Chapter 2 Recording Business Transactions

The Accounting Process as the process of Analyzing (Identifying business

transactions); Classifying); (Determining the specific accounts involved and deciding
whether the accounts should be increased or decreased); Recording (Listing the details in
a permanent record (either in writing or electronically); Summarizing (After a period of
time, showing the results of a group of transactions in the form of financial statements);
and Interpreting (Drawing conclusions and making decisions from financial statements)
and shows the process as a cycle which is repeated every accounting period.
In the process of analyzing the business transactions, the questions that are asked (giving
the acronym ACID) are:

1. What ACCOUNTS are involved?

2. What are the CLASSIFICATIONS of the accounts?

3. Are the accounts INCREASED (+)? Or

4. Are the accounts DECREASED (-)?

The accounts involved in the business transaction are classified under the elements of the
accounting equation as follows:

Assets = Liabilities + Owner’s Equity

Properties of Creditors’ claims Owners’ claims

the business against the properties against properties

The business transactions are summarized in the form of financial statements where the
accounts from the elements of the accounting equation appear on the financial statements
as follows:

Assets = Liabilities + Owner's Equity

Accounts Accounts J. Ashley,
Cash
Receivable
+ Supplies + Equipment = Payable
+
Capital
+ Revenue _ Expenses
+

Income Statement

Statement of Owner’s Equity

Balance Sheet

In Chapter 1, the Recording of transactions (Step 3 in the accounting process) was done
under the accounts within each section of the fundamental accounting equation to see
how the double-entry accounting system works in that with each transaction, the
accounting equation must remain in balance. The transactions are shown with
increases and decreases in the elements of the accounting equation. The manual system

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of accounting is presented first in accounting courses as understanding how to record
business transactions into a manual accounting system helps to understand how to enter
data into a computerized accounting system. The analyzing and classifying steps must be
done first before recording the transaction so that it will be recorded properly.

I. The Double-Entry Accounting System. Every business transaction has at

least two effects (called the Dual Effect) on the accounting equation. It does not mean
that business transactions are recorded twice. In chapter 1, the business transactions
were recorded in a column arrangement under the elements of the accounting
equation so that the increases and decreases can be seen in each account with +’s and
–‘s. When the transactions were completed for a period, such as a month, the equality of
the accounting equation is proved by adding up the left side (Assets) as well as the
right side (Equities) to see that they are the same. Problems can occur when recording
using the column (tabular) arrangement with the accounting equation: The volume of
daily transactions, makes this form of recording impractical for an actual
accounting system because all transactions are recorded on a single sheet. Also with
the column arrangement, it is not easy to determine the total increases to an account or
the total decreases to an account. In chapter 2, then, business transactions are going to be
recorded into a different form of the accounts where the accounts will be shaped like a T.

A. Define account—an individual accounting record in which the results

of transactions are accumulated with increases and decreases in a
specific asset, liability, or owner’s equity item. Accounts collectively
are called a ledger. In a total manual system, the ledger is a book form
that contains all the accounts for a business. But if the business is using
computerized accounting software, the accounts are listed in the software
program not in a book. Accounts are assigned numbers to indicate the
type of account. The ledger should be arranged in the order in which
accounts are presented in the financial statements—assets, liabilities,
owner’s capital, owner’s drawing, revenues, and expenses.
B. Define T-account—simplified form of an account where increases are
accumulated on one side of the T-account and decreases on the other.
The T-account form has the advantage of providing two sides for each
account so the total dollar amount of increases and the total dollar
amount of decreases to an account can be calculated
C. Define the Standard Form of Account—it is the basic account form with
two amount (or money) columns. The left is the Debit and the right is the
Credit column. These columns are used to record the dollar value of
business transactions.
D. Recording transactions in T-accounts:
1. Example of the T-account for Cash: Note how all the pluses (+)’s
or increases are on the left side and all the minuses (–)’s or
decreases are on the right side:

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 Cash
+ -
(a) 60,000 (b) 33,000
(f) 2,520 (d) 2,000
(p) 850 (g) 700
(q) 2,220 (h) 360
(k) 1,800
(l) 160
(m) 200
(n) 1,130
(o) 620
(r ) 2,500
Foot 65,590 Foot 42,470
Bal. 23,120
2. There is a reason that the Cash account has all the +’s on the left
side and all the –‘s on the right side. Refer to the accounting
equation below where T-accounts has been set up under the three
elements of the accounting equation. What determines which side is
the plus (+) side and which side is the minus (–) side has to do with
where the particular account is located within the accounting equation:
Assets = Liabilities + Owner’s Equity
+ - - + - +
Left Right Left Right Left Right
If the account type is left of the equal sign (Assets), then the increases
will go on the left side. But if an account type is right of the equal sign
(Liabilities and Owner’s Equity). This rule is consistent with the
mathematical requirement that signs of all numbers change (from
plus to minus or minus to plus) when they move from one side of an
equation to the other side. This also true with the accounting equation
that in order to keep the equation in balance, accounts on the opposite
side of the accounting equation must have their plus side on the
opposite sides to keep the equation in balance.
RULE OF SIGN PLACEMENT CAN BE SUMMARIZED as follows:
Whether the LEFT side of an account is an INCREASE or + side of an account or whether the RIGHT
side is an account is an INCREASE or + depends on whether the account is LEFT or RIGHT of the
Equal sign. When moving "LEFT" of the equal sign, the + side will be on the LEFT side of the account
and the - side will be on the RIGHT side of the account.
Left of = Left side is + side Right of = Right side is + side

Assets = Liabilities + Owner's Equity

+ - - + - +

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 Left Right Left Right Left Right
Note the accounts under the umbrella of owner’s equity. When dealing with the four
types of accounts that fall under owner's equity, you must determine if the account type increases
or decreases owner's equity. If it increases owner's equity (OE), then the sign placement is the
same, but if it decreases OE, the sign placement is the opposite as shown here
+ Capital - + Revenues
Drawing - Expenses

