Understanding The Recording Process

CHAPTER 2
Understanding the
Recording Process
Accounting Principles, Eighth Edition

Chapter
2-1
Study
Study Objectives
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
2-2
The
The Recording
Recording Process
Process
Steps in the The Recording

The Trial
The Account Recording Process
Balance
Process Illustrated
Debits and Journal Summary Limitations of a

credits Ledger illustration of trial balance
Expansion of journalizing Locating errors
basic equation and posting
Use of dollar
signs
Chapter
2-3
The
The Account
Account
Record of increases and decreases
Account in a specific asset, liability, equity,
revenue, or expense item.
Debit = “Left”
Credit = “Right”
An Account can Account Name

be illustrated in a Debit / Dr. Credit / Cr.
T-Account
form.
Chapter
2-4 LO 1 Explain what an account is and how it helps in the recording process.
Debits
Debits and
and Credits
Credits
Double-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 LO 2 Define debits and credits and explain their

2-5
use in recording business transactions.
Debits
Debits and
and Credits
Credits
If Debits are greater than Credits, the account
will have a debit balance.
Account Name
Debit / Dr. Credit / Cr.
Transaction #1 $10,000 $3,000 Transaction #2

Transaction #3 8,000
Balance $15,000

2-6
Debits
Debits and
and Credits
Credits
If Credits are greater than Debits, the account
will have a debit balance.
Account Name
Transaction #1 $10,000 $3,000 Transaction #2

8,000 Transaction #3
Balance $1,000

2-7
Debits
Debits and
and Credits
Credits Summary
Summary
Liabilities
Normal
Normal Normal
Normal
Balance
Balance Balance
Balance
Debit
Debit Credit
Credit Normal Balance
Assets Chapter
Owners’ Equity
3-24

Normal Balance
Normal Balance
Chapter
Expense
3-23
Revenue
Chapter
3-25

Normal Balance
Normal Balance
Chapter
3-27 Chapter
3-26
Chapter
2-8 LO 2
Debits
Debits and
and Credits
Credits Summary
Summary
Balance Sheet Income Statement
Asset = Liability + Equity Revenue - Expense =
Debit
Credit

2-9
Debits
Debits and
and Credits
Credits Summary
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.

2-10
Debits
Debits and
and Credits
Credits Summary
Summary
Discussion 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

2-11
Assets
Assets and
and Liabilities
Liabilities
Assets
Assets - Debits should

exceed credits.
Normal Balance
Chapter
3-23
Liabilities – Credits
should exceed debits.
Liabilities
The normal balance is on

the increase side.

Normal Balance
Chapter
3-24

2-12
Owners’
Owners’ Equity
Equity
Owners’ Equity Owner’s investments and
revenues increase owner’s
equity (credit).
Owner’s drawings and expenses

Normal Balance
Chapter
3-25
decrease owner’s equity (debit).
Owners’ Capital Owners’ Drawing

Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.
Normal Balance Normal Balance
Chapter Chapter
3-25 3-23

2-13
Revenue
Revenue and
and Expense
Expense
Revenue The purpose of earning
revenues is to benefit the
owner(s).
Normal Balance
The effect of debits and

credits on revenue accounts
Chapter
3-26
Expense
is the same as their effect
on Owner’s Capital.
Expenses have the opposite

effect: expenses decrease
Normal Balance
Chapter
3-27
owner’s equity.
2-14
Debits
Debits and
and Credits
Credits Summary
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.

2-15
Expansion
Expansion of
of the
the Basic
Basic Equation
Equation
Relationship among the assets, liabilities and

owners’ equity of a business:
Illustration 2-11
Basic
Assets = Liabilities + Owners’ Equity
Equation
Expanded
Basic
Equation
The equation must be in balance after every transaction.

For every Debit there must be a Credit.

2-16
Steps
Steps in
in the
the Recording
Recording Process
Process
Illustration 2-12
Transfer journal information

Analyze each transaction Enter transaction in a journal 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
2-17 LO 3 Identify the basic steps in the recording process.
The
The Journal
Journal
Book of original entry (General Ledger).
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.
3. Helps to prevent or locate errors because the

debit and credit amounts can be easily compared.
Chapter
2-18 LO 3 Identify the basic steps in the recording process.
Journalizing
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
2-19 LO 4 Explain what a journal is and how it helps in the recording process.
Journalizing
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 Account Title Ref. Debit Credit
Oct. 1 Cash 15,000
Hanshew, Capital 15,000
(Owners investment)
Chapter
Journalizing
Journalizing
Oct. 3 Purchases office furniture for $1,900, on
account.
General Journal
Oct. 3 Office furniture 1,900
Accounts payable 1,900
(Purchase furniture)
Chapter
Journalizing
Journalizing
Oct. 6 Sells a house and lot for B. Kidman; bills B.
Kidman $3,200 for realty services provided.
General Journal
Oct. 6 Accounts receivable 3,200
Service revenue 3,200
(Realty services provided)
Chapter
Journalizing
Journalizing
Oct. 27 Pays $700 on balance related to transaction of
Oct. 3.
General Journal
Oct. 27 Accounts payable 700
Cash 700
(Payment on account)
Chapter
Journalizing
Journalizing
Oct. 30 Pays the administrative assistant $2,500
salary for Oct.
General Journal
Oct. 30 Salary expense 2,500
Cash 2,500
(Payment for salaries)
Chapter
Journalizing
Journalizing
Simple Entry – Two accounts, one debit and one credit.
Compound Entry – Three or more accounts.
Example – 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
June 15 Equipment 15,000
Cash 10,000
Accounts payable 5,000
(Purchased equipment)
Chapter
The
The Ledger
Ledger
Ledger contains the entire group of accounts

