Chapter 2-1

CHAPTER 2

THE RECORDING PROCESS
Accounting Principles, Eighth Edition
Chapter 2-2

Study Objectives
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.
Chapter 2-3

The Recording Process

The Account

Steps in the Recording Process Journal Ledger

The Recording Process Illustrated Summary illustration of journalizing and posting

The Trial Balance Limitations of a trial balance Locating errors Use of dollar signs

Debits and credits Expansion of basic equation

Chapter 2-4

The Account
Account
Recor of i creases and decreases in a s ecific asset, liabilit , equit , revenue, or expense item. ebit = ´Leftµ Credit = ´Ri tµ
t ame
eb t / r. Cre t / Cr.

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

Chapter 2-5

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

Debits and Credits DoubleDouble-entry accounting system
Each transaction must affect two or more accounts to keep the basic accounting equation in balance. Recording done by debiting at least one account and crediting another. DEBITS must equal CREDITS.

Chapter 2-6

LO 2 Define debits and credits and explain their use in recording business transactions.

Debits and Credits
If Debits are greater tha Credits, the a will have a debit bala e.
Account Na e
De it Dr Credit Cr

ount

Transaction #1 Transaction #3

$10,000 8,000

$3,000

Transaction #2

Balance

$15,000

Chapter 2-7

LO 2 Define debits and credits and explain their use in recording business transactions.

Debits and Credits
If Credits are greater tha Debits, the a will have a credit bala e.
Account Na e
De it Dr Credit Cr

ount

Transaction #1

$10,000

$3,000 8,000

Transaction #2 Transaction #3

Balance

$1,000

Chapter 2-8

LO 2 Define debits and credits and explain their use in recording business transactions.

Debits and Credits Summary
Liabilities

Nor al Balance

De it Dr

Credit Cr

Ow er·s Equity
De it Dr Credit Cr

Nor al Balance

Chapter 3-23

Expense
De it Dr Credit Cr

Chapter 3-25

Nor al Balance

Chapter 3-27

Chapter 3-26

Chapter 2-9

   

Nor al Balance

 

Nor al Balance

¡ ¡

Assets

Chapter 3-24

Revenue
De it Dr Credit Cr

 

Normal Balance Debit

Normal Balance Credit

De it Dr

Credit Cr

 

 

LO 2

Debits a d Credits Summary
Balance Sheet Asset = Liability + Equity Debit Income Statement Revenue - Expense

Credit

Chapter 2-10

LO 2 Define debits a d credits a d explain their use in recording business tra sactions. transactions.

Debits and Credits Summary

Review Question
Debits:
a. increase both assets and liabilities. b. decrease both assets and liabilities. c. increase assets and decrease liabilities. d. decrease assets and increase liabilities.

Chapter 2-11

LO 2 Define debits and credits and explain their use in recording business transactions.

Debits and Credits Summary

Dis ussion Question
Q4. Maria Alvarez, a beginning accounting student, believes debit balances are favorable and credit balances are unfavorable. Is Maria correct? Discuss.

See notes page for discussion
Chapter 2-12

LO 2 Define debits and credits and explain their use in recording business transactions.

Assets and Liabilities
Assets
De it Dr Credit Cr

Assets - Debits should exceed credits. Liabilities ² redits should exceed debits.

Nor al Balance

Chapter 3-23

De it Dr

Nor al Balance

Chapter 3-24

Chapter 2-13

¢

¢

Liabilities
Credit Cr

The normal balance is on the increase side.

LO 2 Define debits and credits and explain their use in recording business transactions.

Owners· Equity
Owner·s Equity
De it Dr Credit Cr

Owner·s investments and revenues increase owner·s equity (credit). Owner·s drawings and expenses decrease owner·s equity (debit).

Nor al Balance

Chapter 3-25

Owner·s Capital
De it Dr Credit Cr

Nor al Balance

Nor al Balance

Chapter 3-25

Chapter 3-23

Chapter 2-14

LO 2 Define debits and credits and explain their use in recording business transactions.

