Financial Accounting, 4e

Weygandt, Kieso, & Kimmel

Prepared by
Gregory K. Lowery
Mercer University
Marianne Bradford
The University of Tennessee

John Wiley & Sons, Inc.

 CHAPTER 2
THE RECORDING PROCESS
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 how
they are used to record 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.
 CHAPTER 2
THE RECORDING PROCESS
After studying this chapter, you should be able to:

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 purpose.

Trial Balance
 PREVIEW OF CHAPTER 2
THE RECORDING
PROCESS

Steps in the The Recording

The Account The Trial Balance
Recording Process Process Illustrated

 Debits and credits  Journal  Summary of  Limitations of a

 Debit and credit illustrations of trial balance
 Ledger journalizing and
procedures  Locating errors
 Stockholders’ posting
equity 
Use of dollar
relationships signs
 Expansion of basic
equation
 THE ACCOUNT
 An account is an individual accounting
record of increases and decreases in a
specific asset, liability, or stockholders’
equity item.
 A company will have separate accounts
for such items as cash, salaries
expense, accounts payable, and so on.
 T ACCOUNT
 In its simplest form, an account consists of
1 the title of the account,
2 a left or debit side, and
3 a right or credit side.
 The alignment of these parts resembles the letter
T, and therefore the account form is called a
T account.
Title of Account
Left or Right or
debit credit
side side
T Account
 DEBITS AND CREDITS
 The terms debit and credit mean left and right,
respectively.
 The act of entering an amount on the left side of an
account is called debiting the account and making
an entry on the right side is crediting the account.
 When the debit amounts exceed the credits, an
account has a debit balance; when the reverse is
true, the account has a credit balance.
DEBITING AN ACCOUNT

Cash
Debits Credits
15,000

Example: The owner (stockholder) invests

$15,000 cash to start the business.
Cash is debited and Common
Stock is credited for $15,000.
CREDITING AN ACCOUNT

Cash
Debits Credits
7,000

Example: Monthly rent of $7,000 is paid.

Cash is credited as Rent Expense is
debited.
 DEBITING AND
CREDITING AN ACCOUNT
Cash
Debits Credits
15,000 7,000
8,000

Example: Cash is debited for $15,000 and

credited for $7,000, leaving a debit
balance of $8,000.
 DOUBLE-ENTRY SYSTEM

 In a double-entry system, equal debits and

credits are made in the accounts for each
transaction.
 Total debits will always equal total credits
and the accounting equation will always
stay in balance.

Assets Liabilities Equity

 ILLUSTRATION 2-3
DEBIT AND CREDIT EFFECTS - ASSETS AND LIABILITIES

Debits Credits
Increase assets Decrease assets
Decrease liabilities Increase liabilities
 NORMAL BALANCE

 Normal balance is the side where an

increase in the account is recorded.

 Every account has a normal balance,

whether it is a debit or credit.

 The opposite side entries should not

exceed the normal balance.
 ILLUSTRATION 2-4
NORMAL BALANCES - ASSETS AND LIABILITIES

Assets Liabilities
Increase Decrease Decrease Increase
Debit Credit Debit Credit

Normal Normal
Balance Balance
 ILLUSTRATION 2-5
DEBIT AND CREDIT EFFECT - COMMON STOCK

Debits Credits
Decrease common stock Increase common stock
ILLUSTRATION 2-6
NORMAL BALANCE - COMMON STOCK

Common Stock
Decrease Increase
Debit Credit

Normal
Balance
 ILLUSTRATION 2-7
DEBIT AND CREDIT EFFECT AND
NORMAL BALANCE - RETAINED EARNINGS

Retained Earnings
Decrease Increase
Debit Credit

Normal
Balance
ILLUSTRATION 2-8
DEBIT AND CREDIT EFFECT AND
NORMAL BALANCE - DIVIDENDS

Dividends
Increase Decrease
Debit Credit

Normal
Balance
 ILLUSTRATION 2-9
DEBIT AND CREDIT EFFECTS - REVENUES AND EXPENSES

Debits Credits
Decrease revenues Increase revenues
Increase expenses Decrease expenses
 ILLUSTRATION 2-10
NORMAL BALANCES - REVENUES AND EXPENSES

