Recording Process

Chapter 2-1

CHAPTER CHAPTER 22

THE RECORDING THE RECORDING PROCESSPROCESS

Accounting Principles, Eighth Edition

Chapter 2-2

THE ACCOUNTTHE ACCOUNT

• An An account account is an individual is an individual accounting record of increases and accounting record of increases and decreases in a specific asset, decreases in a specific asset, liability, or owner’s equity item.liability, or owner’s equity item.

• There are separate accounts for the There are separate accounts for the items we used in transactions such items we used in transactions such as as cashcash, , salaries expensesalaries expense, , accounts accounts payablepayable, etc., etc.

Chapter 2-3

Account Nam eDebit / Dr. Credit / Cr.

Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item.Debit = “Left”Credit = “Right”

AccountAccount

An Account can An Account can be illustrated be illustrated

in a T-in a T-Account form.Account form.

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

The AccountThe Account

Chapter 2-4

Double-entry Double-entry accounting systemEach 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 equalmust equal CREDITS.

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

Debits and CreditsDebits and Credits

Chapter 2-5


If Debits are greater thangreater than Credits, the account will have a debit balance.

$10,000 Transaction #2

$3,000

$15,000$15,000

8,000Transaction #3

Balance

Transaction #1



Chapter 2-6


If Credits are greater thangreater than Debits, the account will have a Credit balance.

$10,000 Transaction #2

$3,000

Balance

Transaction #1



$1,000$1,000

8,000 Transaction #3

Chapter 2-7

Chapter 3-23

AssetsAssetsDebit / Dr. Credit / Cr.

Norm al BalanceNorm al Balance

Chapter 3-27

Debit / Dr. Credit / Cr.


ExpenseExpense

Chapter 3-24

LiabilitiesLiabilitiesDebit / Dr. Credit / Cr.


Chapter 3-25



O wners’ EquityO wners’ Equity

Chapter 3-26



RevenueRevenue

Normal Balance Credit

Normal Balance Debit

Debits and Credits SummaryDebits and Credits Summary

LO 2 LO 2

Chapter 2-8

Balance Sheet Balance Sheet Income StatementIncome Statement

= + =-Asset Liability

Equity Revenue

Expense

Debit

Credit



Chapter 2-9

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.

Review QuestionReview Question



Chapter 2-10

Assets - Debits should exceed credits.

Liabilities – Credits should exceed debits.

The normal balance is on the increase side.LO 2 Define debits and credits and explain their use LO 2 Define debits and credits and explain their use

in recording business transactions.in recording business transactions.

Assets and LiabilitiesAssets and Liabilities

Chapter 3-23

AssetsAssetsDebit / Dr. Credit / Cr.


Chapter 3-24

LiabilitiesLiabilitiesDebit / Dr. Credit / Cr.


Chapter 2-11

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


Owners’ EquityOwners’ Equity

Chapter 3-25



O wners’ CapitalO wners’ Capital

Chapter 3-23

O wners’ DrawingO wners’ DrawingDebit / Dr. Credit / Cr.


Chapter 3-25



O wners’ EquityO wners’ Equity

Chapter 2-12

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 Capital.Expenses have the opposite effect: expenses decrease owner’s equity.


Revenue and ExpenseRevenue and Expense

Chapter 3-27



ExpenseExpense

Chapter 3-26



RevenueRevenue

Chapter 2-13

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 2-14

Expansion of the Basic EquationExpansion of the Basic Equation

Relationship among the assets, liabilities Relationship among the assets, liabilities and owners’ equity of a business: and owners’ equity of a business:

The equation must be in balance after every The equation must be in balance after every transaction. For every transaction. For every DebitDebit there must be a there must be a CreditCredit..

Illustration 2-11Assets Liabilit

ies= Owners’ EquityBasic

EquationExpanded Basic Equation


+

Chapter 2-15

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

Steps in the Recording ProcessSteps in the Recording Process

LO 3 Identify the basic steps in the recording process.LO 3 Identify the basic steps in the recording process.

Illustration 2-12

Analyze each transaction

Enter transaction in a journal

Transfer journal information to ledger

accounts

Chapter 2-16

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.

The JournalThe Journal


Chapter 2-17

Transactions-Are initially recorded in chronological order before they are transferred to the ledger accounts.

A general journal has

1 spaces for dates2 account titles and explanations3 references4 two amount columns

The JournalThe Journal


Chapter 2-18

Journalizing - Entering transaction data in the journal.

JournalizingJournalizing

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

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

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

Oct. 1

Purchases office furniture for $1,900, on account.

