Chapter

Financial Accounting
Lecture 03: The Recording Process

Masud Jahan
Department of Science and Humanities
Military Institute of Science and Technology
Learning Objective

To identify the steps in

the bookkeeping cycle
and discuss the role of
accounting records in
an organization.

LO1
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The Bookkeeping Process

Transactions Recorded in the Journal

Date Description Debit Credit
6/30 Cash 2,000
Paid-in Capital 2,000
To record an investment
by the owners.

Source Documents

Posted to the Ledger

Account Name
Debit Credit

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The Role of Accounting Records
Establishes accountability for
assets and transactions.

Keeps track of routine

business activities.

Obtains detailed information

about a particular transaction.

Evaluates efficiency and

performance within company.

Maintains evidence of a
company’s business activities.
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Learning Objective

To describe a ledger
account and a ledger.

LO2
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The Account

A detailed record of
increases and
decreases in specific
assets, liabilities,
equities, revenues, or
expenses.
Separate accounts are
maintained for each
important asset, liability,
and equity item.

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The Ledger

Accounts are
Cash individual records
showing increases
Accounts
and decreases
Payable
The entire group of
Capital accounts is kept
Stock together in an
accounting record
called a ledger
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Expanding the Accounting Equation

Asset Liability Equity

Accounts = Accounts + Accounts

Owner’s
Owner’s Revenues Expenses
Capital A/c + A/c – A/c – Withdrawals
A/c

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Categories of Account

Accounts are arranged into six categories using

the expanded accounting equation as bellow:

 Assets 4. Expenses
 Liabilities 5. Revenues
 Owner’s Capital 6. Owner’s Withdrawals

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Typical Assets Accounts

 Cash  Office Supplies

 Account Receivable  Equipment
 Notes Receivable  Building
 Inventory  land

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Typical Liability Accounts

 Accounts Payable
 Notes Payable
 Accrued Expenses

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Owner’s Capital

1. In Sole-proprietor:
 X’s Capital

2. In Partnership:
 X’s Capital
 Y’s capital

3. In Corporation:
 Share Capital/
Capital Stock

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Owner’s Withdrawals

1. In Sole-proprietor:
 X’s Withdrawals

2. In Partnership:
 X’s Withdrawals
 Y’s Withdrawals

3. In Corporation:
 Dividend

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Typical Revenues Accounts

 Sales Revenues
 Service Revenues
 Rent Received
 Dividend Received

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Typical Expenses Accounts

 Salary Expenses
 Wages Expenses
 Rent Expenses
 Utility Expenses
 Depreciation Expenses

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Account Format
Tabular Summary (+) (-)

$8000 $8000 $2500

(2500) 75 2000
(2000)
750 150
75
50
(150)
750 8825 4700
(50) (4700)
4125 4125

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Learning Objective

To explain the
double-entry system
of accounting.

LO3
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T-Account

A T-account is a tool used to

represent an account.

Account Name
(Left) (Right)

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 T-Account

The left side of the The right side of the

T-account is always the T-account is always the
debit side. credit side.

Account Name
Left Right

Debit Credit

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The Use of T-Accounts

Increases are
recorded on one Title of the Account
side of the T- Left Right
account, and or or
decreases are Debit Credit
Side Side
recorded on the
other side.

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 Debits and Credits
Whether a debit is an
increase or a decrease
depends on the
account.

Whether a credit is an
increase or a decrease
depends on the
account.
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 Adding Debits & Credits to the
Expanded Accounting Equation
The Expanded Accounting Equation:
Assets = Liabilities + Capital + Revenues – Expenses – Withdrawals

Rearranged:
Assets + Expenses + Withdrawals = Liabilities + Capital + Revenues

The accounts on the left: The accounts on the right:

• Increase with Debits • Increase with Credits
• Decrease with Credits • Decrease with Debits

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Debit and Credit Rules

For Assets, Expenses, Withdrawals Accounts:

Debit for Credit for

Increase Decrease

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Debit and Credit Rules

For Capital, Liabilities, Revenues Account:

Debit for Credit for

Decrease Increase

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Learning Objective

To understand how
balance sheet accounts
are increased and
decreased.

LO4
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 Let’s record
selected
transactions for
S.A’s Lawn
Care Service in
the accounts.

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 May 1: S. Ahmed invested
$8,000 in S.A’s Lawn Care
Service.

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 May 1: S. Ahmed invested $8,000 in S.A’s Lawn
Care Service.

Will S. Ahmed’s
Will Cash increase
Capital increase or
or decrease?
decrease?

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  May 1: S. Ahmed invested $8,000 in S.A’s Lawn
Care Service and received 800 shares of stock.

