CHAPTER

2 The Recording Process

Chapter 2 LEARNING OBJECTIVES
After studying this chapter, you should be able to:

1. Explain what an account is and how it helps in the recording process.

2. Define debits and credits and explain their use in recording business
transactions.
3. Identify the basic steps in the recording process.
4. Explain what a journal is and how it helps in the recording process.
5. Explain what a ledger is and how it helps in the recording process.
6. Explain what posting is and how it helps in the recording process.
7. Prepare a trial balance and explain its purposes.
2-1 2-2

The Account
PREVIEW OF CHAPTER 2 Learning
Objective 1  Record of increases and decreases in a
Explain what an specific asset, liability, stockholders’
account is and how equity, revenue, or expense item.
it helps in the
recording process.  Debit = “Left”
 Credit = “Right”

An account can be
illustrated in a T-
account form.

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 Debits and Credits Debits and Credits
Learning Objective
DEBIT AND CREDIT PROCEDURES 2 Define debits and If the sum of Debit entries are greater than the sum of Credit
credits and explain
their use in recording entries, the account will have a debit balance.
Double-entry system business transactions.

 Each transaction must affect two or more

accounts to keep the basic accounting
equation in balance. Transaction #1 $10,000 $3,000 Transaction #2
Transaction #3 8,000
 Recording done by debiting at least one account and
crediting at least one other account.
Balance $15,000
 DEBITS must equal CREDITS.

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Debits and Credits Debits and Credits

If the sum of Credit entries are greater than the sum of Debit  Assets - Debits should exceed
entries, the account will have a credit balance. credits.

 Liabilities – Credits should exceed

debits.

 Normal balance is on the increase

Transaction #1 $10,000 $3,000 Transaction #2
side.
8,000 Transaction #3

Balance $1,000

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 Debits and Credits Debits and Credits

 Issuance of share capital and revenues  The purpose of earning revenues is to

increase equity (credit). benefit the shareholders.

 Dividends and expenses decrease equity  The effect of debits and credits on
(debit). revenue accounts is the same as their
effect on equity.

 Expenses have the opposite effect:

expenses decrease equity.

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Debits and Credits Summary of Debit/Credit Rules

Normal
Balance Normal Statement of
Debit Balance Financial Position Income Statement
Credit
Asset = Liability + Equity Revenue - Expense

Debit

Credit

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LO 2 2-12 LO 2
 Summary of Debit/Credit Rules Summary of Debit/Credit Rules

Question Question
Debits: Accounts that normally have debit balances are:

a. increase both assets and liabilities. a. assets, expenses, and revenues.

b. decrease both assets and liabilities. b. assets, expenses, and equity.

c. increase assets and decrease liabilities. c. assets, liabilities, and dividends.

d. decrease assets and increase liabilities. d. assets, dividends, and expenses.

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Equity Summary of Debit/Credit Rules

Relationships
Relationship among the assets, liabilities, and equity of a business:

Illustration 2-12
Summary of debit/credit rules

The equation must be in balance after every transaction. Total

Debits must equal total Credits.
Illustration 2-11
Equity relationships

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 > DO IT! E2-2/P.84

Kate Browne, president of Hair It Is Company SA, has just rented space in a
Selected transactions for B. Madar SE, an interior decorating
firm, in its first month of business, are shown below.
shopping mall in which she will open and operate a beauty salon. A friend
Jan. 2 Invested €15,000 cash in the business in
has advised Kate to set up a double-entry set of accounting records in
exchange for ordinary shares.
which to record all of her business transactions.
3 Purchased used car for €7,000 cash for use in
Identify the balance sheet accounts that Hair It Is Company will likely
the business.
use to record the transactions needed to establish and open the business.
9 Purchased supplies on account for €500.
Also, indicate whether the normal balance of each account is a debit or a
11 €1,800 of services were performed and billed.
credit.
16 Paid €200 cash for advertising.
Assets Liabilities Equity
20 Received €700 cash from customers billed on
January 11.
23 Paid creditor €300 cash on balance owed.
28 Declared and paid a €1,000 cash dividend.

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The Account Steps in the Recording Process

Learning Learning
Business documents, such as a sales receipt, a Objective 3 The Journal Objective 4
Identify the basic Explain what a
check, or a bill, provide evidence of the steps in the journal is and how
recording process.  Book of original entry. it helps in the
transaction.
recording process.
 Transactions recorded in chronological
order.

 Contributions to the recording process:

1. Discloses the complete effects of a transaction.

2. Provides a chronological record of transactions.

Analyze each transaction Enter transaction in a journal Transfer journal information to
ledger accounts 3. Helps to prevent or locate errors because the debit and
Illustration 2-13
The recording process credit amounts can be easily compared.

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 The Journal The Journal

JOURNALIZING - Entering transaction data in the journal. SIMPLE AND COMPOUND ENTRIES
Illustration: On September 1, shareholders invested €15,000 cash in the Illustration: On July 1, Tsai Company purchases a delivery truck costing
corporation in exchange for ordinary shares, and Softbyte purchased NT$420,000. It pays NT$240,000 cash now and agrees to pay the remaining
computer equipment for €7,000 cash. NT$180,000 on account. Illustration 2-15
Illustration 2-14 Compound journal entry

GENERAL JOURNAL GENERAL JOURNAL

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> DO IT! > DO IT!