- + + - - + + -
Left Right Left Right Left Right Left Right

What account does to Owner's Equity increases decreases increases decreases

So the sign placement is Same as Opposite of Same as Opposite of
O.E. O.E. O.E. O.E.
a. The assets being left of the equal sign will have the plus (+)
side on the left and the minus (–) side on the right side of the
T-accounts. Place the signs on the asset accounts of Cash,
Accounts Receivable, Supplies, and Equipment.
b. Since the liabilities are right of the equal sign will have the
plus (+) side on the right and the minus (–) side on the left
side of the T-accounts. Place the signs on the liability
accounts of Accounts Payable and Notes Payable.
c. Since the owner’s equity section is right of the equal sign will
have the plus (+) side on the right and the minus (–) side on
the left side of the T-accounts. BUT YOU MUST BE
CAREFUL WITH OWNER’S EQUITY to analyze whether
the particular account type increases or decreases owner’s
equity and will work the same or the opposite of owner’s
equity.
1) The capital account increases owner’s equity so the
plus (+) side on the right and the minus (–) side on
the left side of the T-account.
2) The drawing (dividends for a corporation) account
decreases owner’s equity so the plus (+) side on the
left and the minus (–) side on the right side of the T-
account.
3) The revenue account increases owner’s equity so
the plus (+) side on the right and the minus (–) side
on the left side of the T-account.
4) The expense accounts decrease owner’s equity so
the plus (+) side on the left and the minus (–) side
on the right side of those T-accounts. Therefore,
enter the signs of + and – to the Rent Expense,

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 Advertising Expense, Wages Expense, and Utilities
Expense.
3. Remember to apply the acronym ACID to properly analyze the
transactions to determine what accounts are involved; what the
classifications of the accounts are; and whether the accounts are
being increased or decreased. To complete the transactions, the
accounting equation will be expanded so that the owner’s equity
account types that are revenues and expenses will appear next to
owner’s equity as follows:
Assets = Liabilities + Owner’s Equity + Revenues - Expenses
+ - - + - + - + + -
a. Owner invested $10,000 cash to start a business.
The accounts involved are cash and Owner, Capital. The
classifications are assets and owner’s equity. Both accounts
are increased. According to the rule, cash is increased on
the left side and owner’s capital on the right side (owner’s
capital increases owner’s equity so the sign placement is the
same as owner’s equity). The entry is entered into the T-
accounts as follows:
Assets = Liabilities + Owner’s Equity + Revenues - Expenses
+ - - + - + - + + -
Cash Capital
10,000 10,000

Note: left 10,000 cash and right 10,000 capital—left, right.

b. Company purchases $500 supplies on account. The
accounts involved are Supplies and Accounts Payable. The
classifications are assets and liabilities. Both accounts are
increased. According to the rule, cash is increased on the
left side and liabilities on the right side as right of the equal
sign. The entry is entered into the T-accounts as follows:
Assets = Liabilities + Owner’s Equity + Revenues - Expenses
+ - - + - + - + + -
Supplies Accts. Payable
500 500

Note: left 500 supplies and right 500 accounts payable—left, right.
c. Company paid $1,000 rent expense on a building.
The accounts involved are Rent Expense and Cash. The
classifications are expenses and assets. Rent expense is
increased. Cash is decreased. According to the rule,
expenses are increased on the left side (expenses decrease
owner’s equity so the sign place is the opposite of owner’s
equity) and assets are decreased on the right side. The
entry is entered into the T-accounts as follows:
Assets = Liabilities + Owner’s Equity + Revenues - Expenses
+ - - + - + - + + -

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 Cash Rent Exp.
1000 1000

Note: left 1,000 rent expense and right 1,000 cash—left, right.

d. Company purchased $15,000 of equipment paying

$2,000 down and signing a note for the remainder.
The accounts involved are Equipment, Cash, and Notes
Payable. The classifications are assets and liabilities.
Equipment is increased; cash is decreased; and notes
payable is increased. According to the rule, assets are
increased on the left side and decreased on the right side
and liabilities are increased on the right side. The entry is
entered into the T-accounts as follows:
Assets = Liabilities + Owner’s Equity + Revenues - Expenses
+ - - + - + - + + -
Cash Notes Payable
2,000 13,000
Equipment
15000

Note: left 15000 equipment and right 2,000 cash and right Notes Payable 13,000—
left, right.
e. Company rendered services for cash of $2,500. The
accounts involved are Cash and Service Revenue. The
classifications are assets and revenues. Both accounts are
increased. According to the rule, cash is increased on the
left side and revenues on the right side (revenues increase
owner’s equity so the sign placement is the same as owner’s
equity) as right of the equal sign. The entry is entered into
the T-accounts as follows:
Assets = Liabilities + Owner’s Equity + Revenues - Expenses
+ - - + - + - + + -
Cash Service Rev.
2500 2500
Note: left 2,500 cash and right 2,500 service revenue—left, right.
f. Company rendered services billing customers for
$5,000. The accounts involved are Accounts Receivable
and Service Revenue. The classifications are assets and
revenues. Both accounts are increased. According to the
rule, cash is increased on the left side and revenues on the
right side (revenues increase owner’s equity so the sign
placement is the same as owner’s equity) as right of the
equal sign. The entry is entered into the T-accounts as
follows
Assets = Liabilities + Owner’s Equity + Revenues - Expenses
+ - - + - + - + + -

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Accts.Receiv. Service Rev
5000 5000

Note: left 5,000 accounts receivable and right 5,000 service revenue—left, right.
g. Company paid $250 advertising expense. The
accounts involved are Advertising Expense and Cash. The
classifications are expenses and assets. Rent expense is
increased. Cash is decreased. According to the rule,
expenses are increased on the left side (expenses decrease
owner’s equity so the sign place is the opposite of owner’s
equity) and assets are decreased on the right side. The
entry is entered into the T-accounts as follows:
Assets = Liabilities + Owner’s Equity + Revenues - Expenses
+ - - + - + - + + -
Cash Advert.Exp.
250 250
Note: left 250 advertising expense and right 250 cash—left, right.
h. Company paid $850 wages expense. The accounts
involved are Wages Expense and Cash. The classifications
are expenses and assets. Rent expense is increased. Cash is
decreased. According to the rule, expenses are increased on
the left side (expenses decrease owner’s equity so the sign
place is the opposite of owner’s equity) and assets are
decreased on the right side. The entry is entered into the T-
accounts as follows:
Assets = Liabilities + Owner’s Equity + Revenues - Expenses
+ - - + - + - + + -
Cash Wages Exp.
850 850
Note: left 850 wages expense and right 850 cash—left, right.
i. Company received a bill of $275 for utilities but
will not pay the bill until the following month. The
accounts involved are Utilities Expense and Accounts
Payable. The classifications are expenses and liabilities.
Utilities expense is increased. Accounts Payable is
increased. According to the rule, expenses are increased on
the left side (expenses decrease owner’s equity so the sign
place is the opposite of owner’s equity) and liabilities are
increased on the right side. THIS TRANSACTION IS
OFTEN MISSED ON THE FIRST TEST as it is believed
that this transaction does not need to be recorded. Just
keep in mind that expenses must be recorded when they are
incurred so it needs to be recorded when received as an
expense has already been incurred. The entry is entered
into the T-accounts as follows:
Assets = Liabilities + Owner’s Equity + Revenues - Expenses

