Chapter 2 Notes

Created Sep 7, 2019 433 PM

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Updated Sep 7, 2019 510 PM

The Recording Process

Accounts, Debits and Credits

The Account

Account- individual accounting record of increases and decreases in a

specific asset, liability, or equity item

Consists of title, left or debit side, and right or credit side

T-account- format resembles of T-account

Debits and Credits

Debit- left side of an account

Credit- right side of the account

DO NOT MEAN INCREASE OR DECREASE!! Repeatedly in the recording

process to describe where entries are made in accounts

Debiting and crediting are the acts of making entries/ entering accounts in
the respective side of the account

Debit balance and credit balance is shown when debit exceeds credit or
credit exceeds debit

Debit and Credit Procedure

Debits must equal credits

Equality of debits and credits provides basis for double-entry system

of recording transactions (aka the dual effect of each transaction is
recorded in appropriate accounts)

Debit and Credit Procedure for Assets and Liabilities

Increases and decreases in liabilities are entered on the opposite side

of the increases and decreases in assets

Chapter 2 Notes 1
 Assets usually show debit balances, while liability accounts show credit
balances

Debit and Credit Procedure for Equity

Share-Capital, Retained Earnings and Revenue increase in the Credit

side, while Dividends and Expenses increase on the Debit side

The Journal
The Recording Process

Analyze each transaction in terms of its effect on the accounts

Enter the transaction information in a journal

Transfer the journal information to the appropriate accounts in the ledger

The Journal

Journal- book of original entry

Shows the debit and credit effects on specific accounts

Discloses in one place the complete effects of a transaction

Provides a chronological record of transactions

Helps to prevent or locate errors because the debit and credit amounts
for each entry can be easily compared

Journalizing- entering transaction data in the journal

Complete entries consist of the date of the transaction, accounts and

amounts to be debited and credited, and a brief explanation of the
transaction

Important to use correct and specific account titles in journalizing

Simple and Compound Entries

Simple Entry- entries that only involve a debit and a credit

Compound Entry- transactions that require more than two accounts in

journalizing

Ledger and Posting

The Ledger

Ledger- Entire group of accounts maintained by a company

Chapter 2 Notes 2
 General Ledger- contains all asset, liability, and equity accounts

Provides the balance in each of the accounts

Standard Form of Account

Three-column form of account- contains 3 money columns (debit,

credit, balance)

Balance in the account is determined after each transaction

Posting

Procedure of transferring journal entries to the ledger accounts

Steps:

In the ledger, date, journal page, and debit amount is entered in the
appropriate columns of the account debited

Write account number to which the debit amount is posted in the

reference column of the journal

Repeat for credit amounts

Posting should be in chronological order

Company should post all the debits and credits of one journal entry
before proceeding to the next journal entry

Reference column of a ledger account indicates the journal page from

which the transaction was posted

Chart of Accounts

Lists the accounts and the account numbers that identify their location in
the ledger

Numbering system usually starts with the statement of financial position

accounts and follows with income statement accounts

The purpose of transaction analysis is first to identify the type of account

involved, and then to determine whether to make a debit or a credit to the
account

Trial Balance

Trial Balance- list of accounts and their balances at a given time

Proves the mathematical equality of debits and credits after posting

Chapter 2 Notes 3
 May also uncover errors in journalizing and posting

Useful in preparation of financial statements

Steps:

List the account titles and their balances in the appropriate debit or
credit column

Total the debit and credit columns

Verify the equality of the two columns

Limitations of a Trial Balance

Does not guarantee freedom from recording errors

Does not prove that the company has recorded all transactions or that the
ledger is correct

Chapter 2 Notes 4