Selling, General, and Administrative Expenses—debit.
LO 2 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting
15. The basic steps in the recording process are:
(1) Analyze each transaction in terms of its effect on the accounts.
(2) Enter the transaction information in a journal.
(3) Transfer the journal information to the appropriate accounts in the ledger.
LO 3 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting
16. (a) The debit should be entered first.
(b) The credit should be indented.
LO 3 BT: K Diff: E TOT: 1 min. AACSB: None AICPA FC: Reporting
17. (a) No, debits and credits should not be recorded directly in the ledger.
(b) The advantages of using the journal are:
(1) It discloses in one place the complete effect of a transaction.
(2) It provides a chronological record of all transactions.
(3) It helps to prevent or locate errors because the debit and credit amounts for each entry
can be readily compared.
LO 3 BT: C Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting
18. (a) Cash .......................................................................................................... 12,000
Common Stock .................................................................................. 12,000
(Issued stock for cash)
(b) Prepaid Insurance ..................................................................................... 800
Cash .................................................................................................. 800
(Paid one-year insurance policy)
(c) Supplies .................................................................................................... 1,800
Accounts Payable .............................................................................. 1,800
(Purchased supplies on account)
(d) Cash .......................................................................................................... 7,500
Service Revenue ............................................................................... 7,500
(Received cash for services rendered)
LO 3 BT: AP Diff: M TOT: 3 min. AACSB: Analytic AICPA FC: Reporting
19. (a) The entire group of accounts maintained by a company, including all the asset, liability, and
stockholders’ equity accounts, is referred to collectively as the ledger.
(b) The chart of accounts is important, particularly for a company that has a large number of
accounts, because it helps organize the accounts and identify their location in the ledger.
LO 4 BT: C Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting
20. A trial balance is a list of accounts and their balances at a given time. The primary purpose of a
trial balance is to prove the mathematical equality of debits and credits after all journalized trans-
actions have been posted. A trial balance also facilitates the discovery of errors in journalizing
and posting. In addition, it is useful in preparing financial statements.
LO 5 BT: K Diff: E TOT: 2 min. AACSB: None AICPA FC: Reporting
21. The proper sequence is as follows:
(b) Accounting transaction occurs.
(c) Information is entered in the journal.
(a) Debits and credits are posted to the ledger.
(e) Trial balance is prepared.
(d) Financial statements are prepared.
LO 5 BT: K Diff: M TOT: 2 min. AACSB: None AICPA FC: Reporting
22. (a) The trial balance would balance.
(b) The trial balance would not balance since the debits would be $720 higher than the credits.
LO 5 BT: AN Diff: M TOT: 3 min. AACSB: Analytic AICPA FC: Reporting
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 3-1
Assets
Liabilities
Stockholders’ Equity
(a)
(b)
+
+
+
NE
NE
+
BRIEF EXERCISE 3-2
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
+
Accounts
Receivable
+
Supplies
=
Accounts
Payable
+
Bonds
Payable
+
Common
Stock
+
Retained
Earnings
(1)
+$60,000
+$60,000
(2)
–9,000
–$9,000
Paid div.
BRIEF EXERCISE 3-3
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
+
Inventory
+
Equipment
=
Accounts
Payable
+
Common
Stock
+
Retained
Earnings
(1)
–$286,176
+$286,176
BRIEF EXERCISE 3-4
Debit
Effect
Credit
Effect
Normal
Balance
(a)
(b)
Accounts Payable
Advertising Expense
Decrease
Increase
Increase
Decrease
Credit
Debit
LO 2 BT: K Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting
BRIEF EXERCISE 3-5
Account Debited
Account Credited
June 1
2
Cash
Equipment
Common Stock
Accounts Payable
BRIEF EXERCISE 3-6
June 1 Cash ....................................................................... 5,000
Common Stock ............................................. 5,000
BRIEF EXERCISE 3-7
The basic steps in the recording process are:
1. Analyze each transaction. In this step, source documents are exam-
ined to determine the effects of the transaction on the accounts.
3. Transfer journal information to ledger accounts. This step is called
BRIEF EXERCISE 3-8
(a)
Basic Analysis
(b)
Debit-Credit Analysis
Aug. 1
The asset Cash is increased;
the stockholders’ equity
account Common Stock is
increased.
Debits increase assets:
debit Cash $10,000. Credits
increase stockholders’ equity:
credit Common Stock $10,000.
BRIEF EXERCISE 3-9
Aug. 1 Cash ....................................................................... 10,000
Common Stock .............................................. 10,000
BRIEF EXERCISE 3-10
Cash
Service Revenue
5/12 1,600
5/5 3,800
Accounts Receivable
BRIEF EXERCISE 3-11
PEETE COMPANY
Trial Balance
June 30, 2017
Debit
Credit
Cash .............................................................................
Accounts Receivable ..................................................
$ 5,400
3,000
BRIEF EXERCISE 3-12
BIRELLIE COMPANY
Trial Balance
December 31, 2017
Debit
Credit
Cash .............................................................................
Prepaid Insurance ......................................................
Accounts Payable ......................................................