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 + - - + - + - + + -
Accts. Payable Utilities Exp.
275 275
Note: left 275 utilities expense and right 275 accounts payable—left, right.

j. Owner takes a draw of $1,000. The accounts involved

are Owner, Drawing and Cash. The classifications are
owner’s equity and assets. Owner, Drawing is increased.
Cash is decreased. According to the rule, owner, drawing is
increased on the left side (drawing decreases owner’s equity
so the sign place is the opposite of owner’s equity) and
assets are decreased on the right side. The entry is entered
into the T-accounts as follows:
Assets = Liabilities + Owner’s Equity + Revenues - Expenses
+ - - + - + - + + -
Cash Owner, Drawing
1000 1,000

Note: left 1,000 owner, drawing and right 1,000 cash—left, right.

k. Company received $2,000 from customers on

account. The accounts involved are Cash and Accounts
Receivable. Both fall under the classification of assets. The
cash account is increased and the accounts receivable account
is decreased According to the rule, assets are increased on the
left side and decreased on the right side. This transaction is
known as a shift in assets, that is, the individual asset accounts
changed, but the total dollar value of assets remained the same.
The entry is entered into the T-accounts as follows:

Assets = Liabilities + Owner’s Equity + Revenues - Expenses

+ - - + - + - + + -
Cash
2000
Accts.Rec.
2000

Note: left 2,000 cash and right 2,000 accounts receivable—left, right.

Now you should be able to SEE A PATTERN here from these transactions—
that every transaction had at least one account with a left entry and one
account with a right entry. A RULE should be evident at this point—
EVERY TRANSACTION REQUIRES AN EQUAL DOLLAR AMOUNT
OF ENTRIES ON THE LEFT SIDE OF AN ACCOUNT(S) AS THERE
ARE ENTRIES ON THE RIGHT SIDE OF AN ACCOUNT(S). When
recording transactions, think of marching—LEFT, RIGHT; LEFT; RIGHT
to keep in mind that there needs to be at least one left side of an account

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 entry and at least one right side of an account entry so that the dollar
amounts of left entries will equal the dollar amount of right entries.

II. The Rules of Debit and Credit. The concepts of understanding the rules of
debit and credit are difficult to grasp when applying them to accounting because of
the preconceived ideas that we have concerning what the words debit and credit
mean. For example, when you return an item of a department store and get a
“credit” to your account, that means that your account balance is reduced so you
think the word, “credit” must mean decrease. When you received a bank statement
and see a “debit” memo, it means that a service charge or something similar has
deducted from your account, so then you think that “debit” must be deduct or
decrease. So what has happened from your life experiences, you have associated the
words, “debit” and “credit” with being an increase or a decrease or vice-versa.
Students often get the impression that “debit” means bad and “credit” means good.
But what you need to do to understand the concepts of debit and credit is to just
forget all the preconceived notions that you have as to what these words mean to
you so that you can fully understand and apply them correctly to accounting.

A. How do the terms "debit" and "credit" play into the accounting?
As a Franciscan monk, Luca Pacioli (the father of accounting) spoke Latin. In
Latin, "debit" means "left," and "credit" means "right." So when you "debit"
an account, you are making an entry on the "left" side of an account. When you
"credit" an account, you are making an entry on the "right" side of an account.
Whether that entry increases or decreases the account depends on the
accounts location in relation to the equal sign--left or right of it.
In Latin, the actual word for "left" is "debere" so we get the abbreviation for "debit" as "Dr."
In Latin, the actual word for "right" is "credere" so we get the abbreviation for "credit" as "Cr."

B. In English, we use the word “debit” for debere and the word, “credit”
for credere. But for accounting the term “debit” means left (left side of
an account) and “credit” means right (right side of an account). To
apply the meaning of these words, think of your “left” hand as being your
“debit” hand or your “right” foot as your “credit” foot. When you are
driving and turning left or right, think turning “debit” or turning
“credit.”
C. Summary of the rules for debits and credits in asset, liability,
and owner’s equity accounts to see their relationship to the accounting
equation with T-Accounts. Whether debits and credits signify increases
or decreases depends on the type of account involved. DOUBLE
ENTRY RECORDING RULES:
1. Asset accounts, which are left of the equal sign, the left or debit side
is the increase side of an account, and the right or credit side is the
decrease side of an account. The normal balance of accounts is the
plus side so the normal balance of asset accounts is the debit side.

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 2. Liability accounts which are right of the equal sign, the right or
credit side is the increase side of an account, and the left or debit
side is the decrease side of an account. The normal balance of liability
accounts is the credit or plus side of an account.
3. Owner’s Equity accounts require that you analyze an account type
as to whether it increases or decreases owner’s equity.
a. Capital Account increases owner’s equity so the sign is the
same as owner’s equity with the right or credit side as the
increase side and normal balance of the account.
b. Revenue Accounts increase owner’s equity so the sign is the
same as owner’s equity with the right or credit side as the
increase side and normal balance of the account.
c. Withdrawals or Dividends decreases owner’s equity so the
sign is the opposite of owner’s equity with the left or debit
side as the increase side and normal balance of the account.
To help understand why withdrawals decrease owner’s equity,
just think of it this way that the owner withdrew cash or other
assets from the business and did not put anything back in its
place.
d. Expenses decreases owner’s equity so the sign is the opposite
of owner’s equity with the left or debit side as the increase
side and normal balance of the account.
D. Temporary owner’s equity accounts—Expense accounts,
revenue accounts, and owner’s drawing account are called temporary
owner’s equity accounts because they are used to record transactions
during an accounting period to show changes that occur in owner’s equity
during an accounting period and help with the preparation of financial
statements. Since revenues and expenses appear separately on the income
statement, the accounting equation is expanded to aid in recording these
transactions. The statement of owner’s equity shows the beginning
owner’s capital, the net income, and the drawings to calculate the ending
owner’s capital. Temporary owner’s equity accounts or subdivisions are
used to yield a separate record of the items affecting owner’s equity and
their balances will be transferred to the owner’s equity account at the
end of the accounting period. Refer to the handout on page 5. This
illustration helps to show the effects of the temporary owner’s equity
accounts on owner’s equity. Credits increase owner’s equity and Debits
decrease owner’s equity because owner’s equity is right of the equal
sign soothe right side is the plus side. NOTE that the Revenues T-
account is shown on the right side of the Owner’s Equity T-account to
show that revenues work the same as owner’s equity (a CREDIT to
increase the account) because they increase owner’s equity. But
Expenses T-account and Drawing T-account are shown on the left side
of the larger owner’s equity T-account to show that these accounts
decrease owner’s equity and it take s a DEBIT to decrease owner’s equity.

