3

The Accounting Information

System

Kimmel ● Weygandt ● Kieso

Accounting, Sixth Edition
3-1
 CHAPTER OUTLINE
LEARNING OBJECTIVES
Analyze the effect of business transactions on the
1 basic accounting equation.

Explain how accounts, debits, and credits are used to

2 record business transactions.

Indicate how a journal is used in the recording

3 process.

Explain how a ledger and posting help in the

4 recording process.

5 Prepare a trial balance.

3-2
 Analyze the effect of business transactions
LEARNING
OBJECTIVE 1 on the basic accounting equation.

Accounting Information System

System of
► collecting and
► processing transaction data and
► communicating financial information to decision-makers.

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 Accounting Information System
Accounting information systems rely on a process
referred to as the accounting cycle.

3-4 LO 1
 ACCOUNTING TRANSACTIONS

Not all economic events are financial transactions that

should be recognized and reported in financial statements.
 Not all activities represent transactions.
 Assets, liabilities, or stockholders’ equity items change
as a result of some economic event.
 Dual effect on the accounting equation.

3-5 LO 1
 ACCOUNTING TRANSACTIONS

Question: Are the following events accounting Illustration 3-1

Transaction
transactions? identification process

Discuss guided trip

Purchase
Event options with potential Pay rent
computer
customer

Criterion Is the financial position (assets, liabilities, or

stockholders’ equity) of the company changed?

Record/
Don’t Record

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 ANALYZING TRANSACTIONS

The process of identifying the specific effects of

economic events on the accounting equation.

Basic Accounting Equation

Stockholders’
Assets = Liabilities +
Equity

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 ANALYZING TRANSACTIONS

Illustration 3-2
Expanded accounting equation

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 Transaction Analysis
TRANSACTION 1. INVESTMENT BY STOCKHOLDERS Ray and
Barbara Neal decide to start a smartphone app development company that
they incorporate as Softbyte Inc. On September 1, 2017, they invest
$15,000 cash in the business in exchange for $15,000 of common stock.

Illustration 1-9

Assets = Liabilities + Stockholders’ Equity

Trans- Accounts Accounts Common Retained Earnings
Cash + + Supplies + Equipment = + +
action Receivable Payable Stock Rev. – Exp. – Div.

1. +15,000 +15,000

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 TRANSACTION 2. PURCHASE OF EQUIPMENT FOR CASH Softbyte
Inc. purchases computer equipment for $7,000 cash.
Illustration 1-9

Assets = Liabilities + Stockholders’ Equity

Trans- Accounts Accounts Common Retained Earnings
Cash + + Supplies + Equipment = + +
action Receivable Payable Stock Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
3-10 LO 4
 TRANSACTION 3. PURCHASE OF SUPPLIES ON CREDIT Softbyte Inc.
purchases for $1,600 headsets and other accessories expected to last
several months. The supplier allows Softbyte to pay this bill in October.
Illustration 1-9 Assets = Liabilities + Stockholders’ Equity
Trans- Accounts Accounts Common Retained Earnings
Cash + + Supplies + Equipment = + +
action Receivable Payable Stock Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
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 TRANSACTION 4. SERVICES PERFORMED FOR CASH Softbyte Inc.
receives $1,200 cash from customers for app development services it has
performed. Illustration 1-9

Assets = Liabilities + Stockholders’ Equity

Trans- Accounts Accounts Common Retained Earnings
Cash + + Supplies + Equipment = + +
action Receivable Payable Stock Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
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 TRANSACTION 5. PURCHASE OF ADVERTISING ON CREDIT Softbyte
Inc. receives a bill for $250 from the Daily News for advertising on its
online website but postpones payment until a later date. Illustration 1-9

Assets = Liabilities + Stockholders’ Equity

Trans- Accounts Accounts Common Retained Earnings
Cash + + Supplies + Equipment = + +
action Receivable Payable Stock Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
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 TRANSACTION 6. SERVICES PROVIDED FOR CASH AND CREDIT.
Softbyte provides $3,500 of services. The company receives cash of
$1,500 from customers, and it bills the balance of $2,000 on account.
Illustration 1-9 Assets = Liabilities + Stockholders’ Equity
Trans- Accounts Accounts Common Retained Earnings
Cash + + Supplies + Equipment = + +
action Receivable Payable Stock Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
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 TRANSACTION 7. PAYMENT OF EXPENSES Softbyte Inc. pays the
following expenses in cash for September: office rent $600, salaries and
wages of employees $900, and utilities $200. Illustration 1-9