Revenues Expenses
Decrease Increase Increase Decrease
Debit Credit Debit Credit

Normal Normal
Balance Balance
 ILLUSTRATION 2-11
STOCKHOLDERS’ EQUITY RELATIONSHIPS

Balance Sheet
Stockholders’ Equity

Common Stock Retained Earnings

(Investments by stockholders) (Net income retained in business)

Net income or Net loss

Dividends (Revenues less expenses)
Income Statement

Retained Earnings Statement

 ILLUSTRATION 2-12
EXPANDED BASIC EQUATION AND
DEBIT/CREDIT RULES AND EFFECTS
Basic Equation

Assets = Liabilities + Stockholders’ Equity

Expanded Basic Equation

Retained
Assets = Liabilities + Common + Earnings + Revenues
Stock
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
+ - - + - + - + - +

- Dividends - Expenses
Dr. Cr. Dr. Cr.
+ - + -
 STEPS IN THE
RECORDING PROCESS
The basic steps in the recording process are:
1 Analyze each transaction in terms of its
effect on the accounts.
2 Enter the transaction information in a
journal (book of original entry).
3 Transfer the journal information to the
appropriate accounts in the ledger (book of
accounts).
 ILLUSTRATION 2-13
THE RECORDING
PROCESS
JOURNAL

LEDGER
JOURNAL

1 Analyze each transaction

2 Enter transaction in a journal
3 Transfer journal information to ledger accounts
 THE JOURNAL
 Transactions are initially recorded in
chronological order in a journal before being
transferred to the accounts.
 Every company has a general journal which
contains:
1 spaces for dates,
2 account titles and explanations,
3 references, and
4 two amount columns.
 THE JOURNAL
The journal makes several significant contributions to the
recording process:
1 It discloses in one place the complete effect of a
transaction.
2 It provides a chronological record of transactions.
3 It helps to prevent or locate errors because the debit and
credit amounts for each entry can be readily compared.
 JOURNALIZING

 Entering transaction data in the journal is

known as journalizing.
 Separate journal entries are made for each
transaction.
 A complete entry consists of:
1 the date of the transaction,
2 the accounts and amounts to be debited
and credited, and
3 a brief explanation of the transaction.
 ILLUSTRATION 2-14
TECHNIQUE OF
JOURNALIZING
The
Thedate
dateof
ofthe
thetransaction
transactionisisentered
enteredin
inthe
thedate
datecolumn.
column.
 ILLUSTRATION 2-14
TECHNIQUE OF
JOURNALIZING
The
Thedebit
debitaccount
accounttitle
titleisisentered
enteredat
atthe
theextreme
extremeleft
left
margin
marginof
ofthe
theAccount
AccountTitles
Titlesand
andExplanation
Explanationcolumn.
column.
The
Thecredit
creditaccount
accounttitle
titleisisindented
indentedon
onthe
thenext
nextline.
line.
 ILLUSTRATION 2-14
TECHNIQUE OF
JOURNALIZING
The
Theamounts
amountsforforthe
thedebits
debitsare
arerecorded
recordedininthe
theDebit
Debit
column
columnand
andthe
theamounts
amountsforforthe
thecredits
creditsare
arerecorded
recordedin
in
the
theCredit
Creditcolumn.
column.
ILLUSTRATION 2-14
TECHNIQUE OF
JOURNALIZING
AAbrief
briefexplanation
explanationof
ofthe
thetransaction
transactionisisgiven.
given.
 ILLUSTRATION 2-14
TECHNIQUE OF
JOURNALIZING
AAspace
spaceisisleft
leftbetween
betweenjournal
journalentries.
entries. The
Theblank
blank
space
spaceseparates
separatesindividual
individualjournal
journalentries
entriesand
andmakes
makes
the
theentire
entirejournal
journaleasier
easierto
toread.
read.
 ILLUSTRATION 2-14
TECHNIQUE OF
JOURNALIZING
The
TheRef.
Ref.column
columnisisleft
leftblank
blankat
atthe
thetime
timejournal
journalentry
entry
isismade
madeand
andisisused
usedlater
laterwhen
whenthe
thejournal
journalentries
entriesare
are
transferred
transferredtotothe
theledger
ledgeraccounts.
accounts.
 SIMPLE AND COMPOUND
JOURNAL ENTRIES