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 The key to successful recording is ANALYSIS of transactions. Follow
E.
the process of ANALYZING BUSINESS TRANSACTIONS by
answering the questions in the table as follows:
a. Which Accounts are affected?
b. What is the Classification of each account? Note that the
expanded accounting equation is utilized now for the
classifications (Assets = Liabilities + Owner’s Equity +
Revenues – Expenses).
c. Is each account Increased or Decreased?
d. Which account is Debited and for what amount?
e. Which account is Credited and for what amount?
III. The Trial Balance—a listing of all ledger accounts with their balances to test
the equality of debits and credits, prepared at the end of the accounting period
before the financial statements are prepared.
A. After the transactions have been recorded into the T-Accounts, the
balance in each account needs to be calculated. Balances are arrived
by footing (adding up the column for a total) the debit and credit
columns of each account and calculating the difference between the two
columns. To calculate the difference, you subtract the footed minus side
of the account from the footed plus side of the account. The balance
needs to be shown on the increase side of the account. If there is just one
transaction in an account, that is the balance. In Excel, it is helpful to
double underline the balances to identify the balance. It is possible to
have a negative balance in an account like with cash if the cash has
been overdrawn. But since we are not going to be teaching bad habits in
this accounting course, all the accounts will have normal balances. It is
also possible to have an account with a zero balance even if there are
entries on the debit and credit sides of the account. This could happen in a
liability account such as accounts payable if all the debts has been paid
in full by the end of the accounting period or in the accounts receivable
account if all the customers have paid their accounts in full by the end of
the accounting period. All the transactions as well as the footing and
balancing (footings are highlighted green and balances are highlighted
yellow) of the accounts is shown below so that you can check your work
after determining the balance in each account:

Assets = Liabilities + Owner’s Equity + Revenues - Expenses

+ - - + - + - + + -
Cash Accts.Payable Owner, Capital ServiceRev Rent Expense
10000 1000 500 10000 2500 1000
2500 2000 275 5000
2000 250 775 Owner, Drawing 7500 Advert. Exp.
850 1000 250
1000 Notes Payable
14500 5100 13000 Wages Exp.

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9400 850
Accts.Rec.
5000 2000 Utilities Exp.
3000 275
Supplies
500

Equipment
15000

B. The Trial balance can be considered a trial run as the purpose is to

show that there was an equal dollar amount of debit and credit entries to
the accounts over the accounting period. IT IS NOT A FORMAL
FINANCIAL STATEMENT so the format of the report does not need to
follow all the strict requirements as with the financial statements. It is
actually an accountant’s work paper to check the equality of the debits
and credits in the ledger so it is OK to ABBREVIATE on this report.
The trial balance shows only that total debits in the ledger equal total
credits. The fact that a trial balance is in balance DOES NOT MEAN
OR PROVE THAT NO ERRORS have occurred. Since the trial
balance is a report, there is a format to follow for the presentation as
follows:
1. Heading shows to answers to the questions …
i. Who: Name of the company
ii. What: Name of the report—Trial Balance
iii. When: Last day of the accounting period (Note that
since it has the word “balance” it cannot be over a
period of time as balances change continually so the
balance is at the end of the day on the last day of the
accounting period).
2. Listing of accounts is done as how would appear in a ledger:
i. Assets in order of liquidity.
ii. Liabilities
iii. Owner’ Equity—capital and then drawing
iv. Revenues
v. Expenses
3. Balances of accounts ONLY are brought to the trial balance-not
the debit footing and the credit footing—only the balance. The
normal balance side of an account is always the same as the
increase side. The “normal” balance is where you would expect to
find the balance.
i. Debit balances are entered under the debit column of the
trial balance—assets, drawing, and expenses.
ii. Credit balances are entered under the credit column of
the trial balance—liabilities, owner’s capital, and
revenues.

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C. Types of accounts have the normal balances on the debit side (assets,
owner’s drawing, and expenses) and types of accounts have normal
balances on the credit side (liability, owner’s capital, and revenue).
Balances normally appear on the increase side of an account. NOTE
that three account types have normal debit balances and three
account types have normal credit balances. The Trial Balance
Equation showing that Assets, Drawing, and Expenses on the left side of
the equation as their normal balances are on the left side and that
Liabilities, Capital, and Revenue are on the right side of the equation as
their normal balances are on the right side. A helpful tool to memorize
the accounts with their normal balances is the following T-account:
Dr   Cr
After Eating Dinner A E D L R C Let's Read Comics
A = assets L = liabilities
E = expenses R = revenues
D = drawing C = capital
 
IT SHOULD BE STRESSED THAT THE DEBIT AND CREDIT RULES
LEARNED IN THIS CHAPTER WILL BE USED THROUGHOUT
THE COURSE, ALL OTHER ACCOUNTING COURSES, AND IN
ACCOUNTING PRACTICE. THESE RULES MUST BE LEARNED
THOROUGHLY, OR YOU WILL BE RESTING ON A SHAKY
FOUNDATION THROUGHOUT YOUR ENTIRE STUDY OF
ACCOUNTING.

The following Trial Balance assuming that the month of the

transactions is January in 20--:
Company Name
Trial Balance
January 31, 20--
Account Title Debit Credit
Cash 9,400
Accounts Receivable 3,000
Supplies 500
Equipment 15,000
Accounts Payable 775
Notes Payable 13,000
Owner, Capital 10,000
Owner, Drawing 1,000
Service Revenue 7,500
Rent Expense 1,000
Advertising Expense 250
Wages Expense 850
Utilities Expense 275
Totals 31,275 31,275

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 The totals are always side-by-side to show that the debit total equals the
credit total and also double-underline the totals. Notice that it does not
matter how you capitalize on a trial balance and it is acceptable to abbreviate
(as is only an accountant’s work paper) but you need to use the FULL NAME
OF ACCOUNTS. For example Office Equipment could be written Office
Equip. But it is important that the word, “Office” is used as it is the
FULL NAME OF THE ACCOUNT and there can be more than one kind
of equipment account. Also it is important to use the word “Expense”
with expense accounts. Advertising Expense could be written, “Advert.
Exp.,” because it does show the FULL NAME OF THE ACCOUNT. It is
important to use the word, “Expense,” because there will be, for example,
a “Supplies Expense” account along with the “Supplies” account and
there will different names for different kinds of supplies and equipment
so the full name must be used but words can be abbreviated.