Assets = Liabilities + Stockholders’ Equity

Trans- Accounts Accounts Common Retained Earnings
Cash + + Supplies + Equipment = + +
action Receivable Payable Stock Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
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 TRANSACTION 8. PAYMENT OF ACCOUNTS PAYABLE Softbyte Inc.
pays its $250 Daily News bill in cash. The company previously (in
Transaction 5) recorded the bill as an increase in Accounts Payable.
Illustration 1-9 Assets = Liabilities + Stockholders’ Equity
Trans- Accounts Accounts Common Retained Earnings
Cash + + Supplies + Equipment = + +
action Receivable Payable Stock Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
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 TRANSACTION 9. RECEIPT OF CASH ON ACCOUNT Softbyte Inc.
receives $600 in cash from customers who had been billed for services
(in Transaction 6). Illustration 1-9

Assets = Liabilities + Stockholders’ Equity

Trans- Accounts Accounts Common Retained Earnings
Cash + + Supplies + Equipment = + +
action Receivable Payable Stock Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
3-17 LO 4
 TRANSACTION 10. DIVIDENDS The corporation pays a dividend of
$1,300 in cash to Ray and Barbara Neal, the stockholders of Softbyte Inc.
Illustration 1-9
Assets = Liabilities + Stockholders’ Equity
Trans- Accounts Accounts Common Retained Earnings
Cash + + Supplies + Equipment = + +
action Receivable Payable Stock Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300

3-18 $18,050 $18,050 LO 4

 Summary of Transactions

1. Each transaction must be analyzed in terms of its

effect on:
a. The three components of the basic accounting
equation.
b. Specific types (kinds) of items within each
component.
2. The two sides of the equation must always be equal.
3. The Common Stock and Retained Earnings columns
indicate the causes of each change in the
stockholders’ claim on assets.

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 ANALYZING TRANSACTIONS
Event (1). On October 1, cash of $10,000 is invested in Sierra Corporation
by investors in exchange for $10,000 of common stock.

1. +10,000 +10,000

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 ANALYZING TRANSACTIONS
Event (2). On October 1, Sierra borrowed $5,000 from Castle Bank by
signing a 3-month, 12%, $5,000 note payable.

1. +10,000 +10,000
2. +5,000 +5,000

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 ANALYZING TRANSACTIONS
Event (3). On October 2, Sierra purchased equipment by paying $5,000
cash to Superior Equipment Sales Co.

1. +10,000 +10,000
2. +5,000 +5,000
3. -5,000 +5,000

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 ANALYZING TRANSACTIONS
Event (4). On October 2, Sierra received a $1,200 cash advance from R.
Knox, a client.

1. +10,000 +10,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200

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 ANALYZING TRANSACTIONS
Event (5). On October 3, Sierra received $10,000 in cash from Copa
Company for guide services performed.

1. +10,000 +10,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
5. +10,000 +10,000

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 ANALYZING TRANSACTIONS
Event (6). On October 3, Sierra Corporation paid its office rent for the
month of October in cash, $900.

1. +10,000 +10,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
5. +10,000 +10,000
6. -900 -900

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 ANALYZING TRANSACTIONS
Event (7). On October 4, Sierra paid $600 for a one-year insurance policy
that will expire next year on September 30.

1. +10,000 +10,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
5. +10,000 +10,000
6. -900 -900
7. -600 +600

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 ANALYZING TRANSACTIONS
Event (8). On October 5, Sierra purchased an estimated three months of
supplies on account from Aero Supply for $2,500.

1. +10,000 +10,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
5. +10,000 +10,000
6. -900 -900
7. -600 +600
8. +2,500 +2,500

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 ANALYZING TRANSACTIONS
Event (9). On October 9, Sierra hired four new employees to begin work
on October 15.

1. +10,000 +10,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
5. +10,000 +10,000
6. -900 -900
7. -600 +600
8. +2,500 +2,500

An accounting transaction has not occurred.

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 ANALYZING TRANSACTIONS
Event (10). On October 20, Sierra paid a $500 dividend.

1. +10,000 +10,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
5. +10,000 +10,000
6. -900 -900
7. -600 +600
8. +2,500 +2,500
10. -500 -500

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 ANALYZING TRANSACTIONS
Event (11). Employees have worked two weeks, earning $4,000 in
salaries, which were paid on October 26.