• If an entry involves only two accounts, one debit and one credit, it is considered a
simple entry.
• When three or more accounts are required in one journal entry, the entry is
referred to as a compound entry.
 ILLUSTRATION 2-15
COMPOUND JOURNAL ENTRY

2002
July 1 Delivery Equipment
14,000
Cash 8,000
Accounts Payable
6,000
(Purchased truck for cash with
balance on account)

3
1 2

Inaacompound
In compoundentry,
entry,the
thetotal
totaldebit
debitand
and
creditamounts
credit amountsmust
mustequal
equal
COMPOUND JOURNAL ENTRY

This
Thisisisthe
thewrong
wrongformat;
format;allalldebits
debitsmust
mustbe
belisted
listed
before
beforethe
thecredits
creditsare
arelisted.
listed.
 THE LEDGER
 The entire group of accounts maintained by a
company is referred to as the ledger.
 A general ledger contains all the assets, liabilities,
and stockholder’s equity accounts.

GENERAL
LEDGER
 ILLUSTRATION 2-16
THE GENERAL LEDGER

Individual
Individual Individual
Stockholders’
Assets Liabilities
Equity

Equipment Interest Payable Salaries Expense

Land Salaries Payable Service Revenue
Supplies Accounts Payable Common Stock

Cash Notes Payable Retained Earnings

 ILLUSTRATION 2-18
POSTING A JOURNAL ENTRY
GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2002
Sept. 1 Cash 101 15,000
Common Stock 311 15,000
(issued shares of stock for
cash)
GENERAL LEDGER
CASH NO. 101
Date Explanation Ref. Debit Credit Balance
2002
Sept. 1 J1 15,000 15,000

COMMON NO. 311

COMMONSTOCK
STOCK
Date Explanation Ref. Debit Credit Balance
2002
Sept. 1 J1 15,000 15,000

In
Inthe
theledger,
ledger,enter
enterin
inthe
theappropriate
appropriatecolumns
columnsof
ofthe
theaccount
account(s)
(s)
debited
debitedthe
thedate,
date,journal
journalpage,
page,and
anddebit
debitamount
amountshown
shownininthe
thejournal.
journal.
 ILLUSTRATION 2-18
POSTING A JOURNAL ENTRY
GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2002
Sept. 1 Cash 101 15,000
Common Stock 311 15,000
(issued shares of stock for
cash)
GENERAL LEDGER
CASH NO. 101
Date Explanation Ref. Debit Credit Balance
2002
Sept
Sept.1 1 J1 15,000 15,000

COMMONSTOCK
STOCK NO. 311
COMMON
Date Explanation Ref. Debit Credit Balance
2001
2002 1
Sept.
Sept 1 J1 15,000 15,000

In
Inthe
thereference
referencecolumn
columnof
ofthe
thejournal,
journal,write
writethe
theaccount
account
number
numberto towhich
whichthe
thedebit
debitamount
amountwas
wasposted.
posted.
 ILLUSTRATION 2-18
POSTING A JOURNAL ENTRY
GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2002
Sept. 1 Cash 101 15,000
Common Stock 311 15,000
(issued shares of stock for
cash)
GENERAL LEDGER
CASH NO. 101
Date Explanation Ref. Debit Credit Balance
2002
Sept. 1 J1 15,000 15,000

COMMON STOCK NO. 311

Date Explanation Ref. Debit Credit Balance
2002
Sept. 1 J1 15,000 15,000

In
Inthe
theledger,
ledger,enter
enterin
inthe
theappropriate
appropriatecolumns
columnsof
ofthe
theaccount(s)
account(s)
credited
creditedthe
thedate,
date,journal
journalpage,
page,and
andcredit
creditamount
amountshown
shownininthe
thejournal.
journal.
 ILLUSTRATION 2-18
POSTING A JOURNAL ENTRY
GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2002
Sept. 1 Cash 101 15,000
Common Stock 311 15,000
(issued shares of stock for
cash)
GENERAL LEDGER
CASH NO. 101
Date Explanation Ref. Debit Credit Balance
2002
Sept. 1 J1 15,000 15,000