S. Ahmed’s Capital
Cash increases
increases $8,000
$8,000 with a debit.
with a credit.

Cash S. Ahmed’s Capital

May 1 8,000 May 1 8,000

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 May 2: S.A’s purchased a
riding lawn mower for $2,500
cash.

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 May 2: S.A’s purchased a riding lawn mower
for $2,500 cash.

Will Tools &

Will Cash increase
Equipment increase
or decrease?
or decrease?

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  May 2: S.A’s purchased a riding lawn mower
for $2,500 cash.

Tools & Equipment

Cash decreases
increases $2,500
$2,500 with a credit.
with a debit.

Cash Tools & Equipment

May 1 8,000 May 2 2,500 May 2 2,500

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 May 8: S.A’s purchased a
$15,000 truck. S.A’s paid $2,000
in cash and issued a note
payable for the remaining
$13,000.

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 May 8: S.A’s purchased a $15,000 truck.
S.A’s paid $2,000 in cash and issued a note
payable for the remaining $13,000.

Will Cash and

Will Truck increase Notes Payable
or decrease? increase or
decrease?

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  May 8: S.A’s purchased a $15,000 truck.
S.A’s paid $2,000 in cash and issued a note
payable for the remaining $13,000.

Cash decreases
$2,000 with a credit.
Truck increases
Notes Payable
$15,000 with a debit.
increases $13,000
with a credit.
Cash
May 1 8,000 May 2 2,500
Truck
May 8 2,000
May 8 15,000
Notes Payable
May 8 13,000
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 May 11: S.A’s purchased some
repair parts for $300 on account.

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 May 11: S.A’s purchased some repair parts
for $300 on account.

Will Tools & Will Accounts

Equipment increase Payable increase or
or decrease? decrease?

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  May 11: S.A’s purchased some repair parts
for $300 on account.

Tools & Equipment Accounts Payable

increases $300 with increases $300 with
a debit. a credit.

Tools & Equipment Accounts Payable

May 2 2,500 May 11 300
May 11 300

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 May 18: S.A’s sold half of the
repair parts to ABC Lawns for
$150, a price equal to S.A’s cost.
ABC Lawns agrees to pay S.A’s
within 30 days.

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 May 18: S.A’s sold half of the repair parts to
ABC Lawns for $150, a price equal to S.A’s
cost. ABC Lawns agrees to pay S.A’s within 30
days.

Will Tools & Will Accounts

Equipment increase Receivable increase
or decrease? or decrease?

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  May 18: S.A’s sold half of the repair parts to
ABC Lawns for $150, a price equal to S.A’s
cost. ABC Lawns agrees to pay S.A’s within 30
days.

Tools & Equipment Accounts Receivable

decreases $150 with increases $150 with
a credit. a debit.

Tools & Equipment Accounts Receivable

May 2 2,500 May 18 150 May 18 150
May 11 300

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Learning Objective

To apply the realization

and matching principles
in recording revenue
and expenses.

LO25
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Revenue and Expenses
Inflow of assets
resulting from the
sale of goods or Increases
the rendering of owners’ equity.
services to
customers.

The costs of
assets and Decreases
services used up owner’s equity.
in the process of
earning revenue.

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The Realization Principle: When
to Record Revenue
Realization Principle
Revenues should be
recognized when
they are earned or
realized (i.e., at the
time goods are sold
or services are
rendered.

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The Matching Principle: When to
Record Expenses
Matching Principle
Expenses should be
recorded in the same
accounting period as
the revenues that are
earned as a result of
these expenses.

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Learning Objective

To understand how
revenue and expense
transactions are
recorded in an
accounting system.

LO6
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 Let’s analyze the
revenue and expense
transactions for S.A’s
Lawn Care Service
for the month of May.
We will also analyze a
withdrawal
transaction.

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 May 29: S.A’s provided lawn
care services for a client and
received $750 in cash.

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 May 29: S.A’s provided lawn care services for
a client and received $750 in cash.

Will Service Revenue

Will Cash increase
increase or
or decrease?
decrease?

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  May 29: S.A’s provided lawn care services for
a client and received $750 in cash.

Service Revenue
Cash increases
increases $750 with
$750 with a debit.
a credit.

Cash Service Revenue

May 1 8,000 May 2 2,500 May 29 750
May 29 750 May 8 2,000

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 May 31: S.A’s paid this
month’s gasoline bill for the
lawn mower and the truck for
$50 cash.

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 May 31: May 31: S.A’s paid this month’s gasoline
bill for the lawn mower and the truck for $50 cash.

Will Gasoline
Will Cash increase
Expense increase or
or decrease?
decrease?