1. +10,000 +10,000
2. +5,000 +5,000
3. -5,000 +5,000
4. +1,200 +1,200
5. +10,000 +10,000
6. -900 -900
7. -600 +600
8. +2,500 +2,500
10. -500 -500
11. -4,000 -4,000

3-30 LO 1
 Explain how accounts, debits, and credits
LEARNING
OBJECTIVE 2 are used to record business transactions.

Debit and Credit Procedures

Double-entry system
 Each transaction must affect two or more accounts to
keep the basic accounting equation in balance.
 Recording done by debiting at least one account and
crediting another.
 DEBITS must equal CREDITS.
 Debit = “Left”

 Credit = “Right”

3-31 LO 2
 Using T-Account

Debit Credit

Assets Liabilities

Expenses Equity **

Revenues

**: Dividends is debit account because they decrease equity

3-32
 Summary of Debit/Credit Rules

Balance Sheet Income Statement

Assets = Liabilities + Equity Revenues - Expenses

Debit

Credit

3-33 LO 1
 Summary of Debit/Credit Rules

Question
Debits:

a. increase both assets and liabilities.

b. decrease both assets and liabilities.

c. increase assets and decrease liabilities.

d. decrease assets and increase liabilities.

3-34 LO 1
 DEBIT/CREDIT RULES
Liabilities
Debit / Dr. Credit / Cr.

Normal
Normal Normal
Normal
Balance
Balance Balance
Balance
Debit
Debit Credit
Credit
Normal Balance

Chapter
3-24

Assets Stockholders’ Equity

Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.

Normal Balance Normal Balance

Chapter Chapter
3-23 3-25

Expense Revenue
Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.

Normal Balance Normal Balance

Chapter Chapter
3-27 3-26

3-35 LO 2
 Summary of Debit/Credit Rules

Question
Accounts that normally have debit balances are:

a. assets, expenses, and revenues.

b. assets, expenses, and equity.

c. assets, liabilities, and dividends.

d. assets, dividends, and expenses.

3-36 LO 1
 SUMMARY OF DEBIT/CREDIT RULES

Relationship among the assets, liabilities and stockholders’

equity of a business:
ILLUSTRATION 3-16

Basic
Assets = Liabilities + Stockholders’ Equity
Equation

Expanded
Basic
Equation

The equation must be in balance after every transaction.

For every Debit there must be a Credit.

3-37 LO 2
 Indicate how a journal is used in the
LEARNING
OBJECTIVE 3 recording process.

The Recording Process

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.

Analyze Journalize Post to

business the ledger
transactions transaction accounts

3-38 LO 3
 THE JOURNAL

 Transactions recorded in chronological order in a

journal before they are transferred to the accounts.
 Contributions to the recording process:
1. Discloses the complete effects of a transaction.

2. Provides a chronological record of transactions.

3. Helps to prevent or locate errors because the

debit and credit amounts can be easily compared.

3-39 LO 3
 Using T-Account

Debit Credit

Assets Liabilities

Expenses Equity *

Revenues

*: Dividends are debit account because they decrease equity

3-40
 THE JOURNAL

Journalizing - Entering transaction data in the journal.

Illustration: Presented below is information related to
Sierra Corporation.

Oct. 1 Sierra issued common stock in exchange for

$10,000 cash.
1 Sierra borrowed $5,000 by signing a note.
2 Sierra purchased equipment for $5,000.

Instructions - Journalize these transactions.

3-41 LO 3
 D. C.

A. Lib.
THE JOURNAL Ex. Eq.
Eq.+ Rev.
Oct. 1 Sierra issued common stock in exchange for
$10,000 cash.
A. +

General Journal
Date Account Title Ref. Debit Credit
Oct. 1 Cash 10,000
Common Stock 10,000

3-42 LO 3
 D. C.

A. Lib.
THE JOURNAL Ex. Eq.
Rev.
Oct. 1 Sierra borrowed $5,000 by signing a note.
A. + Lib. +

General Journal
Date Account Title Ref. Debit Credit
Oct. 1 Cash 5,000
Notes Payable 5,000

3-43 LO 3
 D. C.

A. Lib.
THE JOURNAL Ex. Eq.
Rev.
Oct. 2 Sierra purchased equipment for $5,000 in cash.
A. + A. -

General Journal
Date Account Title Ref. Debit Credit
Oct. 2 Equipment 5,000
Cash 5,000

3-44 LO 3
 THE JOURNAL

ILLUSTRATION 3-18 20,000 = 20,000

Recording transactions in
journal form

3-45 LO 3
 D. C.

