The Recording Process

1
Questions of the topic
• Double-Entry System
• Steps in the Recording Process
• The Recording Process Illustrated
• The Trial Balance

2
 Double-Entry System
• Double-entry system is based on the principle of duality, which
means that every economic event has two aspects—effort and
reward, sacrifice and benefit, source and use—that offset, or balance,
each other.

• In the double-entry system, each transaction must be recorded with

at least one debit and one credit, and the total amount of the debits
must equal the total amount of the credits.

3
 Double-Entry System
• Accounts are the basic storage units for accounting data and
are used to accumulate amounts from similar transactions.
• Account is a record of increases and decreases in specific
asset, liability, or stockholders’ equity items.
• An accounting system has a separate account for each asset,
each liability, and each component of stockholders’ equity,
including revenues and expenses

4
Double-Entry System
Double-Entry System

6
• To help identify accounts and make them easy to find, accountants
assign them numbers. A list of these numbers with the
corresponding account titles is called a chart of accounts.
Ledger accounts and double entry
 Double-Entry System
• Rules of Double-Entry Accounting
• Every transaction affects at least two accounts.
• Total debits must equal total credits.
Double-Entry System
Double-Entry System

11
 Double-Entry System

• To refer to the record on the corresponding accounts, a special term

is used — journal entry (accounting entry).
 Double-Entry System
• For correct accounting entries it is necessary to:
• 1. determine the nature of the business transaction
• 2. choose the correct corresponding accounts from the chart of
accounts
• 3. determine the type of accounts
• 4. reflect by the method of double-entry this business transaction
Steps in the Recording Process
 Steps in the Recording Process
• The steps are as follows:
• Step 1: Analyze business transactions from source documents.
• Step 2: Record the transactions by entering them in the general journal.
• Step 3: Post the journal entries to the ledger and prepare a trial balance.
• Step 4: Adjust the accounts and prepare an adjusted trial balance.
• Step 5: Prepare financial statements to communicate to decision makers.
• Step 6: Close the accounts and prepare a post-closing trial balance
 Steps in the Recording Process

• To be recorded, a transaction must relate directly to a business entity.

• Business transactions are recorded on source documents.

16
 Steps in the Recording Process

Types of source documents

Quotation
Purchase order
Sales order
Goods received note
Goods dispatched note
Invoice
Statement
Credit note
Debit note
Remittance advice
Receipt
 Steps in the Recording Process

• The journal makes several significant contributions to the

recording process:
• 1. It discloses in one place the complete effects 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 easily compared
Steps in the Recording Process
• All transactions are recorded in a journal (journal entry) and are
later posted from the journals to a general ledger (group of
accounts for a company).
• After posting, the general ledger accounts contain the same
information as the journals, but the information has been
summarized by account.
Steps in the Recording Process
The general ledger
Steps in the Recording Process

General Ledger Form

 Steps in the Recording Process
• Transferring journal entries to the ledger accounts is called
posting. Posting involves the following steps.
• 1. In the ledger, in the appropriate columns of the account(s)
debited, enter the date, journal page, and debit amount shown
in the journal.
• 2. In the reference column of the journal, write the account
number to which the debit amount was posted.
• 3. In the ledger, in the appropriate columns of the account(s)
credited, enter the date, journal page, and credit amount shown
in the journal.
• 4. In the reference column of the journal, write the account
number to which the credit amount was posted.
 Steps in the Recording Process
• At the end of each step in the accounting cycle in which transactions
have been recorded, the accountant prepares a trial balance. The trial
balance tests that the total of debits and credits in the accounts are
equal.
• These are the steps involved in preparing a trial balance:
• Step 1: List each account that has a balance, with debit balances in
the left column and credit balances in the right column. Accounts are
listed in the order in which they appear on the financial statements.
• Step 2: Add each column.
• Step 3: Compare the totals of the columns.
Steps in the Recording Process
 The Recording Process Illustrated
1. On October 1, C. R. Byrd invests $10,000 cash in an advertising company to be known as Pioneer
Advertising Agency Inc.
2. On October 1, Pioneer purchases office equipment costing $5,000 by signing a 3-month, 12%, $5,000
note payable.
3. On October 2, Pioneer receives a $1,200 cash advance from R. Knox, a client, for advertising services
that are expected to be completed by December 31.
4. On October 3, Pioneer pays office rent for October in cash, $900
5. On October 4, Pioneer pays $600 for a one-year insurance policy that will expire next year on
September 30.
6. On October 5, Pioneer purchases an estimated 3-month supply of advertising materials on account from
Aero Supply for $2,500
7. On October 9, Pioneer hires four employees to begin work on October 15. Each employee is to receive
a weekly salary of $500 for a 5-day work week, payable every 2 weeks—first payment made on October
26.
8. On October 20, Pioneer’s board of directors declares and pays a $500 cash dividend to stockholders.
9. On October 26, Pioneer owes employee salaries of $4,000 and pays them in cash. (See October 9
event.)
10. On October 31, Pioneer receives $10,000 in cash from Copa Company for advertising services
performed in October.
 The Trial Balance

If the debit and credit balances in a trial balance are not equal, look for one
or more of the following errors:
• • A debit was entered in an account as a credit, or vice versa.
• • The balance of an account was computed incorrectly.
• • An error was made in carrying the account balance to the trial balance.
• • The trial balance was summed incorrectly.
• Recording an account as a credit when it usually carries a debit balance, or
vice versa
• Transposing two digits when transferring an amount to the trial balance
 The Trial Balance

If the debit and credit balances in a trial balance are not equal, look for one
or more of the following errors:
• • A debit was entered in an account as a credit, or vice versa.
• • The balance of an account was computed incorrectly.
• • An error was made in carrying the account balance to the trial balance.
• • The trial balance was summed incorrectly.
• Recording an account as a credit when it usually carries a debit balance, or
vice versa
• Transposing two digits when transferring an amount to the trial balance
 The Trial Balance
• Limitations of a Trial Balance
• A trial balance does not guarantee freedom from recording errors, however.
• Numerous errors may exist even though the totals of the trial balance
• columns agree. For example, 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 a transaction.

30
Thank you for your attention!

31