COMMON STOCK NO. 311

Date Explanation Ref. Debit Credit Balance
2002
Sept. 1 J1 15,000 15,000

In
Inthe
thereference
referencecolumn
columnofofthe
thejournal,
journal,write
writethe
theaccount
account
number
numberto towhich
whichthe
thecredit
creditamount
amountwas
wasposted.
posted.
 ILLUSTRATION 2-19
CHART OF
ACCOUNTS

Most
Mostcompanies
companieshave
haveaachart
chartof
ofaccounts
accountsthat
thatlists
liststhe
the
accounts
accountsand
andthe
theaccount
accountnumbers
numberswhich
whichidentify
identifytheir
their
location
locationin
inthe
theledger.
ledger.
 ILLUSTRATION 2-20
INVESTMENT OF CASH BY STOCKHOLDERS

October 1, stockholders invest $10,000 cash in an

Transaction advertising venture to be known as the Pioneer
Advertising Agency Inc.

Basic The asset Cash is increased $10,000, and

stockholders’ equity (specifically Common Stock) is
Analysis increased $10,000.

Debits increase assets: debit Cash $10,000.

Debit -Credit Credits increase stockholders’ equity: credit
Analysis Common Stock $10,000.
 ILLUSTRATION 2-20
INVESTMENT OF CASH BY STOCKHOLDERS

Journal 10, 000

Entry 10,000

Posting 10,000 10,000

 ILLUSTRATION 2-21
PURCHASE OF OFFICE EQUIPMENT

October 1, office equipment costing $5,000 is

Transaction purchased by signing a 3-month, 12%, $5,000 note
payable.

Basic The asset Office Equipment is increased $5,000, and

Analysis the liability Notes Payable is increased $5,000.

Debits increase assets: debit Office Equipment

Debit -Credit $5,000. Credits increase liabilities: credit Notes
Analysis Payable $5,000.
 ILLUSTRATION 2-21
PURCHASE OF OFFICE EQUIPMENT

5,000
Journal 5,000

Entry

Posting 5,000

5,000
 ILLUSTRATION 2-22
RECEIPT OF CASH FOR FUTURE SERVICE

October 2, a $1,200 cash advance is received from R.

Transaction Knox, a client, for advertising services that are
expected to be completed by December 31.

The asset Cash is increased $1,200; the liability

Unearned Revenue is increased $1,200 because the
Basic service has not been rendered yet. Note that although
Analysis many liabilities have the word “payable” in their title,
unearned revenues are considered a liability even
though the word payable is not used.

Debit -Credit Debits increase assets: debit Cash $1,200. Credits

increase liabilities: credit Unearned Revenues
Analysis $1,200.
 ILLUSTRATION 2-22
RECEIPT OF CASH FOR FUTURE SERVICE

1,200
Journal
1,200
Entry

Unearned Rev 209

Oct. 2 1,200
Posting 1,200
 ILLUSTRATION 2-23
PAYMENT OF MONTHLY RENT

Transaction October 3, office rent for October is paid in cash, $900.

Basic The expense Rent is increased $900 because the

payment pertains only to the current month; the asset
Analysis Cash is decreased $900.

Debit-Credit Debits increase expenses: debit Rent Expense $900.

Credits decrease assets: credit Cash $900.
Analysis
 ILLUSTRATION 2-23
PAYMENT OF MONTHLY RENT

Journal 900
900
Entry

Rent Expense 729

Posting 900
Oct. 3 900
 ILLUSTRATION 2-24
PAYMENT FOR INSURANCE

October 4, $600 is paid for a one-year insurance

Transaction policy that will expire next year on September 30.

The asset Prepaid Insurance is increased $600

because the payment extends to more than the
current month; the asset Cash is decreased $600.
Basic Note that payments of expenses that will benefit more
Analysis than one accounting period are identified as prepaid
expenses or prepayments. When a payment is made,
an asset account is debited in order to show the
service or benefit that will be received in the future.

Debit -Credit Debits increase assets: debit Prepaid Insurance $600.

Analysis Credits decrease assets: credit Cash $600.
 ILLUSTRATION 2-24
PAYMENT FOR INSURANCE

Journal 600
600
Entry

Cash 101
Oct. 1 10,000 Oct. 3 900 600
Posting 2 1,200 4 600
 ILLUSTRATION 2-25
PURCHASE OF SUPPLIES ON CREDIT

October 5, an estimated 3-month supply of

Transaction advertising materials is purchased on account from
Aero Supply for $2,500.