A. Lib.
Steps in the Recording Process Ex. Eq.
Rev.
SIMPLE AND COMPOUND ENTRIES

Illustration: On September 1, Softbyte stockholders invested

$15,000 cash in the corporation in exchange for shares of stock.
On September 3, Softbyte purchased computer equipment for
Illustration 2-14
$7,000 cash.
GENERAL JOURNAL

Date Account Title Ref. Debit Credit

Sept. 1 Cash 15,000
Common Stock 15,000

Sept. 3 Equipment 7,000

Cash 7,000

3-46 LO 2
 D. C.

A. Lib.
Steps in the Recording Process Ex. Eq.
Rev.
SIMPLE AND COMPOUND ENTRIES
Illustration: On September 7, Softbyte Company purchases a
delivery truck costing $14,000. It pays $8,000 cash now and agrees
to pay the remaining $6,000 on account. Illustration 2-15
Compound journal entry

GENERAL JOURNAL
Date Account Title Ref. Debit Credit
Sept. 7 Cars 14,000
Cash 8,000
Accounts Payable 6,000

3-47 LO 2
 DO IT! 3 Journal Entries

As president and sole stockholder, Kate Browne engaged in the

following activities in establishing her salon, Hair It Is, Inc.

1. Opened a bank account in the name of Hair It Is, Inc. and

deposited $20,000 of her own money in this account in
exchange for shares of common stock.

2. Purchased equipment on account (to be paid in 30 days) for

a total cost of $4,800.

3. Interviewed three persons for the position of hair stylist.

Prepare the entries to record the transactions.

3-48 LO 3
 DO IT! 2 Recording Business Activities

Prepare the entries to record the transactions.

1. Opened a bank account and deposited $20,000.

Cash 20,000
Common Stock 20,000

2. Purchased equipment on account (to be paid in 30 days) for

a total cost of $4,800.
Equipment 4,800
Accounts Payable 4,800

3. Interviewed three persons for the position of hair stylist.

No entry
3-49 LO 2
 Explain how a ledger and posting help
LEARNING
OBJECTIVE 4 in the recording process.

The Accounting Cycle

Analyze Journalize Post to

Trial Adjusting
business the ledger
Balance Entries
transactions transaction accounts

Adjusted
Financial Closing Post-Closing
Trial
Statements Entries Trial Balance
Balance

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 THE LEDGER

The Ledger is comprised of the entire group of accounts

maintained by a company.

ILLUSTRATION 3-19
The general ledger
3-51 LO 4
 Chart of Accounts
Illustration 2-19

3-52 LO 3
 Posting

Transferring
journal entries
to the ledger
accounts.

Illustration 2-18
Posting a journal
entry

3-53 LO 3
 POSTING

Review Question
Posting:

a. normally occurs before journalizing.

b. transfers ledger transaction data to the journal.

c. is an optional step in the recording process.

d. transfers journal entries to ledger accounts.

3-54 LO 4
 RECORDING PROCESS ILLUSTRATED

Follow these steps:

1. Determine what
type of account is
involved.
2. Determine what
items increased or
decreased and by
how much.
3. Translate the
increases and
decreases into
debits and credits.
ILLUSTRATION 3-21
Investment of cash by
stockholders
3-55 LO 4
3-56
ILLUSTRATION 3-22
LO 4
3-57
ILLUSTRATION 3-23
LO 4
3-58
ILLUSTRATION 3-25
LO 4
3-59
ILLUSTRATION 3-26
LO 4
3-60
ILLUSTRATION 3-28
LO 4
 ILLUSTRATION 3-29

3-61 LO 4
3-62
ILLUSTRATION 3-30
LO 4
3-63
ILLUSTRATION 3-31
LO 4
 JOURNALIZING SUMMARY ILLUSTRATION 3-32
General journal for
Sierra Corporation

3-64 LO 4
 Illustration 3-32

3-65 LO 4
POSTING
SUMMARY

14,600

ILLUSTRATION 3-33
General ledger for
Sierra Corporation

3-66
 DO IT! 4 Posting
Selected transactions from the journal of Faital Inc. during its first month of
operations are presented below. Post these transactions to T-accounts.

 
 
 
 
 
 

3-67 LO 4
LEARNING
OBJECTIVE 5 Prepare a trial balance.
The Accounting Cycle

Analyze Journalize Post to Prepare

Adjusting
business the ledger a Trial
Entries
transactions transaction accounts Balance

Adjusted
Financial Closing Post-Closing
Trial
Statements Entries Trial Balance
Balance

3-68 LO 5
 TRIAL BALANCE

 A list of accounts and their balances at a given time.