£ £

£ £ £

Owner·s Drawing
De it Dr Credit Cr

Revenue and Expense
Revenue
De it Dr Credit Cr

The purpose of earning revenues is to benefit the owner(s). The effect of debits and credits on revenue accounts is the same as their effect on Owner·s apital. Expenses have the opposite effect: expenses decrease owner·s equity.
LO 2 Define debits and credits and explain their use in recording business transactions.

Nor al Balance

Chapter 3-26

Expense
De it Dr Credit Cr

Nor al Balance

Chapter 3-27

Chapter 2-15

¤

¤

Debits and Credits Summary

Review Question
Accounts that normally have debit balances are:
a. assets, expenses, and revenues. b. assets, expenses, and owner·s capital. c. assets, liabilities, and owner·s drawings. d. assets, owner·s drawings, and expenses.

Chapter 2-16

LO 2 Define debits and credits and explain their use in recording business transactions.

Expansion of the Basic Equation
Relationship among the assets, liabilities and owner·s equity of a business:
Basic Equation Expanded Basic Equation
Illustration 2-11

Assets = Lia ilities +

Owner¶s Equity

The equation must be in balance after every transaction. For every Debit there must be a Credit. Credit.
Chapter 2-17

LO 2 Define debits and credits and explain their use in recording business transactions.

Steps in the Recording Process
Illustration 2-12

Analyze each transaction

Enter transaction in a journal

Transfer journal information to ledger accounts

Business documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction.
Chapter 2-18

LO 3 Identify the basic steps in the recording process.

The Journal
Book of original entry (General edger). Transactions recorded in chronological order. ontributions to the recording process:
1. Discloses the complete effects of a transaction. 2. Provides a chronological record of transactions. 3. Helps to prevent or locate errors because the

debit and credit amounts can be easily compared.

Chapter 2-19

LO 3 Identify the basic steps in the recording process.

Journalizing
Journalizing - Entering transaction data in the journal.
E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. Oct. 1 Pete Hanshew begins business as a real estate agent with a cash investment of $15,000. 3 Purchases office furniture for $1,900, on account. 6 Sells a house and lot for B. Kidman; bills B. Kidman $3,200 for realty services provided. 27 Pays $700 on balance related to transaction of Oct. 3. 30 Pays the administrative assistant $2,500 salary for Oct. E2-5 Instructions - Journalize the transactions for E2-4.
Chapter 2-20

LO 4 Explain what a journal is and how it helps in the recording process.

Journalizing
E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency
Oct. 1

Pete Hanshew begins business as a real estate agent with a cash investment of $15,000.
General Journal

Date Oct

Accou t Tit e pt Owners invest ent

e

De it

edit

Chapter 2-21

LO 4 Explain what a journal is and how it helps in the recording process.

Journalizing
E2-4 (Facts) P esented be ow is information re ated to Hanshew Rea Estate Agency.
Oct. 3

Purchases office furniture for $ 9 account.
Gene a Jou na
Date Accou Ti i i

on

Oct. 3

Office u nitu e Accounts ayab e u chase fu nitu e

Chapter 2-22

LO 4 Explain what a journal is and how it helps in the recording process.

Journalizing
E2-4 (Facts) Presente be ow is information re ate to Hanshew Rea Estate Agency.
Oct. 6

Se s a house and lot for B. Kidman; bills B. Kidman $3 2 for realty services provided.
Genera Journa
Date Accou t T tle Accounts Rece vab e Serv ce Revenue (Rea ty serv ces prov e Ref. Debit Cre it

Oct. 6

Chapter 2-23

LO 4 Explain what a journal is and how it helps in the recording process.

Journalizing
E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency.
Oct. 27 Pays $7

on balance related to transaction of
General Journal

Oct. 3.

Date O t. 27

Account Titl Accounts P y Cash (Payment on account) le

R f.

Debit 7

Credit 7

Chapter 2-24

LO 4 Explain what a journal is and how it helps in the recording process.

Journalizing
E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency.
Oct. 30 Pays the administrative assistant $2 00

salary for Oct.
General Journal
Date Oct. 0 Account Title Salary E Cash (Payment for salaries) ense Ref. Debit 2 00 2 00 Credit

Chapter 2-25

LO 4 Explain what a journal is and how it helps in the recording process.

