Chapter-2

Recording Process

Account: An account is an accounting record of increases or decreases in specific assets,

liabilities or owner’s equity item.

Some Commonly Used Accounts:

Assets: Cash, Notes Receivable, Accounts Receivable, Prepaid Expenses, Office Supplies,
Equipment, Furniture, Machinery, Building, Land etc.
Liabilities: Notes Payable, Accounts Payable, Unearned Revenue, Other Short-term Payable,
Mortgage Payable, Debenture, Long-term bank loan etc.
Owner’s Equity: Capital, Withdrawals Account, Revenue, Expense

Steps in Recording Process/ Recording Phases:

The basic steps in recording process are:
1. Analyze each transaction
2. Enter transaction in a journal
3. Transfer journal information to ledger accounts

Determination of Debit and Credit:

Assets Liabilities Owner’s Equity
Debit for Credit for Debit for Credit for Debit for Credit for
Increase Decrease Decrease Increase Decrease Increase
Normal Normal Normal
Balance Balance Balance

Revenue Expense Owner’s Drawings

Debit for Credit for Debit for Credit for Debit for Credit for
Decrease Increase Increase Decrease Increase Decrease
Normal Normal Normal
Balance Balance Balance

Double Entry System

 Luca Pacioli-“Father of Accounting”, first introduced double entry system in his book-
‘Summa de Arithmetica, GeometriaProportioni et Proportionalita’ in 1494.
According to double-entry system, every transaction affects and is recorded in two or more
accounts with equal debits and credits. Every debit must have a corresponding credit and
vice-versa. The effect of a Transaction may be;
 An Asset Increase and a Liability increase or
 An Asset Increase and another Asset Decrease or
 An Assets Increase and Owner’s equity increase
 Revenue Increase owner’s equity and Expense decreases owner’s equity
Recording Process:
1. Recording (Journal):
Recording is the primary task of accounting cycle. The transactions are recorded in the
journal. The journal is a preliminary book of account, which records the business transactions
in chronological order. Transactions are initially recorded in a journal before being
transferred to the accounts. For this reason, the journal is referred to as the book of original
entry. Entering transactions in the journal is known as journalizing.
A complete entry consists of; (1) the date of the transaction, (2) the accounts and amounts to
be debited and credited, and (3) a brief explanation of the transaction.
The journal makes several significant contributions to the recording process which are as;
(1) It discloses in one place the complete effects of a transaction.
(2) It provides a chronological record of transactions.
(3) It helps to prevent or locate errors because the debit and credit amounts for each entry can
be readily compared.
2. Classification (Ledger):
The recorded transactions have to be classified in the form of ledger. The entire group of
accounts maintained by a company is called the Ledger. It is the permanent book of record.
The ledger keeps in one place all the information about changes in specific account balances.
After classifying the transactions that recorded in journal are posted to the ledger under
separate heading. The procedure of transferring journal entries to ledger accounts is called
posting. Posting involves the following steps;
(1) In the ledger, enter in the appropriate columns of the account(s) debited the date, journal
page, and debit amount shown in the journal.
(2) In the reference column of the journal, write the account number to which the debit
amount was posted.
(3) In the ledger, enter in the appropriate columns of the account(s) credited the date, journal
page, and credit amount shown in the journal.
(4) In the reference column of the journal, write the account number to which the4 credit
amount was posted.

3. Summarization (Trial Balance):

A trial balance is a list of accounts and their balances at a given time. Generally, companies
prepare a trial balance at the end of an accounting period. Debit balances appear in the left
column and credit balances in the right column.
The primary purpose of a trial balance is to prove (check) that the debits equal to credits after
posting.