As president and sole shareholder, Kate Browne engaged in the Prepare the entries to record the transactions.
following activities in establishing her salon, Hair It Is Company SA.
1. Opened a bank account and deposited €20,000.
1. Opened a bank account in the name of Hair It Is Company SA and
deposited €20,000 of her own money in this account in exchange
for ordinary shares.
2. Purchased equipment on account (to be paid in 30 days) for a
2. Purchased equipment on account (to be paid in 30 days) for a total cost of €4,800.
total cost of €4,800.

3. Interviewed three applicants for the position of beautician.

Prepare the entries to record the transactions. 3. Interviewed three applicants for the position of beautician.

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 E2-3/p.85 Steps in the Recording Process
Learning
Data for B. Madar SE, interior decorating, are The Ledger Objective 5
presented in E2-2. Explain what a
ledger is and how it
 General Ledger contains all the asset, liability,
Instructions and equity accounts.
helps in the
recording process.
Journalize the transactions using journal page J1.
(You may omit explanations.)
J1
Date Account titles and explanation Ref. Debit Credit

Illustration 2-16
The general ledger
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The Ledger Posting

Learning
STANDARD FORM OF ACCOUNT Illustration 2-17
Three-column form of
Objective 6
account Explain what
posting is and how
it helps in the
recording process.

Transferring
journal entries
to the ledger
accounts.

Illustration 2-18
Posting a journal
entry

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 Posting

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.

Illustration 2-19
Chart of accounts for Yazici Advertising A.S¸ .

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The 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 2-20
Investment of cash
by shareholders
Illustration 2-21
2-31 LO 6 2-32 Purchase of office equipment LO 6
 Illustration 2-22
Receipt of cash for
future service

2-33 LO 6 2-34 Illustration 2-23

Payment of monthly rent LO 6

Illustration 2-24
Payment for
insurance

Illustration 2-25
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Purchase of supplies on credit LO 6
 The Recording Process Illustrated

Illustration 2-26
Hiring of employees

Illustration 2-27
2-37 LO 6 2-38 Declaration and payment of dividend LO 6

Illustration 2-28 Illustration 2-29

2-39 2-40
Payment of salaries LO 6 Receipt of cash for services performed LO 6
 > DO IT! E2-4/p.85
Presented below is information related to Beijing Real Estate Agency
Como Company SpA recorded the following transactions in a general journal Ltd.
during the month of March. Post these entries to the Cash account. Oct. 1 Lynn Robbins begins business as a real estate agent
with a cash investment of ¥200,000 in exchange for
ordinary shares.
Mar. 4 Cash 2,280
2 Hires an administrative assistant.
Service Revenue 2,280
3 Purchases office furniture for ¥19,000, on account.
15 Salaries and Wages Expense 400 6 Sells a house and lot for N. Fennig; bills N. Fennig
Cash 400 ¥32,000 for realty services performed.
19 Utilities Expense 92 27 Pays ¥8,500 on the balance related to the transaction
Cash 92 of October 3.
30 Pays the administrative assistant ¥25,000 in salary for
October.
Instructions
Prepare the debit-credit analysis for each transaction.
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Illustration 2-30
General journal entries

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General journal entries
 The Trial Balance
Learning
A trial balance Objective 7
Prepare a trial
 is a list of accounts and their balances balance and explain
its purposes.
at a given time.

 proves the mathematical equality of debits and credits after

posting.

The steps for preparing a trial balance are:

1. List the account titles and their balances.

2. Total the debit and credit columns.

3. Prove the equality of the two columns.

Illustration 2-31
General ledger
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Trial Balance Limitations of a Trial Balance

Illustration 2-32
A trial balance

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.

5. Offsetting errors are made in recording the amount of a

transaction.

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 Currency Signs and Underlining INVESTOR INSIGHT Why Accuracy Matters

Recently, the German Finance minister, Wolfgang Schauble, said that

Currency Signs
“statistical and communication problems” were to blame for a €55.5
 Do not appear in journals or ledgers. billion error in the accounts of nationalized property lender Hypo Real
Estate Holding (DEU). Mr. Schauble referred to the error as “an
 Typically used only in the trial balance and the financial
annoying mistake.” This seems to be a considerable understatement
statements.
considering that the error represented 2.6% of the German gross
 Shown only for the first item in the column and for the total domestic product. Since the bank had been previously taken over by
of that column. the German government, the error had resulted in an overstatement
of the federal debt of €55.5 billion.)
Underlining
How could this error have occurred?
 A single line is placed under the column of figures to be added
or subtracted.
 Totals are double-underlined.
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> DO IT!

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 E2-14/p.88
The accounts in the ledger of Tempus Fugit Delivery
Service Ltd. contain the following balances on July 31,
2017.

Instructions
Prepare a trial balance with the accounts arranged as
illustrated in the chapter and fill in the missing amount for
Cash.
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