Journalizing
Simple Entry ² Two accounts, one debit and one credit. Compound Entry ² Three or more accounts.
Example ² On June 15, H. Burns, purchased equipment for $15,000 by paying cash of $10,000 and the balance on account (to be paid within 30 days).
General Journal
ate June 15 Account quipment ash ccounts ayable ( urchased equipment)
Chapter 2-26

itle

e .

e it 15,000

Credit 10,000 5,000

LO 4 Explain what a journal is and how it helps in the recording process.

The Ledger
A General Ledger contains the entire group of accounts maintained by a company. The General Ledger includes all the asset, liability, owner·s equity, revenue and expense accounts.

Chapter 2-27

LO 5 Explain what a ledger is and how it helps in the recording process.

Chart of Accounts
Accounts and account numbers arranged in sequence in which they are presented in the financial statements.
Han h
Assets
101 112 126 130 150 158 Cash Accounts receivable Advertising supplies Prepaid insurance Office equipment Accumulated depreciation 00 306 350

al
hart of

ate
ounts

gen
Owner's quity
Hanshew, Capital Hanshew, rawing Income summary

Revenues
00 Service revenue

Liabilities
200 201 209 212 230 Accounts payable Notes payable Unearned revenue Salaries payable Interest payable 631 711 722 726 729 905

Expenses
Advertising supplies expense Depreciation expense Insurance expense Salaries expense Rent expense Interest expense

Chapter 2-28

LO 6 Explain what posting is and how it helps in the recording process.

Standard Form of Account
T-account form used in accounting textbooks. In practice, the account forms used in ledgers are much more structured.
Cash
Dat
O t.

N .
D bt
, ,

Explanat n

R .

Cr

t

Balance
, , ,

Chapter 2-29

LO 5 Explain what a ledger is and how it helps in the recording process.

Posting
Posting ² the process of transferring amounts from the journal to the ledger accounts.
General Journal
Date ct. Account Title ash anshe , apital ner's investment in business Ref. Debit , ,

J1
Credit

101

General Ledger Cash
Date Explanation Ref. Debit

Acct. No. 101
Credit Balance

Oct. 1

J1

15,000

15,000

Chapter 2-30

LO 6 Explain what posting is and how it helps in the recording process.

Posting

Review 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.

Chapter 2-31

LO 6 Explain what posting is and how it helps in the recording process.

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.
Chapter 2-32 Illustration 2-19

LO 6 Explain what posting is and how it helps in the recording process.

The Trial Balance
A list of accounts and their balances at a given time. Purpose is to prove that debits equal credits.
Hanshew Real Estate A ency
Trial Balance October 31, 2008 C h eceiv ble A O ice furni ure Accounts payable Hanshew, Capital Service revenue Salaries expense Debi $ 11,800 3,200 1,900 $ C edi

1,200 15,000 3,200

2,500 $ 19,400

$ 19,400

Chapter 2-33

LO 7 Prepare a trial balance and explain its purposes.

The Trial Balance

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.
Chapter 2-34

LO 7 Prepare a trial balance and explain its purposes.

The Trial Balance

Review Question
A trial balance will not balance if:
a. a correct journal entry is posted twice. b. the purchase of supplies on account is debited to

Supplies and credited to ash.
c. a $100 cash drawing by the owner is debited to

Owner·s Drawing for $1,000 and credited to ash for $100.
d. a $450 payment on account is debited to

Accounts Payable for $45 and credited to ash for $45.
Chapter 2-35

LO 7 Prepare a trial balance and explain its purposes.

Recording Process

Discussion Question
Q2-19. Jim Benes is confused about how accounting information flows through the accounting system. He believes the flow of information is as follows.
a. Debits and credits posted to the ledger. b. Business transaction occurs. c. Information entered in the journal. d. Financial statements are prepared. e. Trial balance is prepared.

Is Jim correct? If not, indicate to Jim the proper flow of the information. See notes page for discussion
Chapter 2-36

LO 7 Prepare a trial balance and explain its purposes.

Copyright
Copyright © 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

Chapter 2-37

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