IV. Steps of the Recording Process showing the FLOW OF ACCOUNTING

DATA illustrating how the accounting process proceeds in a process as follows:

1. Business 2. Business 3. Analyze 4. Entry 5. Entry 6. Prepare a

Transaction → Document → Business → Recorded → Posted to → Trial
Occurs Prepared Transactions in Journal Ledger Balance

A. ANALYZE TRANSACTIONS FROM SOURCE DOCUMENTS. The

principle of objective evidence applies that states financial events recorded in
accounting records are supported by written source documents. Transactions
should be properly documented to provide an audit trail. An audit trail is
documentation that a person can follow in checking or following up on recorded
information. Source documents can take many forms: invoices, bills, check
stubs, memorandums, and so forth. REMEMBER: In the process of
ANALYZING BUSINESS TRANSACTIONS the questions that are asked
(giving the acronym ACID) are as follows:
5. What ACCOUNTS are involved?

6. What are the CLASSIFICATIONS of the accounts?

7. Are the accounts INCREASED (+)? Or

8. Are the accounts DECREASED (-)?

9. Which account(s) are DEBITED and for what amount?

10. Which account(s) are CREDITED and for what amount?

B. RECORD TRANSACTIONS IN A JOURNAL. In Chapter 1, transactions were
recorded in terms of their effects on the accounting equation. This method was

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 used to gain a good understanding of the double-entry system of accounting in
that with every transaction at least two accounts are affected and with the t-
account format above it can be seen, also, with every transaction, there needs to
be an equal dollar amount of debit entries as there are credit entries. The
actual FORMAL RECORD for recording business transaction is the
JOURNAL.

C. POST FROM THE JOURNAL TO THE LEDGER.

D. PREPARE A TRIAL BALANCE OF THE LEDGER.

II. Recording in a Journal.

A. DEFINE A JOURNAL. A journal is a record of original entry. Describing the
journal as “the book of original entry” means that the journal is the first
place in which transactions are formally recorded. The actual first recording
is on the source document. The JOURNAL provides a complete record of
each transaction in chronological order (by order of date). The JOURNAL is
like a diary of information—that is, a day-by-day record of business
transactions in which both the debit and credit parts of an entry are
recorded in one place.
B. STEPS IN RECORDING TRANSACTIONS IN THE BASIC FORM OF
JOURNAL CALLED THE GENERAL JOURNAL. See a full general journal
handout). The format of a general journal is shown below where the:
1. (1) is the area for the particular page of the journal;
2. (2) dates on the journal page where the top will show the year and
month and then just the day is recorded for the remainder of the page;
3. (3) shows the account names and the explanation of each
transaction (Debits go next to the line in the box, Credits are indented 4
to 5 spaces, and the explanation indented about 10 spaces;
4. (4) is for the Post Reference to form an audit trail to trace where the
entry goes from here (THIS COLUMN REMAINS BLANK UNLESS AN
ENTRY IS ACTUALLY POSTED TO A GENERAL LEDGER);
5. (5) the amount of the debit entry (dollar signs are NOT used); and
6. (6) the amount of the credit entry (dollar signs are NOT used).

7. The normal order for recording in a general journal is to enter the

debit account and amount first (or all the debit accounts or amounts in
the case of a compound entry) and then all credit account and amount
second (or all the credit accounts or amounts in the case of a compound
entry) for each particular entry.
8. Note the second entry below which is functionally correct as the debit
entry is next to the line of the box and the credit entry is indented about 5
spaces and the explanation is indented about 10 spaces. There is nothing
wrong with that entry as follows the journalizing (the process of
recording transactions in a journal) rules. But the problem is that the

15
 indenting is often forgotten to do if the credit entry is entered first and
then the entry also does not look as symmetrical as shown with the stair-
step look as with the first entry. That is the reason that you are instructed
in the textbook to always enter the debit(s) first and then the credit(s).
Note the line separating each entry:
General Journal (1) Page 1
(2) Date (3) Account Title (4) P.R. (5) Debit (6) Credit
Year
Month Day Debit account name $ debited
Credit account name $ credited
Explanation
Day Credit account name $ credited
Debit account name $ debited
Explanation

9. Record the date. The year and month are recorded only at the top of a
page and when either changes.
10. Record the account to be debited. The account name (USE EXACT
NAMES FOR ACCOUNTS BUT CAN ABBREVIATE) only is given
with the debit account—any explanation will go AFTER the debit and
credit account names are entered. You only want the account name. A
typical student error is to describe what happened with the account
name but the account names stand alone.
11. Record the amount to be debited. No dollar signs are used.
12. Record the account to be credited. The account name (USE EXACT
NAMES FOR ACCOUNTS BUT CAN ABBREVIATE) only is given
with the credit account—any explanation will go AFTER the debit and
credit account names are entered.
13. Record the amount to be credited. The debit and credit amounts must
be equal. Total debits must equal total credits.
14. Write a brief explanation. The explanation should contain vital
information like information on source documents like names of
suppliers and customers, invoice numbers, check numbers, etc.
Jan. 2—Transaction 0. The business bought office supplies from Central Supply
for $850 would be recorded as follows using the Chart of Accounts for the exact
names for accounts noting that the account, Cash in Bank (Check # s/b recorded in
the explanation) is used rather than just Cash to differentiate this type of cash account
from others that will be also used later on:
General Journal Page 1
Date Account Title P.R. Debit Credit
20--
Jan. 2 Office Supplies 850.00
Cash in Bank 850.00
Purch. Supplies for cash from
Central Supply—Ck.#_______..

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 Jan. 5—Transaction 1. The business sold a used dot matrix printer on account
for $1,500 (must be an antique or gold inlayed!!!). Note that since this is the
second entry on the page, only the “5” goes under the date section. Also note the
line in the explanation indicating some vital information that should be there.
General Journal Page 1
Date Account Title P.R. Debit Credit

. 5 Accts. Receivable 1,500.00

Office Equip. 1,500.00
Sold dot matrix printer on
account to ___________.
Jan. 5—Transaction 2. Ms. Adams invested $75,000 of her personal savings in
the business. Note even though the date is the same date as the transaction above, the
number “5” is still written again to indicate that this is a separate entry.
General Journal Page 1
Date Account Title P.R. Debit Credit

. 5 Cash in Bank 75,000.00

J. Adams, Capital 75,000.00
Owner invested cash in business.
Jan. 11—Transaction 3. The business purchased word processing equipment for
$9,500 on account from Northern Office Equipment Company.
General Journal Page 1
Date Account Title P.R. Debit Credit

. 11 Office Equip. 9,500.00

Accts. Payable 9,500.00
Purch. word proc. equip. from
Northern Office Equip. Inv.#____
Jan. 16—Transaction 4. The business paid $3,500 on account to Northern Office
Equipment Company.
General Journal Page 1
Date Account Title P.R. Debit Credit

. 16 Accts. Payable 3,500.00

Cash in Bank 3,500.00
Paid on acct. to Northern Office
Equip. Co. Ck# ________.
Jan. 25—Transaction 5. Ms. Adams invested an office file cabinet valued at $375
in the business. Note that an owner can invest other assets besides cash into a
business and the amount that is used is the fair market value.
General Journal Page 1
Date Account Title P.R. Debit Credit

. 25 Office Equip. 375.00

17
 J. Adams, Capital 375.00
Owner Invested file cabinet into
the business.

The entire journal page completed would appear as follows noting that the P.R.
column in blank at this time as none of the entries have been posted to a general
ledger as yet:
General Journal Page 1
Date Account Title P.R. Debit Credit
20--
Jan. 2 Office Supplies 850.00
Cash in Bank 850.00
Purch. Supplies for cash from
Central Supply—Ck.#_______..