 Accounts are listed in the order in which they appear
in the ledger.
 Purpose is to prove that debits
▼ HELPFUL HINT
equal credits. Note that the order of
presentation in the trial
 May also uncover errors in balance is:
Assets
journalizing and posting. Liabilities
Stockholders’ equity
 Useful in the preparation of Revenues
Expenses
financial statements.

3-69 LO 5
 TRIAL BALANCE ILLUSTRATION 3-34
Sierra Corporation
trial balance

3-70 LO 5
 LIMITATIONS OF A TRIAL BALANCE

The trial balance may balance even

when
1. a transaction is not journalized,
2. a correct journal entry is not posted,
3. a journal entry is posted twice, ETHICS NOTE An error is
the result of an unintentional
4. incorrect accounts are used in mistake. It is neither ethical
nor unethical. An
journalizing or posting, or irregularity is an intentional
misstatement, which is
5. offsetting errors are made in viewed as unethical.
recording the amount of a
transaction.
3-71 LO 5
 TRIAL BALANCE

Review Question
A trial balance will not balance if:

a. a correct journal entry is posted twice.

b. the purchase of supplies on account is debited to

Supplies and credited to Cash.

c. a $100 cash dividends is debited to the Dividends

account for $1,000 and credited to Cash for $100.

d. a $450 payment on account is debited to Accounts

Payable for $45 and credited to Cash for $45.
3-72 LO 5
 DO IT! 5 Trial Balance

The following accounts come from the ledger of SnowGo

Corporation at December 31, 2017.
Equipment $88,000 Common Stock $20,000
Dividends 8,000 Salaries and Wages
Accounts Payable 22,000 Payable 2,000
Notes Payable (due in
Salaries and Wages
3 months) 19,000
Expense 42,000
Utilities Expense
Accounts Receivable
3,000
10,000
Cash
PrepareRevenue
Service a trial balance in good form.

3-73
7,000 LO 5
95,000
 10,000

10,000

3-74 LO 5
 A Look at IFRS

Compare the procedures for the

LEARNING
OBJECTIVE 6 recording process under GAAP and
IFRS.

KEY POINTS
Similarities
 Transaction analysis is the same under IFRS and GAAP.
 Both the IASB and the FASB go beyond the basic definitions
provided in the textbook for the key elements of financial
statements, that is assets, liabilities, equity, revenues, and
expenses. The implications of the expanded definitions are
discussed in more advanced accounting courses.
3-75 LO 6
 A Look at IFRS

KEY POINTS
Similarities
 As shown in the textbook, dollar signs are typically used only in
the trial balance and the financial statements. The same practice
is followed under IFRS, using the currency of the country where
the reporting company is headquartered.
 A trial balance under IFRS follows the same format as shown in
the textbook.

3-76 LO 6
 A Look at IFRS

KEY POINTS
Differences
 IFRS relies less on historical cost and more on fair value than do
FASB standards.
 Internal controls are a system of checks and balances designed
to prevent and detect fraud and errors. While most public U.S.
companies have these systems in place, many non-U.S.
companies have never completely documented the controls nor
had an independent auditor attest to their effectiveness.

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 A Look at IFRS

LOOKING TO THE FUTURE

The basic recording process shown in this textbook is followed by
companies around the globe. It is unlikely to change in the future. The
definitional structure of assets, liabilities, equity, revenues, and
expenses may change over time as the IASB and FASB evaluate their
overall conceptual framework for establishing accounting standards.

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 A Look at IFRS

IFRS Practice
Which statement is correct regarding IFRS?
a) IFRS reverses the rules of debits and credits, that is, debits
are on the right and credits are on the left.
b) IFRS uses the same process for recording transactions as
GAAP.
c) The chart of accounts under IFRS is different because
revenues follow assets.
d) None of the above statements are correct.

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 A Look at IFRS

IFRS Practice
A trial balance:
a) is the same under IFRS and GAAP.
b) proves that transactions are recorded correctly.
c) proves that all transactions have been recorded.
d) will not balance if a correct journal entry is posted twice.

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 A Look at IFRS

IFRS Practice
One difference between IFRS and GAAP is that:
a) GAAP uses accrual-accounting concepts and IFRS uses
primarily the cash basis of accounting.
b) IFRS uses a different posting process than GAAP.
c) IFRS uses more fair value measurements than GAAP.
d) the limitations of a trial balance are different between IFRS
and GAAP.

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 COPYRIGHT

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