Basic The asset Advertising Supplies is increased $2,500;

Analysis the liability Accounts Payable is increased $2,500.

Debits increase assets: debit Advertising Supplies

Debit -Credit $2,500. Credits increase liabilities: credit Accounts
Analysis Payable $2,500.
 ILLUSTRATION 2-25
PURCHASE OF SUPPLIES ON CREDIT

2,500
Journal 2,500
Entry

Posting 2,500 2,500

 ILLUSTRATION 2-26
HIRING OF EMPLOYEES

October 9, hire four employees to begin work on

October 15. Each employee is to receive a weekly salary
Transaction of $500 for a 5-day work week, payable every 2 weeks
-- first payment made on October 26.

A business transaction has not occurred. There is only

Basic an agreement between the employer and the employees
Analysis to enter into a business transaction beginning on
October 15.

Debit -Credit A debit-credit analysis is not needed because there is no

accounting entry.
Analysis
 ILLUSTRATION 2-27
DECLARATION AND PAYMENT OF
DIVIDEND BY CORPORATION

October 20, the board of directors declares and pays a

Transaction $500 cash dividend to stockholders.

Basic The dividends account is increased $500; the asset Cash

Analysis is decreased $500.

Debit -Credit Debits increase dividends: debit Dividends $500.

Analysis Credits decrease assets: credit Cash $500.
 ILLUSTRATION 2-27
DECLARATION AND PAYMENT OF
DIVIDEND BY CORPORATION

500
Journal 500
Entry

Dividends 332
Posting Oct. 20
500
500
 ILLUSTRATION 2-28
PAYMENT OF
SALARIES
October 26, employee salaries of $4,000 are owed and
Transaction paid in cash. (See October 9 transaction.)

Basic The expense account Salaries Expense is increased

Analysis $4,000; the asset Cash is decreased $4,000.

Debit -Credit Debits increase expenses: debit Salaries Expense

Analysis $4,000. Credits decrease assets: credit Cash $4,000.
 ILLUSTRATION 2-28
PAYMENT OF
SALARIES

4,000
Journal 4,000
Entry

4,000
Posting
4,000
 ILLUSTRATION 2-29
RECEIPT OF CASH FOR FEES EARNED

October 31, received $10,000 in cash from Copa

Transaction Company for advertising services rendered in October.

Basic The asset Cash is increased $10,000; the revenue acct.

Analysis Service Revenue is increased $10,000.

Debit -Credit Debits increase assets: debit Cash $10,000. Credits

Analysis increase revenues: credit Service Revenue $10,000.
 ILLUSTRATION 2-29
RECEIPT OF CASH FOR FEES EARNED

10,000
Journal 10,000

Entry

Service Revenue
400Oct. 31
10,000
Posting
10.000
 THE TRIAL BALANCE
 A trial balance is a list of accounts and their balances at
a given time.
 The primary purpose of a trial balance is to prove the
mathematical equality of debits and credits after
posting.
 A trial balance also uncovers errors in journalizing and
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 2-32
A TRIAL BALANCE
PIONEER ADVERTISING AGENCY
Trial Balance
October 31, 2002
Debit Credit
Cash $ 15,200
Advertising Supplies The total debits 2,500
Prepaid Insurance
Office Equipment
must equal the 600
5,000
Notes Payable total credits. $ 5,000
Accounts Payable 2,500
Unearned Revenue 1,200
Common Stock 10,000
Dividends 500
Service Revenue 10,000
Salaries Expense 4,000
Rent Expense 900
$ 28,700 $ 28,700
 LIMITATIONS OF A
TRIAL BALANCE
 A trial balance does not prove that all transactions have
been recorded or that the ledger is correct.
 Numerous errors may exist even though the trial balance
columns agree.
 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,
5 offsetting errors are made in recording the amount of
the transaction.
 COPYRIGHT

Copyright © 2003 John Wiley & Sons, Inc. All rights reserved. Reproduction or
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programs or from the use of the information contained herein.
CHAPTER 2
THE RECORDING PROCESS