5 Accts. Receivable 1,500.00

Office Equip. 1,500.00
Sold dot matrix printer on
account to ___________.

5 Cash in Bank 75,000.00

J. Adams, Capital 75,000.00
Owner invested cash in business.

11 Office Equip. 9,500.00

Accts. Payable 9,500.00
Purch. word proc. equip. from
Northern Office Equip. Inv.#____

16 Accts. Payable 3,500.00

Cash in Bank 3,500.00
Paid on acct. to Northern Office
Equip. Co. Ck# ________.

25 Office Equip. 375.00

J. Adams, Capital 375.00
Owner Invested file cabinet into
the business.

C. RECORDING A COMPOUND JOURNAL ENTRY—an entry requiring two

or more debits or two more credits or two or more debits and credits. For
example to record the entry: On July 1, 20--, Leeds Company purchased
from Office Max store supplies, $125, office supplies, $75, and office
equipment, $2,000 paying $500 down with check # 101 and the remainder on
account, invoice #7077R, the proper format would be:

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 General Journal Page 1
Date Account Title P.R. Debit Credit
20--
July 1 Store Supplies 125.00
Office Supplies 75.00
Office Equipment 2,000.00
Cash 500.00
Accounts Payable 1,700.00
Purchased supplies & equip.from
Office Max, Ck.#101, Inv.#7077R
NOTE: With a compound journal entry, all the debit entries were entered first
and then all of the credit entries followed by the explanation.

III. The Advantage of Recording in a Journal.

A. The entire entry is in one place..
B. Complete chronological record of transactions
C. Place for an explanation.
D. Lessens possibility of an error in amounts as when recording into T accounts.
E. Makes it easier to locate errors than when using the T account format.

IV. Posting to the Ledger. The Journal shows an entire transaction in one place
but it does not provide the advantage that a T account form did to show the amount
of increases to an account and the amount of decreases to an account nor able to
determine the balance in an account. Therefore the transactions that are entered
into the Journal must be posted to a Ledger that contains all the individual accounts.
The third step in the accounting process is posting (the process of transferring
information from a journal to the individual ledger accounts. The reason why both
a journal and a ledger are necessary is that businesses need a chronological record
of transactions (provided by the journal) and a record of the activity relating to each
account (provided by the ledger). Both are necessary to ensure that information is
recorded and reported accurately.

A. Define and describe the chart of accounts. A chart of accounts is a directory

or listing of accounts in the ledger. It would be similar to a table of contents
in the front of a book and is used as a basis for posting to help locate ledger
accounts. Also it helps us to know the exact name for accounts to aid in the
journaling process. Refer to the Chart of Accounts for Pioneer Advertising
Agency on page 57. Note the sections that have been set-up reflecting the
classifications with the expanded accounting equation. Under the asset
section, you will see that numbers have been skipped in the sequence. This
has been done to provide a flexible system so that accounts can be added
later as needed. Account numbers reflect the type of account as follows:
1. Those beginning with the number 1 = assets.
2. Those beginning with the number 2 = liabilities.

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 3. Those beginning with the number 3 = owner’s equity.
4. Those beginning with the number 4 = revenues.
5. Those beginning with the number 6-7 = expenses.
6. Those beginning with the number 8 = other expenses.
7. Those beginning with the number 9 = other revenues.
The order of accounts in the ledger follow the same order used to prepare
the trial balance which usually follows the order of accounts listed in the
financial statements, with the balance sheet accounts being shown first,
followed by the income statement accounts and therefore the sequence of
accounts in the ledger would be as follows:
1. assets,
2. liabilities
3. owner’s equity
4. revenues
5. expenses
6. other revenues
7. other expenses
B. The three-column account or the balance form of account has three amount
columns so that there is a running balance of the account so that the account
balance can be seen in an account at any time during the account period not
just at the end of the accounting period as was with the T account format
where the General Ledger has (1) a Debit column; (2) a Credit column; and (3)
a Balance column. column. The explanation column is NOT USED FOR
DESCRIPTIONS AS THE JOURNAL CONTAINS THE DESCRIPTIONS.
The explanation column is used to record the word, “Balance,” if the account
has a carry forward balance and also is used to indicate special type of
entries were posted here known as adjusting entries, closing entries; and
reversing entries that will be covered later on in the course. Those are the
ONLY WORDS that will appear under the explanation column. Note the T
that is showing in the debit and credit columns for illustration purposes only
to show that the General Ledger is like the T account as has a column for
enter the plus amounts and a column for entering the minus amounts. But
the General Ledger has the advantage of also giving a running balance in
accounts.
General Ledger
Account Account No.____
Date Item Ref. (1)Debit (2)Credit (3) Balance

20
 C. STEPS IN POSTING. Each debit and each credit in the journal must be
posted. The posting process requires the following 4 steps where the acronym
DAPA will be used:
1. Record the DATE in the ledger account.
2. Record the AMOUNT and obtain the BALANCE in the ledger
account at this point.
3. Record the journal PAGE in the ledger account. The posting
references set up a cross-referencing system.
4. Record the ledger ACCOUNT number in the journal. The last step
sets up a system for knowing if an entry has been posted or not because
if there is an account number in the post reference column of the
journal, then that is an indication that the entry HAS been posted and if
there is not an entry there, then that is saying that the entry HAS NOT
been posted.
Using this 4-step process, the entries will now be posted to the ledger
accounts shown on pages 9 and 10 (this ledger has a 4-column format that
has the balance wither debit or credit which is helpful when learning the
posting and balancing process and is illustrated here) as follows (Enter
plus (+) or minus (-) on the debit and credit columns to indicate which
one increases the account and which one decreases the account to aid in
the process):
Jan. 2 Debit entry to Office Supplies for $850:
1. Record the DATE under the “Date” column.
2. Record the AMOUNT under the debit column of $850 with the
BALANCE of $850 under the balance column.
3. Record the journal PAGE under the Ref. column (J1 for Journal,
page 1).
4. Record the ledger ACCOUNT number in the journal (shown
below in the completed journal.
General Ledger
Account Office Supplies Account No.113
Balance
Date Item P.R. Debit Credit Debit Credit
(+) (-) (+) (-)
20--
Jan 2 J1 850.00 850.00

Jan. 2 Credit entry to Cash in Bank for $850 (Note cash has a beginning
balance so the word, “Balance” appears in the item column; a check
mark under the P.R. as was not posted but brought forward; and the
$5,000 appears in the Debit Balance column NOT IN THE DEBIT
column as was not posted from a journal):
1. Record the DATE under the “Date” column.
2. Record the AMOUNT under the credit column of $850 with the
BALANCE of $4,150 under the balance debit column (a beginning
balance of $5,000 – the credit of $850 = $4,150 debit balance).