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  May 31: S.A’s purchased gasoline for the
lawn mower and the truck for $50 cash.

Gasoline Expense
Cash decreases $50
increases $50 with a
with a credit.
debit.

Cash Gasoline Expense

May 1 8,000 May 2 2,500 May 31 50
May 29 750 May 8 2,000
May 31 50

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 May 31: S. Ahmed withdrew
$200 from business for personal
purpose.

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 May 31: S. Ahmed withdrew $200 from
business for personal purpose.

Will S. Ahmed’s
Will Cash increase
Withdrawals
or decrease?
increase or
decrease?

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  May 31: S. Ahmed withdrew $200 from business for
personal purpose.

Cash decreases S. Ahmed’s

$200 with a credit. Withdrawals
increase $200 with a
debit.
Cash S. Ahmed’s Withdrawals
May 1 8,000 May 2 2,500 May 31 200
May 29 750 May 8 2,000
May 31 50
May 31 200

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 Let’s see how to
find the balance in
the Cash account
for S.A’s Lawn Care
Service.

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 Debit and Credit Entries

CASH
May 1 8,000 May 2 2,500
Receipts Payments
May 29 750 May 8 2,000
are on are on the
May 31 50
the debit credit
side. May 31 200
side.
Total 8,750 Total 4,750
(4,750)
Balance 4,000 The balance is the
difference between
the debit and credit
entries in the
account.

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Learning Objective

To explain the purpose

of a journal and its
relationship to the
ledger.

LO7
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 The Journal

In an actual accounting system, transactions

are initially recorded in the journal.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

2007
May 1 Cash 8,000
S. Ahmed’s Capital 8,000
To record an investment by the owner.

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Journal Entry Format

A typical journal entry might look like this.

Date Account Titles & Explation Debit Credit

2007
May 1 Cash 8,000
S. Ahmed’s Capital 8,000
To record an investment
by the owners.

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Journal Entry Format

Provide a reference Debits are written first.

date for each transaction.

Date Account Titles & Explation Debit Credit

2007
May 1 Cash 8,000
S. Ahmed’s Capital 8,000
To record an investment
by the owners. Total debits must equal
Credits are indented and total credits.
written after debits.

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Making Entries to the Journal Book

Making Entries
involves
recording
information of
individual
transaction
from source
documents.

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Posting Journal Entries to the Ledger Accounts

Posting
involves
copying
information
from the
journal to the
ledger
accounts.

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 Posting Journal Entries to the Ledger Accounts

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

2007
May 1 Cash 8,000
Capital Stock 8,000
Owners invest cash in the business.
General Ledger
Cash
Date Debit Date Credit
2007 2007
May 1 8,000 May
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 Posting Journal Entries to the Ledger Accounts

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

2007
May 1 Cash 8,000
S. Ahmed’s Capital 8,000
General
Owners invest cash Ledger
in the business.
S. Ahmed’s Capital
Date Debit Date Credit
2007 2007
May May 1 8,000
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 Posting Journal Entries to the Ledger Accounts

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

2007
May 2 Tools & Equipment 2,500
Cash 2,500
Purchased lawn mower.

Let’s see what the cash account looks like after

posting the cash portion of these transactions
for S.A’s Lawn Care Service.
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Ledger Accounts After Posting

General Ledger
Cash
Date Debit Date Credit
2007
May 1 8,000 May 2 2,500

This ledger format is referred to as a

T-Account.

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Ledger Accounts After Posting

General Ledger
Cash
Date Debit Credit Balance
2007
May 1 8,000 8,000
2 2,500 5,500

This ledger format is referred to as a

running balance.

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Learning Objective

To prepare a trial
balance and explain its
uses and limitations.

LO8
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Trial Balance
 A trial Balance is a list of accounts and their
balances at a given time.
 Customarily, a trial Balance is prepared at the
end of an accounting period.
 The primary purpose of a trial balance is to
prove (check) that the total of all debit
balances equal the total of all credit balances
of all the accounts in ledger after posting.

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 Now, let’s look at
the Trial Balance
for S.A’s Lawn
Care Service for
the month of May.

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 Trial Balance
S.A's Lawn Care Service
Unadjusted Trial Balance
May 31, 2007
Account Debit Credit All balances are
Cash $ 4,000 taken from the
Accounts receivable 150 ledger accounts on
Tools & equipment 2,650 May 31.
Truck 15,000
Notes payable $ 13,000
Accounts payable 300
S. Ahmed’s Capital 8,000
S. Ahmed’s Withdrawals 200 Proves equality
Service revenue 750 of debits and
Gasoline expense 50 credits.
Total $ 22,050 $ 22,050
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End of Lecture 03
THANK YOU ALL…