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2015-09-13

Chapter 2: The Recording Process


Study Objectives
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PRINCIPLES OF 1. Define debits and credits and illustrate how


FINANCIAL ACCOUNTING they are used to record transactions.

Chapter 2
The Recording Process 2. Explain the recording process and analyze,
journalize, and post transactions.

3. Explain the purpose of a trial balance, and


prepare one.

Part 1: Debits & Credits The Account


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An individual accounting record of increases


and decreases in a specific asset, liability, or
owners equity item
Examples: cash, accounts payable, service
revenue, salaries expense

Three parts: title, debit side, credit side


In its simplest form, these parts are positioned
like the letter T
Therefore called a T account

Debits & Credits Tabular Versus Account Form


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Tabular Summary
Debit (Dr.) indicates left; Credit (Cr.) indicates Account Form
CASH
right $15,000
CASH
Entering an amount on the left side is called -7,000
Debit Credit
debiting the account 1,200
15,000 7,000
1,500
Entering an amount on the right side is -600
1,200 600
1,500 900
crediting the account -900
600 200
-200
Debit balance 250
-250
1,300
Debit amounts exceed the credits 600
Balance 8,050
Credit balance -1,300
$8,050
Credit amounts exceed the debits

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Debit & Credit Procedure Assets, Liabilities & Owners Capital


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Debit does not mean increase or decrease


Can be either depending on the type account
Credit also does not mean increase or decrease
also depends on account type
Assets are on the debit side of the equation
Increases are also on debit side; decreases on
credit side
Liabilities are on the credit side
Increases are on the credit side; decreases on
the debit side

Drawings, Revenues, Expenses Accounting Equation Expanded


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Double-Entry Accounting System Part 2: Recording Transactions


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Each transaction is recorded with equal


debits and credits
Total debits always equals total credits

Accounting equation will always stay in


balance
Assets = Liabilities + Owners Equity

Every account has a normal balance


Either debit or credit

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The Accounting Cycle The Recording Process


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The first three steps in the accounting cycle:


1. Analyze business transactions
Determine effect on accounts
2. Enter transactions in a journal
The book of original entry
3. Transfer journal information to ledger
accounts - Posting

The Journal Journalizing


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Where transactions are first recorded Entering transaction data in the journal
Every company has a general journal Separate journal entry for each
Contributes to recording process: transaction
Discloses complete effect of a transaction in one
A complete entry consists of
place
Provides a chronological record Transaction date
Helps prevent and locate errors Accounts & amounts to be debited and
Provides explanation and identifies the source credited
document Brief explanation of transaction

Journalizing Technique Journalizing Technique 2


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Debit amounts are recorded in the Debit (left)


Transaction date is entered in date column
column
Debit account title is entered at the left margin of
Credit amounts are recorded in the Credit (right)
the Account Titles and Explanation column
column
Credit account title is indented on the next line.
A brief explanation of the transaction is provided

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Journalizing Technique 3 Journalizing Technique 4


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Separate entries with a blank line Simple entry: involves two accounts
Ref. column is used later when transferred to Compound entry: involves three or more
ledger
accounts
List all debits in each entry before listing credits

The Ledger Standard Form of Account


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Ledger: entire group of accounts


maintained by a company
General ledger: contains all the assets,
liabilities, and owners equity accounts
Arranged in financial statement order
Assets, liabilities, owners capital, drawings,
revenues and expenses
Posting: procedure of transferring journal
entries to the ledger accounts

Posting Chart of Accounts


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List of accounts and their account


numbers
Indicates where accounts are found in the ledger
Usually starts with balance sheet accounts,
followed by income statement accounts

Varies by company
Number of accounts
1. Post to debit account: date, journal page number, amount Types of accounts
2. Enter debit account number in journal reference column
Numbering system
3. Post to credit account: journal page number, amount
4. Enter credit account number in journal reference column

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Part 3: Trial Balance The Trial Balance


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The Trial Balance Example Trial Balance


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List of accounts and their balances at a


specific time
Proves that debits equal credits after
posting
Uncovers errors in journalizing and posting
To prepare a trial balance:
1. List accounts and their balances
2. Total the debit and credit columns
3. Ensure the two columns are equal

Limitations of a Trial Balance Locating Errors


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Does not prove: If trial balance does not balance, then:


That all transactions have been recorded, or If error is an amount such as $1, $100 or
That the ledger is correct $1,000, re-add and re-calculate account
Numerous errors may exist even though the
balances
If divisible by two, look for entry (= of the
trial balance columns agree
error ) in the wrong column
Total
debits and total credits may be equal, but
may still be posted to the wrong account or in the If divisible by nine, look for transposition
wrong amount errors
Otherwise, scan to see if an account
balance has been omitted