21
 3. Record the journal PAGE under the P.R. column (J1 for Journal,
page 1).
4. Record the ledger ACCOUNT number in the journal (shown
below in the completed journal.
General Ledger
Account Cash in Bank Account No.111
Balance
Date Item P.R. Debit Credit Debit Credit
(+) (-) (+) (-)
20--
Jan 1 Balance √ 5,000
2 J1 850.00 4,150

Jan. 5 Debit entry to Accounts Receivable for $1,500:

5. Record the DATE under the “Date” column.
6. Record the AMOUNT under the debit column of $1,500 with the
BALANCE of $1,500 under the balance debit column.
7. Record the journal PAGE under the P.R. column (J1 for Journal,
page 1).
8. Record the ledger ACCOUNT number in the journal (shown
below in the completed journal.
General Ledger
Account Accounts Receivable Account No.112
Balance
Date Item P.R. Debit Credit Debit Credit
(+) (-) (+) (-)
20--
Jan 5 J1 1,500.00 1,500.00

Jan. 5 Credit entry to Office Equipment for $1,500:

5. Record the DATE under the “Date” column.
6. Record the AMOUNT under the credit column of $1,500 with the
BALANCE of $1,500 under the balance credit column ($3,000
beginning minus (-) $1,500 in the credit column = $1,500 debit
balance).
7. Record the journal PAGE under the P.R. column (J1 for Journal,
page 1).
8. Record the ledger ACCOUNT number in the journal (shown
below in the completed journal.
General Ledger
Account Office Equipment Account No.116
Balance
Date Item P.R. Debit Credit Debit Credit
(+) (-) (+) (-)
20--
Jan 1 Balance √ 3,000.00

22
 5 J1 1,500.00 1,500.00

Jan. 5 Debit entry to Cash in Bank for $75,000:

9. Record the DATE under the “Date” column.
10. Record the AMOUNT under the debit column of $75,000 with the
BALANCE of $79,150 under the balance debit column (a prior
balance of $4,150 + the debit of $75,000 = $79,150 balance).
11. Record the journal PAGE under the P.R. column (J1 for Journal,
page 1).
12. Record the ledger ACCOUNT number in the journal (shown
below in the completed journal.

General Ledger
Account Cash in Bank Account No.111
Balance
Date Item P.R. Debit (+) Credit Debit (+) Credit
(-) (-)
20--
Jan 1 Balance √ 5,000
2 J1 850.00 4,150
5 J1 75,000.00 79,150.00

Jan. 5 Credit entry to J. Adams, Capital for $75,000:

13. Record the DATE under the “Date” column.
14. Record the AMOUNT under the credit column of $75,000 with the
BALANCE of $82,000 under the balance credit column (a prior
beginning balance of $7,000 + the credit of $75,000 = $82,000
balance).
15. Record the journal PAGE under the P.R. column (J1 for Journal,
page 1).
16. Record the ledger ACCOUNT number in the journal (shown
below in the completed journal.

General Ledger
Account J. Adams, Capital Account No.311
Balance
Date Item P.R. Debit (-) Credit Debit (1) Credit
(+) (+)
20--
Jan 1 Balance √ 7,000
5 J1 75,000.00 82,000.00

Jan. 11 Debit entry to Office Equipment for $9,500:

17. Record the DATE under the “Date” column.
18. Record the AMOUNT under the debit column of $9,500 with the
BALANCE of $11,000 under the balance debit column ($1,500

23
 prior balance plus (+) $9,500 in the debit column = $11,000 debit
balance).
19. Record the journal PAGE under the P.R. column (J1 for Journal,
page 1).
20. Record the ledger ACCOUNT number in the journal (shown
below in the completed journal.
General Ledger
Account Office Equipment Account No.116
Balance
Date Item P.R. Debit Credit Debit (+) Credit
(+) (-) (-)
20--
Jan 1 Balance √ 3,000.00
5 J1 1,500.00 1,500.00
11 J1 9,500.00 11,000.00
Jan. 11 Credit entry to Accounts Payable for $9,500:
21. Record the DATE under the “Date” column.
22. Record the AMOUNT under the credit column of $9,500 with the
BALANCE of $10,500 under the balance credit column (a prior
beginning credit balance of $1,000 + the credit of $9,500 = $10,500
credit balance).
23. Record the journal PAGE under the P.R. column (J1 for Journal,
page 1).
24. Record the ledger ACCOUNT number in the journal (shown
below in the completed journal.
General Ledger
Account Accounts Payable Account No.211
Balance
Date Item P.R. Debit (-) Credit Debit (1) Credit
(+) (+)
20--
Jan 1 Balance √ 1,000
11 J1 9,500.00 10,500.00

Jan. 16 Debit entry to Accounts Payable for $3,500:

25. Record the DATE under the “Date” column.
26. Record the AMOUNT under the debit column of $3,500 with the
BALANCE of $7,700 under the balance credit column (a prior
credit balance of $10,500 - the debit of $3,500 = $7,000 credit
balance).
27. Record the journal PAGE under the P.R. column (J1 for Journal,
page 1).
28. Record the ledger ACCOUNT number in the journal (shown
below in the completed journal.
General Ledger
Account Accounts Payable Account No.211

24
 Balance
Date Item P.R. Debit (-) Credit Debit (1) Credit
(+) (+)
20--
Jan 1 Balance √ 1,000
11 J1 9,500.00 10,500.00
16 J1 3,500.00 7,000.00

Jan. 16 Credit entry to Cash in Bank for $3,500:

29. Record the DATE under the “Date” column.
30. Record the AMOUNT under the credit column of $3,500 with the
BALANCE of $75,650 under the balance debit column (a prior
balance of $79,150 - the credit of $3,500 = $75,650 debit balance).
31. Record the journal PAGE under the P.R. column (J1 for Journal,
page 1).
32. Record the ledger ACCOUNT number in the journal (shown
below in the completed journal.
General Ledger
Account Cash in Bank Account No.111
Balance
Date Item P.R. Debit (+) Credit Debit (+) Credit
(-) (-)
20--
Jan 1 Balance √ 5,000
2 J1 850.00 4,150
5 J1 75,000.00 79,150.00
16 J1 3,500.00 75,650.00

Jan. 25 Debit entry to Office Equipment for $375:

33. Record the DATE under the “Date” column.
34. Record the AMOUNT under the debit column of $375 with the
BALANCE of $11,375 under the balance debit column ($11,000
prior balance plus (+) $375 in the debit column = $11,375 debit
balance).
35. Record the journal PAGE under the P.R. column (J1 for Journal,
page 1).
36. Record the ledger ACCOUNT number in the journal (shown
below in the completed journal.
General Ledger
Account Office Equipment Account No.116
Balance
Date Item P.R. Debit Credit Debit (+) Credit
(+) (-) (-)
20--
Jan 1 Balance √ 3,000.00
5 J1 1,500.00 1,500.00

25
 11 J1 9,500.00 11,000.00
25 J1 375.00 11,375.00

Jan. 25 Credit entry to J. Adams, Capital for $375:

37. Record the DATE under the “Date” column.
38. Record the AMOUNT under the credit column of $375 with the
BALANCE of $82,375 under the balance credit column (a prior
beginning balance of $82,000 + the credit of $375 = $82,375 credit
balance).
39. Record the journal PAGE under the P.R. column (J1 for Journal,
page 1).
40. Record the ledger ACCOUNT number in the journal (shown
below in the completed journal.
General Ledger
Account J. Adams, Capital Account No.311
Balance
Date Item P.R. Debit (-) Credit Debit (1) Credit
(+) (+)
20--
Jan 1 Balance √ 7,000
5 J1 75,000.00 82,000.00
25 J1 375.00 82,375.00

Below is the completed General Journal to check your work

that account numbers (bolded for emphasis for the added
items not shown on the General Journal above) were properly
recorded back in the General Journal . The posting process
should be done each time an entry is made in the General
Journal so that account balances are always current like with
Cash, for example, to know that the account has not been
overdrawn. Since transactions are recorded first in the
General Journal (the book of original entry) and then
transferred to the ledger, the General Ledger is often referred
to as the book of final entry.
General Journal Page 1
Date Account Title P.R. Debit Credit
20--
Jan. 2 Office Supplies 113 850.00
Cash in Bank 111 850.00
Purch. Supplies for cash from
Central Supply—Ck.#_______..

5 Accts. Receivable 112 1,500.00

Office Equip. 116 1,500.00

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 Sold dot matrix printer on
account to ___________.

5 Cash in Bank 111 75,000.00

J. Adams, Capital 311 75,000.00
Owner invested cash in business.

11 Office Equip. 116 9,500.00

Accts. Payable 211 9,500.00
Purch. word proc. equip. from
Northern Office Equip. Inv.#____

16 Accts. Payable 211 3,500.00

Cash in Bank 111 3,500.00
Paid on acct. to Northern Office
Equip. Co. Ck# ________.

25 Office Equip. 116 375.00

J. Adams, Capital 311 375.00
Owner Invested file cabinet into
the business.

V. Review of the Trial Balance.

A. Its purpose is to show that debits equal credits. Remember: The trial
balance is not a formal financial statement, but a test of the equality of debits
and credits in the ledger.
B. How to prepare it.
1. Enter the heading:
a. First line tells Who: Name of the company
b. Second line tells What: Name of the report—Trial Balance
c. Third line tells When: Single date—last day of the
accounting period as showing the “balance” in accounts.
2. Enter the account names in the order shown in the ledger—assets
in order of liquidity, liabilities, owner’s capital, owner’s drawing,
revenues, and expenses
3. Transfer the final balance showing in each account to either the
debit or credit column of the Trial Balance whether the final
balance is a debit or a credit balance.
4. Add up the debit and credit columns. If they balance, then double-
underline the totals (after checking the check figures of course!). If
they do not, you need to locate and correct the error(s). See tips
below.

D. Use, “J. Adams, Professional Services” as the name of the company and the
year as 20--. The trial balance should appear as below when you are finished:

27
 J. Adams, Professional Services
Trial Balance
January 31, 20--
Account Title Debit Credit
Cash 75,650.00
Accounts Receivable 1,500.00
Office Supplies 850.00
Office Equipment 11,375.00
Accounts Payable 7,000.00
J. Adams, Capital 82,375.00
Totals 89,375.00 89,375.00
VI. Locating and Correcting Errors.
A. Identify the types of errors. The difference between debits and credits will
often give a clue to the type of error and/or where it occurred.
1. Math errors. To find them first re-add the columns.
2. Posting errors. First check to see if the balance of a particular
account type (asset, liability, owner’s equity, revenue, or expense) is
on its normal balance side which is the account type’s plus (+) side.
a. Posting a debit or credit more than once called a doubling
error. This error is found by subtracting the difference
between the debit and credit column. If the difference is
divisible by 2. Divide the difference by 2 and look to see if
there is a transaction for that amount or if an account balance
has that difference.
b. Posting to the wrong side.
c. Leaving out a posting.
d. Posting the wrong amount. Common errors of this type are
transpositions (the reversal of digits, such as entering 240 for
420) and slides (an entry with an incorrectly places decimal
point, such as entering 100 for 1,000 or 10,000 for 1,000 or 24.50
for 245 . Both transpositions and slides cause the difference in
the debit and credit columns to be divisible by 9.
1) To find slide errors, look as the account balances to
see if any of the account balances have an
unreasonable balance as compared to the balances in
the other accounts by too many or not enough zeros.
2) To find transposition errors, add 1 to the first digit of
the difference and then investigate all accounts for a
transposition where the difference between the first and
second digit is that number. See example below:
ABC Company
Trial Balance
Debit Credit
911
585

28
 703
1,210
255
277
1,812
719
514
745
857
472
4,395 4,665
The difference between the total debits and the total
credits is $270 ($4,395 - $4,665) which is divisible by 9
($27/9 = 30). To see if the difference of 270 is from a
transposition error, add 1 to the first digit of the
difference. Thus, 2 (the first digit of the 270 difference) +1
= 3. Investigate all account balances where the difference
between the first and second digits is 3 (See the bolded first
two digits of those accounts that have a difference of 3).
This really helps to narrow down the search for the
accounts that may have a transposition. This handout
page 13, comes from the booklet, Mastering Correction of
Accounting Errors that is tested on the Certified
Bookkeeper Exam.

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