Unearned Service Revenue .......................................
$20,800
3,500
$ 2,500
1,800
SOLUTIONS TO DO IT! REVIEW EXERCISES
DO IT! 3-1
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
+
Accounts
Receivable
=
Accounts
Payable
+
Common
Stock
+
Retained Earnings
Revenues
–
Expenses
–
Dividends
(1)
+$20,000
+$20,000
DO IT! 3-2
Boyd would likely need the following accounts in which to record the trans-
actions necessary to ready his photography studio for opening day:
Cash (debit balance) Equipment (debit balance)
DO IT! 3-3
Each transaction that is recorded is entered in the general journal. The
three activities would be recorded as follows:
1. Cash .......................................................................... 8,000
Common Stock ................................................. 8,000
DO IT! 3-4
Cash
DO IT! 3-5
CHILLIN’ COMPANY
Trial Balance
December 31, 2017
Debit Credit
Cash ............................................................................. $ 6,000
Accounts Receivable ................................................. 8,000
Supplies ...................................................................... 5,000
SOLUTIONS TO EXERCISES
EXERCISE 3-1
2. Decrease in assets and decrease in stockholders’ equity.
4. Increase in assets and increase in stockholders’ equity.
6. Increase in liabilities and decrease in stockholders’ equity.
8. Increase in assets and decrease in assets.
EXERCISE 3-2
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
+
Accounts
Receivable
+
Equipment
=
Accounts
Payable
+
Common
Stock
+
Retained Earnings
Revenues
–
Expenses
(1)
+$40,000
+$40,000
Issued Stock
(2)
+$30,000
+$30,000
(3)
–4,000
–$4,000
Rent Expense
(6)
–8,000
–8,000
Utilities Expense
(7)
–30,000
–30,000
(8)
+1,300
–1,300
Advertising Expense
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
+
Accounts
Receivable
+
Supplies
+
Equipment
=
Accounts
Payable
+
Bonds
Payable
+
Common
Stock
+
Retained Earnings
Revenues
–
Expenses
–
Dividends
(1)
+$100,000
+$100,000
Issued Stock
$ 56,800
+
$10,000
+
$4,700
+
$60,000
$4,700
+
$45,000
+
$100,000
+
+$26,000
–
$33,200
–
$11,000
3-14 Copyright © 2016 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 8/e, Solutions Manual (For Instructor Use
EXERCISE 3-3
EXERCISE 3-4
(a) 1. Stockholders invested $20,000 cash in the business.
3. Paid $750 cash for supplies.
5. Paid $1,500 cash on accounts payable.
7. Paid $800 cash for rent.
9. Paid salaries of $3,000.
10. Incurred $300 of utilities expense on account.
(b) Issued common stock ............................................................. $20,000
Service revenue ........................................................................ 9,500
Dividends .................................................................................. (2,000)
(c) Service revenue ........................................................................ $ 9,500
Rent expense ............................................................................ (800)
EXERCISE 3-5
WOLFE COMPANY
Income Statement
For the Month Ended August 31, 2017
Revenues
Service revenue ........................................................ $9,500
Expenses
Salaries and wages expense ................................... $3,000
WOLFE COMPANY
Retained Earnings Statement
For the Month Ended August 31, 2017
Retained earnings, August 1 ............................................................. $ 0
Add: Net income ............................................................................... 5,400
WOLFE COMPANY
Balance Sheet
August 31, 2017
Assets
Current assets
Cash ............................................................................ $15,500
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable ...................................................... $ 2,800
Stockholders’ equity
EXERCISE 3-6
Account
(a)
Normal Balance
Debit or Credit
(b)
Balance Sheet or
Income Statement
Accounts payable
Credit
Balance sheet
Accounts receivable
Debit
Balance sheet
Common stock
Credit
Balance sheet
Trans-
action
(a)
Basic
Type
(b)
Specific
Account
(c)
Effect
(d)
Normal
Balance
(a)
Basic
Type
(b)
Specific
Account
(c)
Effect
(d)
Normal
Balance
2.
Asset
Equipment
Increase
Debit
Asset
Cash
Decrease
Debit
4.
Asset
Accounts
Receivable
Increase
Debit
Stockholders’
Equity
Service
Revenue
Increase
Credit
6.
Asset
Cash
Increase
Debit
Asset
Accounts
Receivable
Decrease
Debit
8.
Stockholders’
Dividends
Increase
Debit
Asset
Cash
Decrease
Debit
3-18 Copyright © 2016 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 8/e, Solutions Manual (For Instructor Use Only)
EXERCISE 3-7 (Continued)
(b)
General Journal
Trans.
Account Titles
Debit
Credit
2.
Equipment ...........................................................
Cash .............................................................
10,000
10,000
4.
Accounts Receivable .........................................
Service Revenue .........................................
3,700
3,700
6.
Cash ....................................................................
Accounts Receivable ................................
1,100
1,100
8.
Dividends ............................................................
400
EXERCISE 3-8
Oct. 1 Debits increase assets: debit Cash $30,000.
Credits increase stockholders’ equity: credit Common Stock