3Sells a house and lot for B. Kidman; bills B. Kidman $3,200 for realty services provided.

6

Pays $700 on balance related to transaction of Oct. 3.

27Pays the administrative assistant $2,500 salary for Oct.

30

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

Chapter 2-19

Account Title Ref. Debit CreditOct. 1 Cash 15,000

Hanshew, Capital 15,000 (Owners investment)

Date


General Journal



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

Oct. 1

Chapter 2-20

Account Title Ref. Debit CreditO ct. 3 O ffice furniture 1,900

Accounts payable 1,900 (Purchase furniture)

Date


General Journal



Purchases office furniture for $1,900, on account.

Oct. 3

Chapter 2-21

Account Title Ref. Debit CreditO ct. 6 Accounts receivable 3,200

Service revenue 3,200 (Realty services provided)

Date


General Journal



Sells a house and lot for B. Kidman; bills B. Kidman $3,200 for realty services provided.

Oct. 6

Chapter 2-22

Account Title Ref. Debit CreditO ct. 27 Accounts payable 700

Cash 700 (Payment on account)

Date


General Journal



Pays $700 on balance related to transaction of Oct. 3.

Oct. 27

Chapter 2-23

Account Title Ref. Debit CreditO ct. 30 Salary expense 2,500

Cash 2,500 (Payment for salaries)

Date


General Journal



Pays the administrative assistant $2,500 salary for Oct.

Oct. 30

Chapter 2-24

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).


Account Title Ref. Debit CreditJune 15 Equipment 15,000

Cash 10,000 Accounts payable 5,000

(Purchased equipment)

DateGeneral Journal

Chapter 2-25

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

The LedgerThe Ledger

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

Chapter 2-26

Accounts arranged in sequence in which they are presented in the financial statements.

Chart of AccountsChart of Accounts

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

Hanshew Real Estate AgencyChart of Accounts

101 Cash 300 Hanshew, Capital112 Accounts receivable 306 Hanshew, Drawing126 Advertising supplies 350 Incom e sum m ary130 Prepaid insurance150 Office equipm ent158 Accum ulated depreciation 400 Service revenue

200 Accounts payable 631 Advertising supplies expense201 Notes payable 711 Depreciation expense209 Unearned revenue 722 Insurance expense212 Salaries payable 726 Salaries expense230 Interest payable 729 Rent expense

905 Interest expense

Liabilities

Assets O wner's Equity

Revenues

Expenses

Chapter 2-27

T-account form used in accounting textbooks.In practice, the account forms used in ledgers aremuch more structured.

Standard Form of AccountStandard Form of Account

Explanation Ref. Debit CreditOct. 1 15,000 15,000

27 700 14,300 30 2,500 11,800

CashDate

No. 101Balance

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

Chapter 2-28

Posting Posting – the process of transferring amounts from the journal to the ledger accounts.

Cash Acct. N o. 101Date Explanation Ref. Debit Credit Balance

General Ledger

Account Title Ref. Debit CreditO ct. 1 Cash 15,000

Hanshew, Capital 15,000 (O wner's investment in business)

DateGeneral Journal

Oct. 1 Owner investment J1 15,000 15,000

101

J1

PostingPosting


Chapter 2-29

Posting Posting – the process of transferring amounts from the journal to the ledger accounts.

Acct. N o. 301Date Explanation Ref. Debit Credit Balance

Hanshew CapitalGeneral Ledger

Account Title Ref. Debit CreditOct.1 Cash 15,000

Hanshew, Capital 15,000 (Owner's investment in business)

Date

General Journal

Oct. 1 Owner investment J1 15,000 15,000

101

J1

PostingPosting


301

Chapter 2-30

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.


PostingPosting


Chapter 2-31

The Recording Process IllustratedThe 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.

Illustration 2-19

Chapter 2-32

A list of accounts and their balances at a given time.Purpose is to prove that debits equal credits.

The Trial BalanceThe Trial Balance

LO 7 Prepare a trial balance and explain its purposes.LO 7 Prepare a trial balance and explain its purposes.

Debit CreditCash 11,800$ Accounts receivable 3,200 Office furniture 1,900 Accounts payable 1,200$ Hanshew, Capital 15,000 Service revenue 3,200 Salaries expense 2,500

19,400$ 19,400$

Hanshew Real Estate AgencyTrial Balance

October 31, 2008

Chapter 2-33

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.



Limitations of a Trial Balance

Chapter 2-34

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.




Recording Process

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