maintained by a company.
A general ledger contains all the asset,

liability, owner’s equity, revenue, and expense
accounts.
Chart of Accounts
Chapter
2-26 LO 5 Explain what a ledger is and how it helps in the recording process.
Chart
Chart of
of Accounts
Accounts
Accounts arranged in sequence in which they are
presented in the financial statements.
Hanshew Real Estate Agency
Chart of Accounts
Assets Owner's Equity
101 Cash 300 Hanshew, Capital
112 Accounts receivable 306 Hanshew, Drawing
126 Advertising supplies 350 Income summary
130 Prepaid insurance
150 Office equipment Revenues
158 Accumulated depreciation 400 Service revenue
Liabilities Expenses
200 Accounts payable 631 Advertising supplies expense
201 Notes payable 711 Depreciation expense
209 Unearned revenue 722 Insurance expense
212 Salaries payable 726 Salaries expense
230 Interest payable 729 Rent expense
905 Interest expense
Chapter
2-27 LO 6 Explain what posting is and how it helps in the recording process.
Standard
Standard Form
Form of
of Account
Account
T-account form used in accounting textbooks.

In practice, the account forms used in ledgers are
much more structured.
Cash No. 101

Date Explanation Ref. Debit Credit Balance
Oct. 1 15,000 15,000
27 700 14,300
30 2,500 11,800
Chapter
2-28 LO 5 Explain what a ledger is and how it helps in the recording process.
Posting
Posting
Posting – the process of transferring amounts from the
journal to the ledger accounts.
General Journal J1
Oct. 1 Cash 101 15,000
Hanshew, Capital 15,000
(Owner's investment in business)
General Ledger
Cash Acct. No. 101
Date Explanation Ref. Debit Credit Balance
Oct. 1 Owner investment J1 15,000 15,000
Chapter
Posting
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
The
The Recording
Recording Process
Process Illustrated
Illustrated
Illustration 2-19
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
The
The Trial
Trial Balance
Balance
A list of accounts Hanshew Real Estate Agency

Trial Balance
and their balances October 31, 2008
at a given time. Debit Credit
Cash $ 11,800
Purpose is to Accounts receivable 3,200
Office furniture 1,900
prove that debits Accounts payable $ 1,200
equal credits. Hanshew, Capital 15,000
Service revenue 3,200
Salaries expense 2,500
$ 19,400 $ 19,400
Chapter
2-32 LO 7 Prepare a trial balance and explain its purposes.
The
The Trial
Trial Balance
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
The
The Trial
Trial Balance
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 Cash.
c. a $100 cash drawing by the owner is debited to
Owner’s Drawing for $1,000 and credited to Cash
for $100.
d. a $450 payment on account is debited to Accounts
Payable for $45 and credited to Cash for $45.
Chapter
Recording
Recording Process
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
Copyright
Copyright
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Reproduction or translation of this work beyond that permitted
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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
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CHAPTER 2

Accounting Principles, Eighth Edition

Steps in the The Recording

Debits and Journal Summary Limitations of a

An Account can Account Name

Double-entry accounting system

Recording done by debiting at least one

DEBITS must equal CREDITS.

Chapter LO 2 Define debits and credits and explain their

Transaction #1 $10,000 $3,000 Transaction #2

Chapter LO 2 Define debits and credits and explain their

Transaction #1 $10,000 $3,000 Transaction #2

Chapter LO 2 Define debits and credits and explain their

Debit / Dr. Credit / Cr.

Debit / Dr. Credit / Cr.

Asset = Liability + Equity Revenue - Expense =

Chapter LO 2 Define debits and credits and explain their

Chapter LO 2 Define debits and credits and explain their

See notes page for discussion

Assets - Debits should

The normal balance is on

the increase side.

Chapter LO 2 Define debits and credits and explain their

Owner’s drawings and expenses

Owners’ Capital Owners’ Drawing

Normal Balance Normal Balance

Chapter LO 2 Define debits and credits and explain their

The effect of debits and

Expenses have the opposite

Chapter LO 2 Define debits and credits and explain their

Relationship among the assets, liabilities and

The equation must be in balance after every transaction.

Chapter LO 2 Define debits and credits and explain their

Transfer journal information

Business documents, such as a sales slip, a check, a

Book of original entry (General Ledger).

Transactions recorded in chronological order.

Contributions to the recording process:

2. Provides a chronological record of transactions.

3. Helps to prevent or locate errors because the

Oct. 1 Pete Hanshew begins business as a real estate agent with

E2-5 Instructions - Journalize the transactions for E2-4.

Ledger contains the entire group of accounts

A general ledger contains all the asset,

T-account form used in accounting textbooks.

Cash No. 101

A list of accounts Hanshew Real Estate Agency

The trial balance may balance even when

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