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,
4. Incorrect accounts are used in journalizing or posting, or
5. Offsetting errors are made in recording the amount of a transaction.
Preparation of Journal, Ledger and Trial Balance (Recording Process):
Record the given transactions in the Journal, Classify the transactions by the Ledger,
Summarize the transactions in form of Trail Balance and also prepare an Income Statement &
a Balance Sheet.
October 1: Abir invests Tk. 30,000 cash in an Advertising Agency to be known as the Pioner
Advertising Agency.
October 1: Office equipment costing Tk. 15,000 is purchased by signing a 3 months, 12% Tk.
15,000 note payable.
October 2: Tk. 3,600 cash advance is received from R.K. Company aclient, for advertising
services that are expected to be completed by December 31.
October 3: Office rent for October is paid in cash Tk. 2,700
October 4: Tk. 1,800 is paid for a one-year insurance policy that will expire next year on
Septemebr 30.
October 5: An estimated 3–month supply of advertising materials is purchased on account
from Pacific Supply Tk. 7,500.
October 9: Hire four employee to begin work on October 15-Each employee is to receive a
weekly salary of Tk. 1,500 for a 5-day workweek payable every 2 weeks– first
payment made on October 26.
October 20: Abir withdraws Tk. 1500 for his personal use.
October 26: Employee’s salaries of Tk. 12,000 are owed and paid cash.
October 31: Received Tk. 30,000 in cash from Nishu Company for advertising services
provided in October.
Solution:
Pioner Advertising Agency
General Journal
Date Account Titles and Explanation Ref. Debit Credit
2012 Cash 101 30,000
October, 1 Abir’s Capital 301 30,000
(Owner’s investment of cash in business)
1 Office Equipment 175 15,000
Notes payable 200 15,000
(Issued 3-month, 12% note for office equipment)
2 Cash 101 3,600
Unearned Revenue 209 3,600
(Received cash from R.K. Company for future
services)
3 Rent Expenses 729 2,700
Cash 101 2,700
(Paid October rent)
4 Prepaid Insurance 130 1,800
Cash 101 1,800
(Paid One-year policy effective date October – 1)
 5 Advertising Supplies 126 7,500
Accounts Payables 201 7,500
(Purchased supplies on account from Pacific
supply)
20 Abir’s Drawing 306 1,500
Cash 101 1,500
(Withdrew cash for personal use)
26 Salaries Expenses 726 12,000
Cash 101 12,000
(Paid Salaries to date)
31 Cash 101 30,000
Service Revenue 400 30,000
(Received cash for services Provided)

General Ledger
Cash No. 101
Date Explanation Ref. Debit Credit Balance
2012
Oct. 1 J1 30,000 30,000
2 J1 3,600 33,600
3 J1 2,700 30,900
4 J1 1,800 29,100
20 J1 1,500 27,600
26 J1 12,000 15,600
31 J1 30,000 45,600

Accounts Payable No. 201

Date Explanation Ref. Debit Credit Balance
2012
Oct. 5 J1 7,500 7,500

Unearned Revenue No. 209

Date Explanation Ref. Debit Credit Balance
2012
Oct. 2 J1 3,600 3,600

Advertising Supplies No. 126

Date Explanation Ref. Debit Credit Balance
2012
Oct. 5 J1 7,500 7,500
Abir’s Capital No. 301
Date Explanation Ref. Debit Credit Balance
2012
Oct. 1 J1 30,000 30,000
 Abir’s Drawing No. 306
Date Explanation Ref. Debit Credit Balance
2012
Oct. 20 J1 1,500 1,500

Prepaid Insurance No. 130

Date Explanation Ref. Debit Credit Balance
2012
Oct. 4 J1 1,800 1,800

Office Equipment No. 157

Date Explanation Ref. Debit Credit Balance
2012
Oct. 1 J1 15,000 15,000

Service Revenue No. 400

Date Explanation Ref. Debit Credit Balance
2012
Oct. 31 J1 30,000 30,000

Notes Payable No. 200

Date Explanation Ref. Debit Credit Balance
2012
Oct. 1 J1 15,000 15,000

Service Expenses No. 726

Date Explanation Ref. Debit Credit Balance
2012
Oct. 26 J1 12,000 12,000

Rent Expenses No. 729

Date Explanation Ref. Debit Credit Balance
2012
Oct. 3 J1 2,700 2,700
 Pioner Advertising Agency
Trial Balance
As on October 31, 2012

Account titles Debit (tk.) Credit (tk.)

Cash 45600
Advertising supplies 7500
Prepaid Insurance 1800
Office Equipment 15000
Accounts Payable 7500
Unearned Revenue 3600
Notes Payable 15000
Abir’s Capital 30000
Abir’s Drawing 1500
Service Revenue 30000
Service Expenses 12000
Rent Expenses 2700
Total 86100 86100