Chapter 3: The Accounting Information System
3.1 Using the Accounting Equation to Analyze Transactions
• Accounting information system = the system of collecting and processing
transaction data and communicating financial information to decision-makers
o Factors that shape an accounting information system:
→ The nature of the company’s business
→ Types of transactions
→ Size of the company
→ Volume of data
→ Information demands of management and others
o Most business use computerized accounting systems—sometimes referred
to as electronic data processing (EDP) systems
→ These systems handle all the steps involved in the recording process,
from initial data entry to preparation of the financial statements
• Accounting information systems are based on a process referred to as “the
accounting cycle”
Accounting Transactions
• Accounting transactions = what you call economic events that require recording in
the financial statements
o An accounting transaction occurs when assets, liabilities, or stockholders’
equity items change as a result of some economic event
Analyzing Transactions
• Remember the basic accounting equation: Assets = Liabilities + Stockholders’
Equity
• Transaction analysis = the process of identifying the specific effects of economic
events on the accounting equation
• The accounting equation must always balance.
o Each transaction has a dual (double-sided) effect on the equation
▪ Ex:
, • If an individual asset is increased, there must be a
corresponding:
o Decrease in another asset or
o Increase in a specific liability or
o Increase in stockholders’ equity
o Two or more items could be affected when an asset is increased
• Recall that stockholders’ equity is comprised of two parts: common stock and
retained earnings
o Common stock is affected when the company issues new shares of stock in
exchange for cash
o Retained earnings is increased when the company recognizes revenue, and
decreased when the company incurs expenses or pays dividends
o Revenue increases stockholders’ equity
▪ Revenue is recorded when services are performed
▪ Therefore, revenues would increase when services are performed,
even though cash has not been received
o Expenses decrease stockholders’ equity
▪ Payments of expenses that will benefit more than one accounting
period are identified as assets called prepaid expenses or
prepayments
o Dividends are a reduction of stockholders’ equity but not an expense
▪ Dividends are not included in the calculation of net income. Instead,
a dividend is a distribution of the company’s assets to its
stockholders, which is presented in the retained earnings statement
Summary of Transactions
• Issuing shares of stock to stockholders = change in common stock
3.1 Using the Accounting Equation to Analyze Transactions
• Accounting information system = the system of collecting and processing
transaction data and communicating financial information to decision-makers
o Factors that shape an accounting information system:
→ The nature of the company’s business
→ Types of transactions
→ Size of the company
→ Volume of data
→ Information demands of management and others
o Most business use computerized accounting systems—sometimes referred
to as electronic data processing (EDP) systems
→ These systems handle all the steps involved in the recording process,
from initial data entry to preparation of the financial statements
• Accounting information systems are based on a process referred to as “the
accounting cycle”
Accounting Transactions
• Accounting transactions = what you call economic events that require recording in
the financial statements
o An accounting transaction occurs when assets, liabilities, or stockholders’
equity items change as a result of some economic event
Analyzing Transactions
• Remember the basic accounting equation: Assets = Liabilities + Stockholders’
Equity
• Transaction analysis = the process of identifying the specific effects of economic
events on the accounting equation
• The accounting equation must always balance.
o Each transaction has a dual (double-sided) effect on the equation
▪ Ex:
, • If an individual asset is increased, there must be a
corresponding:
o Decrease in another asset or
o Increase in a specific liability or
o Increase in stockholders’ equity
o Two or more items could be affected when an asset is increased
• Recall that stockholders’ equity is comprised of two parts: common stock and
retained earnings
o Common stock is affected when the company issues new shares of stock in
exchange for cash
o Retained earnings is increased when the company recognizes revenue, and
decreased when the company incurs expenses or pays dividends
o Revenue increases stockholders’ equity
▪ Revenue is recorded when services are performed
▪ Therefore, revenues would increase when services are performed,
even though cash has not been received
o Expenses decrease stockholders’ equity
▪ Payments of expenses that will benefit more than one accounting
period are identified as assets called prepaid expenses or
prepayments
o Dividends are a reduction of stockholders’ equity but not an expense
▪ Dividends are not included in the calculation of net income. Instead,
a dividend is a distribution of the company’s assets to its
stockholders, which is presented in the retained earnings statement
Summary of Transactions
• Issuing shares of stock to stockholders = change in common stock
